Live on Bloomberg TV

00:00Tell us what you like about what's going on. Before we get to some of the criticisms or questions that you have I think it's the right thing to be considering the tax code in a comprehensive way and I applaud that instinct in the bill. I think we have a tax code that is shot shot through with loopholes and shelters and so the impulse to have tax reform is I think a good and a welcome impulse. Even if I don't have even if I have a lot of questions about the particular directions that have been put forward I think it's probably the right thing to be lowering the US corporate rate somewhat . Given how high it is relative to the rest of the world that's probably a necessary step. I think some of the adjustments that are made that I'd like the expansion of the child care credit are probably steps in the right direction. But David I don't want to mislead you. While the word tax reform is good . Fundamentally this isn't tax reform. This is tax cutting and it's a rather indiscriminate non-strategic kind of tax cutting that I think is likely to increase unfairness is likely to cheat the future and is not likely to provide significant benefit in terms of economic growth. So let's talk let's talk for a moment about cutting the corporate rate because you said it didn't make sense to cut it somewhat. Do you agree with other economists including even some of the Harvard faculty who say that if we do cut that rate it will encourage investment there'll be investment flow in the United States which will actually create capital investment and will create jobs . Not very much for two reasons. One we already have record low costs of capital. Companies are sitting with large amounts of cash that's invested in Treasury bills where they're earning 1 percent. And so if they have attractive investments they can make them at very very low cost. Right now that's the first problem. The second is the bill does include an element that I think is in many ways constructive which is expensing of investment for equipment. That is when I make an equipment investment I can write it off in the first year. Think about what that means David. If you make a one dollar investment you get a deduction equal to the corporate tax rate. Then you share all the profits. You share a fraction equal to the corporate tax rate with respect to the government. So the government is paying for the same fraction of the investment that is claiming later in benefits. As long as that's true the corporate tax rate shouldn't really have any effect on the incentive to make the investment. What the corporate tax rate does do is tax monopoly profits. What it does do is tax rents that somehow are derived from some source of competitive advantage. What it does do is tax the profits earned on capital that's already been put in place. But in the presence of expensing it's an elementary economic principle that the corporate tax rate shouldn't affect the level of investment and indeed because of interest deductibility it may even be that a higher corporate tax rate would operate to encourage investment. Now there are some more complicated aspects involving the choice of a global location for investment. But here if you just take the simplest view of it all the principle that the administration is pushing is so-called territorial taxation. What that means is that instead of taxing the global income of U.S. companies they're going to try to tax the only the US income of U.S. companies. What could be a more straightforward incentive to invest more abroad than that. Now it's more complicated because they're having a global minimum tax and there are a variety of complexities. But at root the tax is being cut on old capital and the tax is being cut on income earned abroad. And I would have thought the right focus for a tax reform would be cutting the tax on new investments made to employ new workers in the United States . And so that's where it seems to me that the tax bill is more responsive to the special interests than it is to the economic interests of American families. So Larry Jonathan hit from what you see on the table so far you don't see an increase in capital expenditure off the back of what's being proposed. There may be a small. There may be a some small impact but not one that is of scale compared to the one point five trillion dollar cost . And any reckoning of the tax bill has to reckon with any direct effects it has and the indirect effect it has of enlarging the budget deficit and therefore putting upward pressure on interest rates. So I would be very surprised if there was a net substantial impact on investment and even more surprised if there was a net substantial positive impact on hiring. Larry you mentioned the price of it. Are you concerned about the deficit. And if so why and when did that change for you Look my view is that the deficit needs to be used as a tool to stabilize the economy. And so I think it's very important to be running deficits to stimulate the economy when there's unused capacity. And I think when the economy is booming you have to reload the fiscal cannon. And right now when you've got four point one percent unemployment and we created 260000 jobs last month that is not a moment to be hitting the accelerator that's a moment to be reload in the tank. So we'll be in a position to respond when ever the next recession comes. Because it'll come and it will come on at some point. So a big increase in the deficit right now for a form of expenditure that for the most part is not going to be productive. Remember most of the money is being spent for the benefit of monopolies capital that has already button put been put in place. Yeah and the passive owners of existing businesses not those who operate those businesses. And so spending that kind of money to no great benefit seems to me imprudent. Well Larry I want to give you the opportunity to respond to something because some people might be listening to this and arguing that it's OK to make this argument around the deficit when you're not in power. Now the Democrats around and the Republicans are saying when you make the following argument some people would say that's not an economic argument. That's a political one. What you say back to them I hope. I hope that's not true. If if what was being proposed was productive infrastructure investment that would substantially expand the capacity of the economy finance to some degree with debt I would be supported. I would be supporting that right now. I would not have supported and did not support large tax cuts when the Democrats were in power. My judgments about this don't have anything to do with who the administration is. They do have something to do with what the money is being used for. And I think that's sort of elementary economic good sense. If my face somebody my family asks me about borrowing money and they're borrowing it to put a valuable extension on their house I'm going to say it's a good idea. If they're borrowing at close they'd like to spend more this year. I'm likely to say it's a bad idea this year. So I think I've got a pretty consistent principle on this in supporting borrowing for investment and borrowing for stimulus when the economy is at a below normal level of strength but not supporting locking in a long term increase in borrowing largely to print largely not to finance investment at a time when the economy is very strong. So Larry as an economist give us your prognosis if this tax bill went through as really specified right now what would be the effect on interest rates . What would be the effect on inflation within a range. Because right now we have pretty low inflation rate and we have pretty low interest rates so we could afford moving up a little bit . If it were to stimulate the economy yeah but I don't think I don't think because I as I explained David that there is likely to be much stimulus and I think the evidence is that if we encrypt if we saw increase in interest rates increase 50 or 100 basis points you would see some meaningful impact on markets some meaningful impact on housing decisions some meaningful impact on business investment decisions. I don't think that this tax bill would have any would. I think the likelihood is that growth would be slightly slower over five years with this tax bill than it would be without this tax bill. I think we would leave ourselves in a much weaker position to respond to the next recession and I think we would have channeled income away from the vast majority of the population towards a small minority of the population. The precise impact between interest rates and inflation would depend on the decisions that the Federal Reserve made. My guess is you'd see some increase in inflation which from current levels does not trouble me. And you would see some increase in interest rates which I think would work to discourage investment and offset any possible benefits here. So Larry where's the biggest mispricing the market. BEN Oh look I don't. I don't know that I'm in a position to call mispriced things in the market. I think in general if you look at the market what the market has responded to in recent months has been the microeconomics of individual companies who for a variety of reasons are seeing substantial increases in profits and cash flows. And that's what's been driving the market rather than the macro news out of Washington. You can see that by looking at what's happened to baskets of the stocks that might be most affected by tax reform versus baskets of stocks that would be relatively unaffected. What's striking is that it isn't hugely the stocks that would be the greatest beneficiaries of tax cuts that are the ones that have rallied. And I think what that suggests is that this is a response to a economic rather than a political phenomenon around higher profitability. Well nevertheless. But President Trump said the reason even just today the reason our stock market so successful is because of me I've always been great with money . I've always been great with jobs. That's what I do. What do you think I think it's a preposterous claim. It's highly irresponsible for a president to make. It's highly irresponsible and foolish for a president to make . Because if you take credit when the market goes up it's hard to see why you shouldn't be blamed when the market goes down. And that's why more thoughtful presidents have of both parties have over time not tried to score themselves on the basis of particular moral particular market movements. And so I think it's very foolish for any president to try to brag on a market that has strengthened as a factual matter. Markets all over the world have rallied very substantially many more than the United States calling into question the idea that it's specifically what our president is doing. And if you look at the composition of the rally and you look at different stocks it's not the case that the ones that are most affected by the president's prices by the president's tax policies are the ones that have by any substantial margin rallied rally the most. And you know at the risk now of descending to a cheap shot but I don't think it's a completely cheap shot. You know the president says he's so good with money . It would be easier to evaluate whether that claim was right . If the president like all previous presidents allowed the American people to see his tax returns and to see the sources of his income and to see what possible tax shelters he's using and to see who his business partners have been. And so it seems to me that if he's going to claim his prowess with money as one of his virtues that's a further reason why the requests that he make available his tax return as every official who works in his government is required to do so seems appropriate .

No schedule data available.

Larry Summers on Tax Code, Trump's Market Claims

Former U.S. Treasury Secretary Larry Summers examines the GOP tax plan and comments from President Donald Trump on the success of the stock market. He speaks on "Bloomberg Daybreak: Americas." (Source: Bloomberg)

More From Bloomberg Daybreak: Americas
All episodes and clips

Bloomberg Markets
"Bloomberg Markets" is focused on bringing you the most important global business and breaking markets news and information as it happens.
More episodes and clips