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Taxes, Trade, Tariffs, And Trump

Rick Newman, China Trade War, Trump

With Rick Newman, Senior Columnist at Yahoo Finance

A friend of the show, Rick Newman, Senior Columnist at Yahoo Finance, joined us again, for a discussion of taxes and tariffs.

Trump Laws

The law that was passed by the Trump administration in 2017, which went into effect early in 2018, was the first topic of discussion. Rick explained that this legislation had resulted in approximately two-thirds of the population receiving a tax reduction, with only 6% seeing an increase. From the perspective of the general public, this would seem to be a broadly successful policy.

Tax Refunds

The news wasn’t quite so good with regard to tax refunds. Rick noted that tax refunds will be less during the current tax year than has been the case previously. Rick explained the psychology behind this and noted that the bottom line is that the total amount of tax that you pay is what ultimately matters. If you’re receiving a refund, it means that you paid too much, which is not necessarily a good thing! Rick’s advice is to focus on what you have actually paid and to be aware that two-thirds of the US taxpayers paid less tax this year.

Rick observed that since many Americans now receive 24 pay slips within an annual period, the average tax reduction of $1,000 may not seem particularly noticeable.

China Tariffs

The discussion then moved on to trade tariffs, particularly the hodgepodge of import tariffs that the Trump administration imposed over the last year or so. In particular, Chinese imports were heavily targeted. The Trump administration has put out a lot of rhetoric on this matter, indicating that it’s good for America and American business, but Rick suggested that the reality certainly doesn’t mesh with this perspective.

The Trump administration has given the impression that China is bearing the cost to import these goods, when the reality is that the US consumer is actually footing the bill for imposing these tariffs in the first place. Importers pay the tariffs, which means that American companies are footing the bill, which they then, oftentimes, pass on to the consumer. Furthermore, American businesses that relied on exports can be damaged by this policy, as China, for example, has understandably enacted retaliatory tariffs on American goods. This situation has particularly impacted US farmers.

Higher Education Scandal

The discussion then moved on to the recent investigation of wealthy families bribing and buying their way into elite colleges for their children. The corruption involved, beside the parents themselves, coaches, college administrators, and “grooming” companies who were the agents behind the whole scheme.

Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital.  Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.  Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances.  The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

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Steve Pomeranz: I’m very happy to have Rick Newman back with us. He is Senior Columnist at Yahoo Finance. And he often offers insightful takes on many of the biggest stories of our time. He was previously Chief Business Correspondent and Pentagon correspondent for US News and World Report. Hey Rick, welcome back.

Rick Newman: Thanks, Steve.

Steve Pomeranz: You recently wrote an article about the taxes and tariffs. And you either, if you hate this president or you love this president, I thought it would be nice to know the facts about the effects, if any, of the reduction in taxes passed by the government last year and what has been the effect on the US of tariffs imposed on China as well. Two very important issues. So here’s my question to start: did the law which went into effect in 2017 lower the tax bill for about two-thirds of Americans as stated?

Rick Newman: Yeah, so I think you mean when it was passed in 2017, but went into effect at the beginning of 2018 and yes. Reliable third party analysis says that about two-thirds of all individual payers got a tax reduction from that law. Taxes went up for about 6% of taxpayers. So that means the remainder, which is I guess around 25%, really didn’t see much change in their taxes.

Steve Pomeranz: Okay, so what was the problem with the refund checks this tax season? Why was their so much reporting on people complaining about lower refunds?

Rick Newman: Probably two reasons there was a lot of reporting on it. One is the press loves a gotcha moment without a doubt, and this was an instance in which, I mean, the tax season’s not over yet, so we don’t know the final numbers. But it does appear that tax refunds are coming in lower this year than they have in the past. So for Republicans who said, oh, taxpayers just gonna love our tax cut law. Turns out taxpayers don’t love the tax cut law and this is another instance of why. But this is also, tax refunds are kind of an important part of the consumer economy.

And some people have said this is much ado about nothing because what’s important, it’s not the size of your tax refund because if you get a refund that means you overpaid taxes in the prior year. The real thing to focus on is the total amount of taxes you pay for the year and the data does say that, as I said before, about two-thirds of Americans did get a tax cut. Nonetheless, consumer psychology is such that a lot of American consumers depend upon that tax return. And if you’ve been in the same job in the same circumstances for a number of years, you kind of get used to know what the amount of that tax return is going to be.

Steve Pomeranz: Yeah.

Rick Newman: And look, people aren’t stupid about their money. They know that they’re essentially lending the government their money for a short period of time at zero interest rate. But they like the fact that they get a lump sum payment in the spring of every year. A lot of people kind of count on that; they use it to pay down debt.

Steve Pomeranz: Yeah, vacation.

Rick Newman: Yeah, that’s right. In the auto industry, for example, there’s a meaningful increase in car purchases in the spring that is probably attributable to the fact that people have this tax refund to play with. So it’s a little bit condescending to say, oh, consumers are missing the point, but they’re not getting a big enough tax refund.

Steve Pomeranz: Well, it seems to me that there’s something else at play then if two-thirds of Americans are paying lower taxes and yet, and they’re not changing the tax structure, the number of dependents that they declare and things like that. So the increase in taxes or the reduced paycheck must be coming from somewhere else. Not the reduced paycheck, the reduced refund, must be coming from somewhere else. Otherwise, the math doesn’t seem to work for me.

Rick Newman: Well, here’s where it’s coming from. People, so the amount that you should have had deducted by your employer essentially changed last year because the tax rates changed and the tax tables changed as well. And the IRS did not really do a great job of providing guidance on this.

First of all, if you think about the timing, the law didn’t pass until the very end of 2017. And it took the IRS months to figure out what we think is really going to happen. And even then, it was just an estimate. And most people didn’t know what they were supposed to do. I mean, it’s not like we all got a notice in the mail from the IRS or not even from our employers. Nobody told people they needed to do anything differently. So almost everybody just said, well, if my taxes are lower, I guess I don’t have anything to worry about here.

Steve Pomeranz: Yeah, I think that’s it.

Rick Newman: And so, when we say about two-thirds of people did get a tax cut, the average tax cut was about $1,000 per year which is not nothing, but when you factor it over 24 semi-monthly paychecks, it’s not all that much in a given paycheck.

Steve Pomeranz: Right.

Rick Newman: And polls showed that a lot of Americans didn’t even notice that their paycheck may have gone up by a little bit. So I think it’s something most people didn’t even think about.

Steve Pomeranz: Okay, so moving on, you wrote that the Trump tax cuts reduce taxes paid by businesses and workers by a total of about $150 billion per year, so that’s a real number.

Rick Newman: Yep.

Steve Pomeranz: But were there other taxes, and then I want to discuss in a minute the effect of tariffs as well. But were there other tax hikes somewhere that means there was an offset of the $150 billion savings.

Rick Newman: Well, this brings us immediately to the tariffs you say you just want to discuss. So we also know that the Trump administration imposed tariffs on a bunch of different types of imports last year. And these came in kind of a hodge-podge way. There was never a coherent grand plan that said we’re going to phase in all these import taxes at these points of time. We had steel and aluminum tariffs in March of last year. We had washing machine tariffs in January.

And then Trump hit almost half of all Chinese imports with new tariffs in phases at three different points last year. So some economists have now tallied this all up, and they have found that, in total, those tariffs are a tax of about $3 billion per year that Americans are paying. Trump does not describe this accurately. He says China is paying these new tariffs that are flowing into the treasury. That is not how tariffs work, and that’s not what’s happening.

Steve Pomeranz: Mm-hm.

Rick Newman: The way tariffs work is the importer, when the importer takes possession of the imported goods, the importer then has to pay the tariff. It does go to the Treasury, but it’s American firms that are paying that. And if they can pass that on to consumers, they do, through higher prices.

And they can’t always do that, so sometimes they just eat the cost. But if you annualize that, it’s simple math to say, well, 3 billion a month times 12 months is 36 billion in new taxes. They’re hidden taxes. But, I mean that’s not a negligible amount of money either. So for $150 billion in new tax cuts you can reduce that by about $36 billion on an annualized basis. So the Trump tax cuts have a little less impact in that regard.

Steve Pomeranz: All right, well, we have a $20 trillion economy. So 36 billion here, 36 billion there, it doesn’t seem to be enough obviously to cause inflation. And also not enough to cause recession. What is your thinking on that?

Rick Newman: Well, you’re right, I think you’re right about that. And when I wrote about this, I pointed that out. But $36 billion isn’t nothing, either. And we’ve seen big fights in Congress over a lot less than $36 billion.

Steve Pomeranz: Mm-hm.

Rick Newman: President Trump shut down the government because the gap in funding for the border wall that he wanted and the Congress was offering him was only about $3.5 billion. We had a government shutdown over $3.5 billion Right. So it’s not nothing, and then this is concentrated in a few different pockets of the US economy.

And it’s not hurting most people, but it is hurting some people in these parts of economy. The most obvious example that comes to mind is farmers who used to sell soybeans or pork or other products to China, and China has put on retaliatory tariffs in response to the US tariffs and that market has essentially dried up for some of these farmers. So farmers are actually having a tough year.

Steve Pomeranz: Yeah.

Rick Newman: Farm income is down significantly and trade wars are a big part of it.

Steve Pomeranz: One of the purposes of the tariff is to raise the prices of imported goods to, bring them to parity, to some parity with local manufacturers, with domestic manufacturers. And therefore, I move some of that business back to the United States. Has that happened?

Rick Newman: There could be a little bit of anecdotal evidence that it has happened. But I’m not aware of any anybody who has looked into this, who has found that this has had any kind of systematic effect that would show up in national data and it’s not surprising either. So what economists have found is that companies, US companies, that used to import parts or components or products from China are now doing what they call import substitution which means they’re just going to other countries to get those products. Because I can get it from India or-

Steve Pomeranz: Yeah.

Rick Newman: Indonesia or someplace else, Vietnam is another good example. So if they can get the product from someplace else, they are getting it from someplace else and without a doubt, a lot of companies are considering moving their supply chains permanently out of China.

Steve Pomeranz: Mm-hm.

Rick Newman: To these other countries where there are no tariffs, of course. There’s no guarantee that Trump won’t, at some point in the future, put tariffs on imports from other countries. So this is one of the types of uncertainty that CEOs and CFOs are complaining about. It is a big leap to go from importing products from China and making them in the United States, simply because the cost of making it here is so much higher.

And you cannot just automatically just move production back to the United States because then you’ve got to persuade your consumers to pay considerably more for the same product. And that is just not a given, in fact, when price of something goes up, unless it’s something people absolutely must have, they’re depending on, when the price goes up, sales go down, and that’s why we’re not seeing much of this happening.

Steve Pomeranz: Rick Newman is Senior Columnist at Yahoo Finance and is joining us today. We’re talking, as you can see, about taxes and tariffs. So, Rick, if China is losing business, what’s been the result on their economy? Has it weakened?

Rick Newman: Well, Trump has claimed that the tariffs in his other protectionist trade policies are hurting China, and he’s probably right about that. So we’ve seen that in the Chinese stock market, which has been up recently this year, but that is on expectations of a trade deal with the United States. The Chinese stock market was down significantly more than the S&P 500, for example, last year, 2018.

And we’ve seen other ways the Chinese economy is really slowing. That is partly because of things inherent to the Chinese economy. But the Trump trade dispute is part of it. I think there are two problems here, though. I think Trump is not only harming the Chinese with these tariffs and other policies. As we’ve been discussing, he’s harming some Americans as well, and that’s basically just what happens with tariffs and protectionism. You sort of have to hurt yourself.

Steve Pomeranz: Yeah.

Rick Newman: In order to hurt the other guy. And it becomes attrition warfare. Like, who can hold out the longest.

Steve Pomeranz: Who can last.

Rick Newman: And who can hold out the longest.

Steve Pomeranz: Well, the idea is to suffer some pain to get an expected and planned or hoped for result. And a little pain is not so great, but if you’re dealing with a country that can withstand or is strong as well.

Rick Newman: Yep.

Steve Pomeranz: It is a war of attrition and it’ll be interesting to see who blinks first.

Rick Newman: Right, and ideally both sides would blink, and we would sort of get our way out of this. But most of the trade experts I’ve been interviewing and following say China will make some concessions here, and one thing they can do, for example, is they can agree to buy more US exports. So, in theory, that might lower the trade deficit between the two countries.

But China is not going to fundamentally reform the way it runs its economy as Trump and others wish they would. They are not going to give up control of the big, the giant banks and the giant steel producers and things like that. They are not going to stop trying to gain dominance in these 10 or 11 key industries they have decided are just vital to their future.

Steve Pomeranz: Right.

Rick Newman: They’re not going to stop doing that. They’re probably going to not stop stealing western technology either. They might say, we don’t steal western technology, we don’t intend to and we never did, but they’re not going to stop doing that. Because honestly, it has been working for them, and the US president needs to get reelected in 2020. The Chinese president does not have that problem. [LAUGH] He does not have to deal with electoral politics. So without a doubt, one of the things China is thinking is maybe we can just wait this out.

Steve Pomeranz: All right, well, interesting. Some of this is really beyond my scope of discussing, and it’s not in my wheelhouse, so to speak. But you just talked about the top goals of the Chinese government. And I know one thing that a lot of Asians are doing is, they’re coming to the United States, and they’re seeking out our outstanding institutions of higher education.

And on that note, recently, there have been reports of a lot of cheating going on on the US side of the ledger here of wealthy families and wealthy parents buying their way into these elite institutions. And I know you have written about that as well. Where do we start, I want to talk about this a little bit. But just give us some of the information that you found out and the opinion that you have.

Rick Newman: Sure, I read the indictment and all the legal documents that support it. It’s an appalling situation. And there has been a completely legitimate outburst of outrage on social media and elsewhere that as if the rich don’t have all the advantages already, these families. And there were apparently around 800 families that sought out this one guy who was able to get the fake, get the surrogate test taker to take the test for the kids, so they’d get higher SAT and ACT scores.

And then, find a way to bribe somebody at these universities—there were at least eight elite universities, Stanford, Georgetown, and a bunch of others—where they bribed coaches to claim that these kids were athletes, which would sort of ease the admission requirements for them.

And that’s kind of how they got in. Even though they didn’t play sports, and they never joined the team. So if there’s anything, any sort of good news here is that this was criminal and people are going to jail over it. The guy who was kind of the mastermind of this scheme, who ran these two companies in California that did all these, he has pled guilty, so, he’s going to be going to jail.

And it looks like some of the coaches at the universities who took bribes in order to get these kids in when they shouldn’t have gotten in will also be going to jail. So that leaves a big question is what’s going to happen to the parents in these 800 families. Felicity Huffman, the actress is one of them, she has been in court recently. I think everybody wants to know are these parents just going to get a slap on the wrist and pay a fine and get out of it or are they going to possibly have to go to jail. That would be quite a spectacle.

Steve Pomeranz: I think what really bothers me, I mean, look everybody looks for an edge there looking to kind of figure out this system, play the system. It’s the corruption of the coaches that particularly bothers me, and there’s so much about this that bothers me. But when you think about the institutional actors here.

We’re not saying that the colleges themselves knew about it. But you have coaches that are lying and that are being paid to lie. You’ve got professional test-takers that are going in and being paid to take tests. I mean it’s a whole system of corruption all the way down the line and the idea basically by somehow getting your child in to one of these elite institutions if they don’t really, I don’t say deserve it, but they’re really not well suited, they haven’t earned it for themselves, is really doing a disservice to the child. And I know you’ve written about that in the past.

Rick Newman: Yeah, there are so many ways of looking at this but one of them is, what’s apparent is, and I think it’s fair to say these kids were not qualified for the universities they got into, and it includes Yale, so at least one Ivy League and others, so they were not qualified. So they could have gotten into school somewhere, but their parents wanted them to get into these more privileged schools, more elite schools. Yeah, I even wrote a book called Rebounders that came out in 2012, and I basically studied resilience and how this applies in people’s career’s when something goes wrong.

And there’s now a ton of excellent research on this and it shows that the way we build resilience as human beings is we have to overcome setbacks in order to become resilient. Emotionally you are not born with it, you learn it. And parents help their kids learn resilience by letting them overcome or helping them overcome setbacks on their own. But you have to overcome a setback; you have to let a kid fail; you have to let something go wrong for kids. And you protect them, you do that in a safe way. You don’t just turn them loose when they’re six years old, obviously. But you let them fall down on the playground. And if they don’t make the baseball team, they don’t make the baseball team.

Steve Pomeranz: Right.

Rick Newman: And then you help them figure out what to do next and how to overcome that. Obviously, when you are buying every privilege for your kids and the kids never have to accomplish anything for themselves, I would argue that’s a crime against the children. Even if it’s not technically illegal.

Steve Pomeranz: We’ll leave it right there. My guest, Rick Newman, Senior Columnist at Yahoo Finance. You can find him. How do they find you, Rick?

Rick Newman: Finance@Yahoo.com is where all of our stuff is and my personal website is rickjnewman.com.

Steve Pomeranz: Very good, and of course, thank you for sharing your time with us. To hear this in any other interview again, if you have a question about what we’ve just discussed. We love to get your questions. Visit our website at stevepomeranz.com to join the conversation. And while you’re there, sign up for our weekly update. You’ll hear all about our upcoming live events and the important topics that we’ve covered this week straight to your inbox every single week. That’s stevepomeranz.com.

Steve Pomeranz: My guest is Rick Newman, senior columnist at Yahoo Finance.