Daniel J. Mitchell, an American economist based in Washington, D.C., and former Senior Fellow of the Cato Institute and the Heritage Foundation, visited Vienna last week to give a talk on “Donald Trump’s Tax Reforms.” Over a classic Viennese Schnitzel, Kai Weiss talked with him about Trump, globalization, populism, and pro-market reforms in the US and around the world.
Kai Weiss: You are here in Vienna to talk about Donald Trump’s recently passed tax cuts. Could you just shortly sum up your thoughts on them?
Dan Mitchell: The first thing to understand is that it is not a tax cut in the long run. Starting in year ten it’s a revenue increase, so it’s really a revenue neutral tax reform in the long run with a small-size tax cut in the beginning. To answer your question: It’s a very good plan, much better than I thought, because it does some important things: it lowers the corporate tax rate significantly in the United States, it modestly lowers some other taxes as well – but really the lower corporate tax rate is as we say the crown jewel of the Trump plan. It pays for that by restricting the state and local tax deductions, because under our federal system, states and local governments levy their own taxes, and those used to be deductible – you could use those taxes to lower your central government tax burden. Now there’s a limit on that. It also restricted business interest deductibility, so companies won’t be incentivized to issue as much debt. And also, it changes the inflation measure, because in all likelihood we have been overstating inflation, and so there is a new measure which will be used to adjust tax brackets for inflation. So, is that a simple, pure flat tax, which is the gold standard for tax reform? No. But is it a good step in the right direction? Yes.
After one year of Trump, would you say he is better than Obama, better than Bush? How is he doing so far?
Bush and Obama were almost completely bad, both of them were very statist, big-government politicians. With Trump it’s random: on some issues like taxes and regulation he’s good, on other issues like trade and government spending he is bad. He’s sort of a populist. You have to be careful with that term, because it can mean different things to different people, but he’s a populist in the sense that he always wants to do things that people will like. People like tax cuts, people like government handouts, at least some people like protectionism in the favored industries, so a lot of the things he’s doing are exactly what you expect a traditional politician to do who wants to try to be liked by voters. But that’s still better than Bush or Obama. Bush had a tax cut, but it wasn’t nearly as good as Trump’s tax cut. Obama did nothing good, nothing but a relentless expansion of the burden of the state.
There was an article in The American Conservative recently, where the argument was made that Trump so far is the most libertarian President since Calvin Coolidge, who of course was the head of state from 1923 to 1929, and is today seen as one of the most pro-market politicians in US history. Would you agree with this or is that rather exaggerated?
I think it’s very much exaggerated, because Reagan was much better than Trump. Now having said that, other than Reagan and Coolidge every Republican President in the past 120 years has been bad, so I would modify that statement to “He’s the second most libertarian President since Coolidge” – actually, let me take that back and elaborate: Bill Clinton turned out to be a pretty good President, maybe not because he wanted to, but with the combination of the Republican Congress – Newt Gingrich, and the 1994 revolution. So I think the statement in The American Conservative was an exaggeration, but Trump on economic policy has so far been somewhat good. Now he could wreck everything with a lot of protectionism, and he’s already started out 2018 in the wrong direction, so we’ll have to see.
In the run-up to the 2016 elections, Libertarian Presidential candidate Gary Johnson was asked who his favorite political leaders in the world are – and he had no idea. Are there any good political leaders right now?
I actually wrote a column about that, and I pointed out that the reason Gary Johnson had trouble figuring out who was a good President or who was a good political leader in the world was because there are no good political leaders in the world, or very few. I wound up listing some of them, but most of them were retired – like Mart Laar in Estonia, José Piñera in Chile. You know, it’s very difficult to think of a politician who is currently in office who has a good, admirable track record.
Historically seen there are classic positive examples like Thatcher and Reagan of course, but is there a sort of underrated leader who you would say stands out?
Well, Bill Clinton was underrated, but I don’t really want to list him, because he probably was good only because of Congress – and in our separation of powers system in America, the powers of a President are much less than the powers of a Prime Minister. Ivan Mikloš in Slovakia was very good in the early 2000s. He then made a big mistake when his government supported the Greek bailout, and that caused the government to collapse, so he made a big mistake there … Who else is a good political leader? Economically I guess you have to say the leaders of Hong Kong and Singapore have been good in the sense that they haven’t done anything stupid, but otherwise …
So it is tough?
It is tough, I mean Gary Johnson hesitated because it is difficult to find a good politician. I mean, there have been some good politicians in New Zealand: Roger Douglas with the Labour Party, and then Ruth Richardson with the National Party. There were some good politicians in Australia. There was a lot of good free-market reform in the world in the 80s and 90s, some of it was just driven by jurisdictional competition which of course is something I very much like. But it happened, whether politicians did it because they felt they had to, or they did it because they believe in the right thing. But in terms of really good, strong, free-market, libertarian ideals, no, Gary Johnson had trouble answering because it’s very hard to find any.
And in countries like Hong Kong or Switzerland you often don’t even know who the politicians are.
Right, that actually reminds me, I listed Kasper Villiger. He was never the actual head of state or anything like that, but he was the Finance Minister, and he was very, very good in Switzerland.
When you look at people like Trump, Le Pen, and all the right-wing “populists,” why do you think this backlash, this rise of “populism,” can be seen currently?
I guess I accept the conventional definition, which is that it’s coming about because low-skilled people have a hard time in the globalizing economy, and because those people tend to be the very ones who are most economically pressed by immigration. If you are already having trouble competing, because you don’t have the education and training to compete in a globalized economy, and then you have a bunch of low-skilled migrants coming in, that is a recipe for people to be somewhat upset, angry, and frustrated, and they are very susceptible to populist messages. Now, I think it’s important to distinguish between bad manifestations of populism, and – I don’t know if I would say they are good, but neutral manifestations. Brexit was seen as a populist outcome – if I was in the UK, I would have voted for Brexit, and I would have voted for Brexit for the reasons that libertarian people like Dan Hannan talked about. Were there people who voted for Brexit because they didn’t like people of different skin color? Yes, and that’s unfortunate, but that doesn’t change the fact from a libertarian policy perspective – assuming Theresa May doesn’t screw it up totally – Brexit should be a good thing in the long run.
The arguments has to be made that the international division of labor helps pretty much everyone, and the world is getting wealthier and wealthier. But, as you kind of mentioned already, when you look at globalization, let’s say you have a coal miner in West Virginia, and his workplace was closed down, or a blue-collar worker in Europe whose car factory was moved to China: do they actually profit from globalization?
Individual people can lose from globalization, there is no question about that. But that’s always been true about change. When the electric light bulb was invented, people in the candle-making industry were hurt. When the automobile was invented, people in the horse-and-buggy industry were hurt. When the personal computer was invented, that destroyed the typewriter industry. Yes, people were hurt by competition, people are hurt by trade, but in the long run, society is much better off, including the descendants. That doesn’t mean however that at any given point and time, some individual people, or individual communities even, could get hurt by trade, by technological development, by just anything that would fall under the rubric of Schumpeter’s “creative destruction.”
There are people who argue that if you look back a few decades, “the poor”, or even an average family, in industrialized countries is worse off than they’ve been decades ago. If you look at the 1960s for example, you have this image of a family, where the mother stays at home to care for the kids, everyone has a brand-new car, everyone is just happy. Today this is often not possible, where both parents have to work sometimes two jobs, and then still only get along just like that. Could it truly be the case that despite us having all these new technologies, much is worse than it’s been a few decades ago?
I think the average poor person has to be better off today than they were. If somehow there is this magical world where you can vote to have your life in the 1960s, or your life today, I think 95 percent of the poor would vote for the life today. The quality of human existence is just so much higher. Now, there are all sorts of interesting technical questions about whether income is measured correctly – is inflation overstated for instance? But if you look at more concrete measures such as the average square footage, the average amount of consumer amenities, there are so many ways poor people are better off today. Having said that, there are some very serious problems: back in the 1960s you didn’t have the very high out-of-wedlock birth rates, and we have seen a destruction of the family in low-income communities. As a libertarian, it’s not my job to tell people how to build a family, but just as a societal observation, that’s been very, very bad for low-income households – probably subsidized by government, because government has in effect replaced the father as a source of income, and made marriage a much less attractive proposition, and I think that’s had a very negative effect on low-income communities. In that sense, I think the lower-income society is probably worse off. But in terms of just material lifestyle issues, they are better off.
A concern brought forth mostly by Marxists, but also by many conservatives – and even Adam Smith, is that the division of labor is maybe creating wealth, but there’s the danger of “overspecialization,” where people become alienated from their jobs, having to constantly work on minute and ever-repeating tasks. Would you say that there is something true about that? Could there be a point where work is too specialized and where people maybe get wealthier, but not necessarily happier?
I confess I have never thought about that. I will just make a very generic observation that people have to make a judgement in their own lives: how hard are you working versus how much are you enjoying life? And maybe if you are hyper-specialized, maybe that calculation becomes more important – I don’t know, I’ve never thought about it, but as far as I’m concerned, it’s up to each individual to decide, “am I doing what’s best for my life?”
We made a short video last year during the Free Market Road Show, and you said there: “Good policy is the same all over the world. You have to make government smaller to give the private sector more room to create more jobs and growth.” And you also said that you travel around the world and look at different places, look what works, what doesn’t, and then try to “copy” it in the US. Do you think there’s a certain set of policies that works everywhere in the world and that can just be copied everywhere, or are there differences from region to region, or culture to culture?
I’m sure there are cultural differences that make a difference in how much of a response or benefit you get from different policies, but my view is that the policies are the same. The first thing I do when I visit a country is I look at Economic Freedom in the World from the Fraser Institute, and you can see the five major categories: fiscal policy, trade policy, regulatory policy, monetary policy, and rule of law, property rights. Those are good things to have no matter where you are in the world, and I think they are associated with better economic performance no matter where you are in the world. Maybe in some cultures higher taxes do more damage than in other cultures – as a matter of fact, you do see social scientists writing about the reason that Nordic countries historically have withstood higher taxes is because there’s higher levels of social trust in society. So I’m perfectly willing to believe that there are differences in how the policies impact societies, but I firmly believe that the good policies are the same all over the world.
Last question and straight forward: is taxation theft?
My anarcho-capitalist friends will say “Yes, it’s all theft,” and in some sense, they are right –government takes money from you by the threat of coercion and if you don’t give them the money they will throw you in jail, if you resist they will shoot you. How is that different than a robber in the street? Well, it’s different than the robber in the street, because in theory you are part of a democratic society – but then the argument from the anarcho-capitalist is that “two wolves and a sheep vote what they have for lunch, why does that make a system just?” These are interesting theoretical discussions, especially if you are twenty years old, and you are in college, talking to other people – I don’t have that luxury anymore, I’m proud to just move policy in the right direction, and what I always tell my anarcho-capitalist friends is this: “Let’s get government down to five to ten percent of GDP, and then we can argue about how much farther we can go.” For right now, we should all be on exactly the same side, whether we favor zero percent of GDP or whether we favor ten percent of GDP. Right now, governments in Western societies are consuming 35 to 55 percent of GDP, so we have a long, long battle, and with very uphill odds. If we somehow miraculously win that battle, then we can have a big fight over the proper role of the state.
Daniel J. Mitchell is a public policy economist in Washington, D.C. He has been a Senior Fellow at the Cato Institute and the Heritage Foundation, an economist for Senator Bob Packwood and the Senate Finance Committee, and a Director of Tax and Budget Policy at Citizens for a Sound Economy. He has published in The Wall Street Journal, The New York Times, Investor’s Business Daily and The Washington Times. Dr. Mitchell received a Bachelor’s degree and a Master’s degree from the University of Georgia, and holds a PhD in economics from George Mason University.
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Kai Weiss is an International Relations student and works for the Austrian Economics Center and Hayek Institute.