With Steve Forbes, Editor-in-Chief of Forbes Media
Donald Trump’s Tax Plan
Today’s guest is none other than Steve Forbes, founder of the influential Forbes magazine, author and four-time winner of the Crystal Owl award for financial journalism, and two-time presidential candidate, among other distinctions. We enjoyed a wide-ranging conversation with Forbes about Donald Trump’s tax plan and other economic policies, the need for tax cuts followed by tax code reforms, the benefits of deregulation for small business, deep-seated problems in the healthcare industry, and his outlook on stocks for the coming year.
Host Steve Pomeranz kicks off the discussion by asking Forbes to explain why he strongly urged Trump to pass “big and bold” tax cuts that would galvanize the economy. Forbes’ two-fold response blends philosophy and pragmatism: First, taxes place too much of a burden on productivity, risk-taking, and financial success; and secondly, cutting taxes has historically led to periods of robust economic growth. When freed from onerous taxation, he argues, people take more risks, do more, and, as a result, the economy and everyone participating in its benefits. The same goes for excessive regulation, including healthcare mandates, which he believes force small business owners to curb their plans to expand and take on risks.
Trump Tax Cuts
Forbes admits he is concerned that Congressional Republicans may already be hedging on the possibility of dramatic tax cuts from a Trump administration, and this leads him to believe that Trump ought to act urgently to pass tax cuts immediately. He believes that a delay or scaling back of tax cuts will defer their economic boost in the near term, perhaps for as long as two years and that this will eventually hurt Republicans and make further economic reforms and gains less likely. In Forbes’s opinion, tax cuts should not be paid for by other taxes, such as the Border Adjustable Tax which will add a sales tax to imported goods, which he is stridently against. Instead, cuts should be offset by reductions in spending, where he sees plenty of opportunity for in a bloated federal budget. Later in the interview, Forbes makes the case that tax cuts—on income, capital gains, and corporate taxes—will ultimately drive more tax revenues, as economic activity intensifies, a point that we will return to momentarily.
Tax Reform and the Flat Tax
Forbes is well-known for his advocacy of a “flat tax”, but he actually sees its adoption as a multistage process. He envisions that, at the start, we should move ahead with an across the board tax cut, some simplification of tax codes, and a whittling down of tax brackets to just two—a lower bracket taxed at 10% rate and an upper one taxed at 25%. From there, we might evolve a system similar to one found in Hong Kong which allows people to choose to either be taxed at a flat tax rate or use the more complex multiplebrackets and deductions system. This he believes will set the stage for the introduction of a universal flat tax. He also wants to do away with taxes on savings and estates, thus allowing people to “leave this world unmolested by the IRS”.
Trump and Capital Gains Tax Rates
When it comes to capital gains taxes, Forbes seems even more convinced that their reduction will have a direct stimulus effect on the economy and even help fund government programs through rising tax revenues. Again, he looks for historical examples to back up his argument, noting that Kennedy, Clinton, and George W Bush all enacted capital gains tax cuts and saw an immediate “revenue feedback” of increased tax revenues. Forbes wants to see the capital gains tax rate reduced right away from its current 23.8% to 20%—which could be easily achieved with a repeal of the Net Investment Income Tax that was created with the Affordable Care Act. This would be a mere prelude to a lasting reduction to a 10 or 15% capital gains rate when more comprehensive tax reform is passed.
Steve Pomeranz asks Forbes why he is bullish on a lower corporate tax rate increasing the amount of corporate investment when US corporations are currently using their large cash holding to buy back stock and ramping up dividends. Forbes opines that excessive regulation and volatility in the value of the dollar have kept many businesses on the sidelines and that this defensive position will change if Trump follows through on his deregulation agenda.
Healthcare Reform in the Trump Era
The topic then turns to healthcare reform—including Big Pharma—for the latter half of the conversation. Pomeranz notes that pharmaceutical companies have underperformed the market recently, perhaps due to a perception that Trump will shake up the current system in ways that could challenge drug makers. On the surface, this would seem to be at odds with the possibility of reforms to the FDA’s expensive drug testing and approval regime. The broader point, Forbes suggests, is the lack of free markets and transparency throughout healthcare. He supports national health insurance markets as opposed to the state-level programs that Obamacare created, and he backs greater price transparency at all levels of healthcare. The lack of these limits consumer’s options and makes shopping for the best care at the best price virtually impossible.
Near the end of their talk, Pomeranz asks whether the idea of trickle-down economics—which in a nutshell proposes that tax cuts for the rich drives more consumption, eventually benefiting the less affluent in terms of wage growth, opportunity and further tax cuts—has been discredited. Forbes vigorously defends the idea that tax cuts increase investment which in turn increases tax revenues, and by doing so creates opportunity for more tax relief. He doesn’t support a top-down model or tax cuts aimed at top earners. In fact, he argues that Obama’s Federal Reserve pursued a failed top-down model in the wake of the financial crisis of 2008. Forbes is convinced that an across the board attack to “remove barriers, tax barriers, regulatory barriers, healthcare barriers” offers a path towards lasting prosperity. He believes we’re overdue for 5% GDP growth after a decade of 2% growth.
Forbes 2017 Stock Forecast
Pomeranz wraps up the discussion by asking Forbes about his forecasts for the stock market and companies or sectors he’s interested in. Forbes cautions listeners to pay attention to “what gets done” politically and follow the impact on markets and individual stocks. He believes that equities will remain a good investment if the overall environment facilitated by Washington DC is positive. As for particular sectors, Forbes sees great opportunities in the healthcare sector down the road (for now he calls it a “hopeless financial liability”) as it transitions to a more free-market system. He’s also bullish on high-tech, though he admits that there are “a lot of casualties” in the sector.
The two return to Trump for the final takeaway and Forbes again asserts that Trump needs to act big and bold and swiftly to avoid being “eaten alive” by the political establishment.
Steve Forbes will be at the MoneyShow Orlando.
Steve Pomeranz will be speaking on February 10th: Myth Busting Your Way to Riches.
For more information on the MoneyShow Orlando and to register for free, click here.
Steve Pomeranz: With the new President now in office, we want you to be prepared for the impact of the new administration, and its effect on your portfolio and your financial well-being. Once again, I want to welcome Steve Forbes, Jr., Editor-In-Chief of Forbes Media, and who, himself, was twice a candidate for the nomination of the Republican party for President. Hey, Steve, welcome to the show.
Steve Forbes: Good to be with you, Steve. Thank you.
Steve Pomeranz: In your December 30th commentary, you wrote that Trump’s tax cuts should be big and bold. Why, in your opinion, is reducing taxes so important to create vigorous economic revival?
Steve Forbes: Because they’re such a barrier to people moving ahead. It’s not just that the Government takes too much money out of your pocket, but, also, the price, the burden of doing productive things like productive work, risk-taking, and the success are much, much too high. We’ve seen time and time again in the past when those tax rates are reduced the economy booms. People do more, take more risks, and we all move ahead. “A rising tide lifts all boats,” as John Kennedy famously said.
Whether it’s Democrat like Kennedy who cut tax rates vigorously or Ronald Reagan who did the same, the American people always respond. Given the huge tax burden the American people face today, I think Donald Trump must move aggressively—and I think he will—for a massive tax cut even though a lot of people even in his own party are getting a little bit of what you might call cold feet-itis.
Steve Pomeranz: Yeah, I was going to ask you about that. There already seems to be some equivocating by Congress to delay or scale down the tax reductions. Why would a delay be so wrong in your view?
Steve Forbes: Because I think the American people must see right away that this new President, this new Congress, is delivering and getting this economy moving forward again. If you delay a tax cut that means we won’t see any real improvement in the economy until maybe next year or the year after. The Republicans will pay a political price which will make further progress very difficult, and it will be an unnecessary economic delay. It’s like having a great quarterback and deciding to save the quarterback for next season. No, use the quarterback now.
Steve Pomeranz: Now when he’s hot.
Steve Forbes: Yeah, when he’s hot.
Steve Pomeranz: Gotcha.
Steve Forbes: One of the things, by the way, that Donald Trump has got to avoid is what some House Republicans are proposing as part of this tax cut, this crazy thing called The Border Adjustability Tax, which would impose a sales tax on all things we bring into this country. Your price of gasoline will go up 30 cents a gallon. The stuff you buy at Wal-Marts and Targets is going to go up. The price of automobiles is going to go up. Over $120 billion tax on the American consumer. Republicans say, Paul Ryan says, “Well, we need the money for tax cuts.” No, you don’t. You should cut taxes, put a restraint on spending. Ryan’s own party members have come up with some big proposals on reigning in spending and ending duplicate government programs over the next decade, but don’t punish the American people. This Border Adjustable Tax has got to be killed in the cradle or it’s going to hurt the economy.
Steve Pomeranz: You’ve always been a vocal proponent of the flat tax. You’ve written a book about it, but now you’re calling for two tax brackets, or you agree with this idea of a 25% tax bracket and a 10% tax bracket. However, in an interview you did in 2015 you said, “The problem with two rates is that they’re like rabbits. They multiply.” Why are you backing the two-rate idea now?
Steve Forbes: I see this as an interim step. When Ronald Reagan took over he had a big tax cut in ’81, but he had an even more sweeping change of the tax code a few years later. To get a tax bill through now, I will take two rates, I will take some simplification, a good cut and tax rates, but set the stage to get the economy moving and then do more fundamental positive reform a year or two down the road. In other words, a flat tax.
Steve Pomeranz: You have an idea that I think you were using Hong Kong as an example, you can offer the American people a choice. Either you take the flat tax and then you don’t get any deductions for mortgage, interest, and other things or you can choose the second method, which is to go back to the many different tax brackets, we’ll say. Then use your deductions, but you leave the choice to the American people. Do you think that’s a viable idea?
Steve Forbes: Yes, Hong Kong, as you mentioned, does a variation of that. In this way, people don’t get hung up, “Am I going to lose this deduction or that deduction?” You can explain until you’re blue in the face that you’ve come out ahead. Let people see for themselves, that way they don’t have to trust us or anybody else. They can do their own math and see, “By golly, this new simple tax is the way to go.” What I think will excite people, if it’s done right, the way we propose in our book Reviving America is a family of four, for example—with generous exemption for adults and for kids—a family of four would pay no federal income tax on their first $52,800 of salary. Then above that you’d only pay 17 cents on the dollar. There’d be no tax on your savings, no death taxes. You should be allowed to leave the world unmolested by the IRS. I think that kind of a tax code, where literally you could do your return with a few keystrokes on a computer or a piece of paper, a single sheet of paper, would really be a good positive jolt to the economy.
Steve Pomeranz: Yeah, I guess accountants who do tax returns will probably not be quite so happy, but so be it.
Steve Forbes: Even though I’m a conservative, I would support job retraining for tax accountants, tax lawyers, and IRS agents.
Steve Pomeranz: My guest is Steve Forbes, Jr., Editor-In-Chief of Forbes Media. Of course, Forbes, we all know the great magazine and Forbes.com. Hilary Clinton had a proposal to raise capital gains rates to 39.6% and then, in a very complicated way, have them fall back to the current 23.8%. I was wondering why do you think they believed this would be beneficial to the economy?
Steve Forbes: She falls under the first, they don’t realize that a tax on the people who take risks hurts risk-taking and, therefore, progress. They also think that people who do trading quickly—let’s say you want to sell out after a year or two—it’s bad for the economy. What they don’t realize is you have different classes to different kinds of investors. You have venture capitalists who put in seed money and then want out and go on to the next venture. You have others who would do later stage investing, and then the ultimate investor who might want to hold it for five or ten years or three years.
Trying to have Washington dictate how long you should hold an asset is ridiculous and absolutely counterproductive. The fact that she would have left the rate at 24% shows that she learned nothing from the Kennedy tax cuts, nothing from what Bill Clinton did when he cut the Capital Gains Tax, or George Bush cut the Capital Gains Tax. When you cut that tax, the revenue feedback, as they say, is immediate; you immediately get more revenue. I hope with Donald Trump in the next few days, couple of weeks, he’ll get rid of the Obama addition to the Capital Gains Tax. That’ll take it back to 20%, and then in the tax reform bill take it back to 10 or 15%, and that revenue comes back—not only comes back, it multiplies—whereas with other tax cuts, it takes a little time, as building a factory takes a little time.
Steve Pomeranz: Corporations have record amounts of cash right now, and they seem to have trouble figuring out how to invest the money. So, they’re increasing dividends, they’re buying back stock. Why do you think lowering corporate tax rates would create more investment if they can’t find places to invest their money right now?
Steve Forbes: Because the returns, prospective returns, aren’t worth the risk. Until Trump took over, what you had was a situation where especially smaller businesses were in a defensive crouch wondering what new regulation, what new burden Washington was going to throw on them. You combine that with a very uncertain dollar going up and down like a yo-yo, and it made perfectly good sense to sit on the sidelines. Banks were, in effect, punished if they went to smaller new businesses which is why lending to this critical area of the economy is stagnated, and another reason why new business creations are fewer than the businesses closing their doors. We need more door opening, not door closing.
Steve Pomeranz: You know, I know that you are a tremendous advocate for, as I mentioned before, unfettered capitalism.
Steve Forbes: Capitalism that has sensible rules of the road. James Madison said, “We’re not angels, so we do need laws.” So, we got to recognize that we are not perfect beings by a wide margin.
Steve Pomeranz: Right now, healthcare, and especially pharmaceutical companies, are coming under a lot of political pressure, even Donald Trump has said that he wants to get pharmaceutical companies to start bidding for the sale of their drugs, and so on. I guess make it more of a free market segment rather than more government controlled and more monopolistic, as it seems to be right now. The sector really is taking it hard on the chin; it’s significantly underperformed the S&P 500. How do you see the future of healthcare, and how does this idea of having a product that so affects people’s lives be subject to the ebbs and flows of free market pricing?
Steve Forbes: Well, the challenge we have now in healthcare is that we don’t really have free markets. We have pieces of it, but the proof of it is if you go to a hospital and ask what a treatment is going to cost in advance, they give you a strange look because it means either you’re uninsured or you’re just plain crazy. Everywhere else in the economy you want to know what something’s going to cost, but if you want to know what it’s going to cost in healthcare they just say, “Oh, don’t worry about it. Insurance will cover it.” Maybe it will and maybe it won’t. You don’t have real free markets, and that’s why we’ve got to get reforms such as nationwide shopping for health insurance where a lot of companies compete for your business, pricing transparencies so you can see what things actually cost in advanced and to get a real free market there. In terms of new medicines, we do need reform of the Food and Drug Administration which approves these things. They’re still, in many ways, operating as if this was 1950, not 2017, and get a more efficient way of approving new medicines. Because it now takes a billion to two billion dollars to create a new drug and get through all the clearances. If you want a free market, we’ve got to reform positively the way we approve these new drugs, so we get more of them and more competition.
Steve Pomeranz: I’m speaking with Steve Forbes, we all know him as the Editor-In-Chief of Forbes Magazine and Forbes Media. He will be speaking at The MoneyShow Orlando which is between February 8th and 11th. Steve will be appearing on February 9th and also be on a panel right after his talk. You can register for free at the OrlandoMoneyShow.com or find out more at my website, which is stevepomerantz.com.
Steve, let’s talk about fiscal stimulus. I mean if Trump were to do what he proposes to do, and we get some decent fiscal stimulus into the economy, the question that I’ve heard posed quite a lot is if these tax cuts, for example, are tilted toward the upper brackets, that the stimulus might actually be limited if it doesn’t really trickle down to the average taxpayer. Has the concept of lower taxes, this idea of lower taxes increasing government revenues, been discredited?
Steve Forbes: No. When tax cuts come in and the investments that result from them bear fruit, you get a huge increase in government revenues, which creates the opportunity for further tax reductions. Unfortunately, politicians too often take the money and spend it instead of returning it to we, the people. What trickle-down economics was what Barrack Obama practiced where they had the Federal Reserve try to pump up the stock market, keep interest rates artificially low, on the theory that would stimulate business and eventually workers would get some benefit.
What Trump was going to do and what Ronald Reagan did was to reduce tax rates across the board top to bottom, so not only do you keep more of what you currently earn, but, with the extra investment that results, you have the prospect of better jobs, of pay raises, and the like, climbing the economic ladder of success as your skills improve. That’s what we badly need. This top-down approach—no, what Trump is proposing and what Reagan did and other presidents have done like John Kennedy is just the opposite. Do it across the board, remove barriers, tax barriers, regulatory barriers, healthcare barriers, and, by golly, things will really hum. We’ve had a decade of 2% growth, which is way below the historic average, so we’re due for a decade of 5% growth, and I think we can achieve it if we get these things done right.
Steve Pomeranz: Let’s talk about investments. You’ve won awards for your forecasting prowess. As you position your own money for the next year or next four years, what areas would you emphasize?
Steve Forbes: Well, I think, one, investors should look at what actually gets done. One of the reasons we had a stock market rally after the elections, especially in small-cap stocks, was the prospect of reducing the burdens on people who want to do business and create new jobs and reducing the tax burden. It faltered in recent weeks precisely because of the news that Republicans might not be so enthusiastic for doing these big, positive things. The key thing for market performance now is what gets done. Also, what crises may emerge overseas. They should look at creating the right environment. If the right environment is created, as Reagan demonstrated in the early ’80s and John Kennedy did in the early ’60s, by golly, the economy will do well and equities will do well. Areas to look at, one of the areas is various facets of healthcare. Right now, it looks like a hopeless financial liability, but as you get more of a true free market and effective safety nets, you’re going to turn a liability into the greatest growth industry ever because healthcare is personal. High tech is always going to be an interesting area. A lot of casualties there, but, if you get a good hit, you will do very well. You should also look for—if these reforms get through—you should also look for high tech being applied not just to things like better software and the like, but to more physical things like building buildings, manufacturing products, things like airplanes. Airplanes have been improving evolutionary, in an evolutionary manner for decades. I think with the high tech in the next generation you could see truly revolutionary changes in the way we create aircraft so that you could go from, say, New York to Hong Kong, instead of 17 or 18 hours, in 3 or 4 hours.
Steve Pomeranz: That would be amazing. Unfortunately, we are out of time. My guest, as I mentioned before, is Steve Forbes, Editor-In-Chief of Forbes Media and, of course, the Forbes Magazine, so famous and so important. Also, twice a candidate for the nomination of the Republican party. He’s been there. You’ve been through all of the slings and arrows of being a candidate. I guess the bottom line to me is it’s in a sense it’s politics as usual, but Trump better step up to the plate and be a very, very strong leader as I suppose we’re all counting on.
Steve Forbes: Yeah, and I think he’s indicated he knows he’s got to do big and strong at the beginning because the political establishment will eat him alive if he doesn’t.
Steve Pomeranz: Right. Steve will be speaking at The MoneyShow Orlando. He’ll be appearing on February 9th. Thank you so much, Steve. I appreciate you coming on.
Steve Forbes: Thank you, Steve. See you then.
Steve Pomeranz: To find out more about this conversation and to find out more about this interview and to join the conversation don’t forget to go to stevepomerantz.com. Thank you, Steve.
Steve Forbes: Thank you.