house council of economic advisers kevin hassett. this is 40 minutes. >> before joining, he was a senior economist at the federal reserve board. any of you who know kevin or have seen him speak know that he

is a clear thinker, a straight talker, and says what he thinks. he is, i think, serving the administration and the country extraordinarily well. the format we are going to use today is question-and-answer. i'm going to lead off with a question or two for kevin and then he's kind enough to be willing to accept questions from the audience. he has a hard stop at 1:30 p.m. so let's keep that in mind. please join me in a round of applause for our panelist this morning. [applause] whether it's charlie rose or david rubenstein, don't want to talk about that.

let me start, kevin, with a very broad question. on the recent tax reform bill. what in your view are the three most important changes that that bill accomplished? mr. hassett: thanks so much and let me begin by thanking john for his leadership for all these years. i think it might've been that i wrote a paper for the very first meeting, but if it wasn't the first, it was the second. mr. samuels: we take credit for your career. mr. hassett: four could be the other way around. it's because of that first paper. anyway i think it has become a highlight of the washington tax community every year because you bring in even people from oxford to come help us think about

average tax rates. we have learned so much. i know that there are probably diverse opinions about the nuances of the international tax rules in the tax bill in this room. i think there are a heck of a lot of good things in the tax overthat 02 the research the years, nonpartisan economic research with the best tax economist in the world. it's really an honor to be here. a lot of my old friends since i've been here eating lunch asked me what it's like to be in the white house. i never knew what it was like to live in dog years, but i'm doing that right now. other than that, it's an incredible honor to have a chance to serve this country. the three things that i think are most important -- i guess people could pick and choose, but i think it would not surprise anyone to say that i

think the tax rate getting to 21% is something that really mike in the front convince me to what i would call number one. the reason that i think that is number one instead of the expensing is that when i was in grad school and alan and i first started writing papers, i was really convinced that expensing was the most important thing. as i watched the international tax code evolves over time and watched the literature move along with it, i've become convinced that things like plant location response more to average tax rates and getting the average tax rate in the u.s. down to 21% should -- we thought that should cause a lot of firms to want to relocate their activity here to the u.s. anecdotally that's already beginning to happen. one of the things that the staff

does as we help fact check stuff it comes to the white house. being nerds we are pretty aggressive about what is a recent thing? there was a daily number in the president's speech, but the person who put it in the speech neglected to notice that the last year we had data was the leap year. you had to divide by 366. another one is that it turns out if we would ask people in the room how many firms are there in the 5000, sound like one of those jokes. it turns out there are not 5000. it's 3900 something. if you say 5000 firms in the wilshire 5000 that's not correct. the reason i mentioned it is a the fact that there is well more than 300 firms have made significant announcements about what they're doing, it's very significant economically. we saw the beginnings of the

effects of the slower rate and what it's going to do for america firms and american workers in today's jobs report where january wages spiked to a level that was the highest. monthly changes are volatile, but the 12 month change that's moved through a little bit is the highest it has been since 2009. that is thing one. i think that thing two -- i know there's been a lot of political debate about how much redistribution there should be. i know alan and i had some disagreements about how he did is inequality work, but i think one thing we said we all agreed about is that we should have a society that equalizes opportunity. the big expansion of the child credit, that may be what bigger than the president hoped, is the

kind of thing that people who agree and equalizing opportunity is an idea that you should support and it's an important part of the tax bill because it will get money to people who really need it. the third thing -- i will even go to something that seems kind of minor, but i think -- i said in "the new york times" a few days ago that it might be the biggest part of the tax bill and we should talk about it a lot more is the creation of opportunity zones in the tax bill, which is something that jared bernstein and i wrote a paper about half a dozen years ago and have been advocating as academics ever since. the opportunity zones are going to increase the chance that there is a race to invest in communities in america. that is an important component of this tax bill because as we go out and say the tax bill is going to encourage capital

formation and wage growth, then the natural question some of he would have would be how do we know it's not just want to happen in san francisco or some other place that's a really booming labor market right now? how do you know it will help distressed communities that everybody cares the most about and it needs to turn around right now? i think the opportunity zones are designed in a way that it's going to create a positive mast equilibrium where everybody goes because everyone else is going to distressed communities with capital. mr. samuels: very interesting. i will ask one more question and that i'm to turn it to questions from the audience. and that is the impact of this bill on the deficit. if you round numbers, the joint committee staff scored this on a static basis as losing over 10 years $1.5 trillion and then the dynamic score took it to about $1 trillion. if you at the interest on the additional debt, you are about $1.3 trillion over the budget

window. should we be concerned about that? mr. hassett: round numbers, of course you should always be concerned about the deficit. in present value, the u.s. fiscal situation doesn't look so good. i think that if we look at the tax bill in isolation and think about the deficit impact that it has, i think there has been a lot of confusion about it. first on the corporate side, as you know, the corporate side almost statically scored was revenue neutral, which relative to the size of gdp is rounding error. the corporate side is on was revenue neutral because a lot of the stuff like the beat and the things that you were talking about earlier today, there are things that gather revenue that offset the revenue lost from lowering rates.

if you think about the fact that even with the joint tax model, which i disagree a lot with, that getting all the way down to $1 trillion dynamic score for a bill to get to reach to 21% is pretty impressive given the most of the growth effects are coming for the corporate side. the cost of the refundable child credit is about $700 billion. if you consider the full dynamic score of the tax bill, there other parts you can pick and choose, but if you withdrew the child credit altogether, then you would have had something that was very close to an 86 style act. when you are thinking about -- i know we are all concerned about the deficit and we all understand that we have long run balances that have to be fixed, but when you're thinking about the tax bill, i would say that if you remove the child credit

that you have something very similar to an 86 act. you have to ask yourself do you think the child credit at the margin was worth the deficit increase that it gave you? i think most people in this room would think it was. then the question is what do we do in the long run? that is something that is certainly getting a lot of attention from everybody in town and at the white house. in the short run, we had this raging problem where we had the least competitive tax code in the developed world and the least competitive tax code in the developed world led to some very striking things in the data that got way too little attention. if you look at the last decade, profit growth was about 10% a year for u.s. firms. wage growth on average the last decade was -.4%. we did some structural break analysis and found that there never been a time in u.s. history where the two headed in directions so opposite.

there's complete disconnect to how well firms are doing and how well workers are doing. my belief is it is because those profits were booked in ireland to get the lower rate and so on. it's not just my belief. one of the things that the career staff at cae does is that they let you think about how the economy is doing. one of the things that they do is look at productivity growth where productivity growth comes from. one of the charts they have been making forever is the contribution to productivity growth from capital steepening. and the contribution to productivity growth from capital deepening went negative for the first time in u.s. history in the second half of the obama administration. imagine -- we had an economy that was growing and the contribution to parts of the growth was negative. you ask yourself, why did wages grow -4% year?

why did classical deepening go negative for the first time in u.s. history? the profits in the operations were over there because we had this tax code that said don't locate activity in the u.s.. located over there and we will give you a big tax break. i know that there are a lot of tax experts who understand this, but an example i like to use -- let's suppose there was some kind of manufacturing plant in the u.s. and we made something like let's say shampoo. we've been making it for a while and it's been very profitable. then john because he's a clever international tax guy says, why don't we make half the shampoo in ireland? then what happened would be that the firm would say, let's close down our plant in the u.s. and put a plant in ireland and keep the headquarters here in the u.s. so john and i don't have to sell our houses.

the shampoo we are selling for $10 a bottle in the u.s. we make it in ireland and what we do is the u.s. parent buys the shampoo from our own subsidiary in ireland for $15 a bottle. we sell it for $10 in the u.s. and now we lost five dollars. we post a five dollar loss for the parent and post really healthy profits in ireland because they are selling shampoo for $15 instead of $10. then all of a sudden, what does the parent do? the parent carries the loss back and gets refunded the past taxes that we paid when we had an operation the u.s. we have this cuffed as system where the u.s. tax code is subsidizing the location of the plant in another country. when you have kafkaesque features, and it got fixed by

the code, i think we are already seeing the movement and wages. people say there has been -- i think our current count is more than 3 million workers affected by announced wage increases of more than $1000 and so on. why is it happening already if the story is capital deepening? i think milton friedman would say it should adjust right away, but if you have contracts that slow it down, i think the bonuses would be explained why optimism that u.s. firms have that this activity that used to be over there is coming back and fear that their competition is going to steal their workers. they are getting out ahead of the wage increases they expect people will be offering. it is really early in the game. i want to see at least another many months of the data that we

just saw that they could -- we just saw today. wage increase in today's data that came out was 3.6% after being in the ones and twos for a good long time. mr. samuels: that is certainly good news. mr. hassett: it could be a blip. we hope it isn't. i think economic theory suggests that's smoothing of the ups and downs. the fact that it looks that way so fast is so interesting and surprising. mr. samuels: so questions? jim? maybe if you would identify yourself? >> kevin, there are lots of expiring factors in the 2017 bill. a lot of things expire after 2025. how should we think about the administration's position that -- what is supposed to happen after that?

is the idea that they will be extended, and if so, how do they make up for the tax revenue from that? if they are not supposed to be extended, then why do we have them in the first place? mr. hassett: there are a lot of expiring provisions. this goes back to the very first text paper that i wrote and co-authored with a guy at the table over there. we wondered about how firms should think about future tax policy because it is expected future tax policy that matters. expected future tax policy is not observable. our identification idea back in the day was that after the 86 act that it makes changes. we thought it was reasonable to say that future tax policy would surely expect that there were not be a reversal of it within

the next three or four years. someone over there concurs. [laughter] i think as we model it, let's just be economists. as we model capital spending right now in anticipation of the future tax policy, then i think there is stuff like the expensing that expires. for those of you keeping score at home, that expiration of expensing shows up in the delta gamma term in the user cost, which means it's like having an investment tax credit. now it should accelerate investment right away. i actually see four people in the audience shaking. something is actually could accelerate activity now because you want to get stuff and before it expires. some things can go the other way. if the rate went back totally to 35% and the expensing

disappeared, then the long run target capital stocks would be unaffected. therefore, how much do you really want to change capital today given that any and your target is where you started with? my view is that as an economic modeler, what is important to do is wrap my brain around what investment firms are going to expect. i will do that before i talk about what government should do. one thing that is clear from work i've done on tax policy over the years is that there's a really big impact of elections on tax policy uncertainties. i was asked in an interview just yesterday when i look ahead to things that i'm worried about for the outlook, then what am i worried about? one thing i'm worried about is that there will be an election where people are elected who want to eliminate all these things. if you look at the history of

usuallytial politics, as you go into the fall, it's 50-50 in the betting markets. what that means is that right what are the odds that the corporate tax stuff is all there five years from now, then we could take a poll. if we all had our little clickers, i guess we would get something like not 100%, right? [captions copyright national cable satellite corp. 2016] [captioning performed by the national captioning institute, which is responsible for its caption content and accuracy. visit ncicap.org] what are the odds that the corporate tax stuff is all there five years from now, then we could take a poll. if we all had our little clickers, i guess we would get something like not 100%, right? i think this idea that if i say that i've got a permanent tax for 10 years but that somehow is going to be really important to the modeling i think there's a little bit to it. if you have a permanent thing, it's harder to reverse and so on. in terms of the economic effect, the expirations are not at the margins super affecting things because of the uncertainty that's already there. the white house should obviously

get back to that. they want stuff to be permanent and we understand the bird rule and we are really grateful that this historic tax bill has passed and we understand some of that involves the expiration of things. a lot of things happened when president obama came in. he extended almost every single thing that passed with the bush tax cuts of the top rate and i think a lot of it if it works the way we think will be extended on a bipartisan basis. i can say that with the expensing in particular that one of the reasons why expensing costs a lot at the end of the budget window is that you're taking depreciation from outside the budget window and moving it inside the budget window.

expensing ends up having a really huge cost at the end of 10 years even though it's basically moving the same amount of money from over five years into one year. that doesn't matter in the first year and a 10 year window, but it matters a lot in the 19 year. -- in the ninth year. if you go five years from now, the 10 year cost of adding a year to expensing at zero, are they going to do that? i would guess that if we were modeling it as firms, we would expect expensing to be permanent but i induction. it would be better if it was permanent by law, but permanent by induction is better than we were a couple months ago. mr. samuels: yes? >> i'm ralph. mr. samuels: wait for the mike. someone turn on ralphs mic. say your question i will repeat it.

>> i was asking about the repeal of the deficit tax and i knew that was a major issue. some groups are decrying the tax bill. where do you see that? mr. samuels: the question was how important is the repeal of the death tax and the calculus? mr. hassett: it was not one of the three things that i listed. i think that internet economic models -- in our economic models we tend to want to do away with it. it's something that might grass has written a lot about and he has remarked on how and polls it's almost impossible to construct a poll where you can find someone who would pay the death tax and yet attempts to be one of the least popular taxes.

i think the death tax on the other hand really does fall very much on very high income people. folks who are concerned about distribution issues like the death tax a lot because of the relatively efficient device to redistribute in a manner they find attractive. because of all those factors, anyone forecasting would say the death tax is going to be on the agenda after every election. there will be people who want to repeal it. maybe there are peers who took an optimal tax class and then there's going to be folks on the left about the rich acquiring more and more in society and wanted to undo that with the death tax. the death tax being on the table is the easiest thing to forecast. if it were fully eliminated, they would've done it in this bill. there will be a lot of political change that might make it so that would happen. i think there was a compromise that you saw that reflects the political reality that there's a lot of differing opinion on that topic.

what my hope is again going back to the question is that the good news for the people of this room is we just give you a lot of variation to study. there's a lot of papers that can be written. many of them may be funded by the i tpf. the hope is that over time, i know that the idea that the link between corporate taxes and wages was significant and controversial during the debate. i believe strongly in the corporate literature that we cited that found the effects that the president even mentioned in the state of the union. the hope is over the next two years as the academic literature involves that a consensus emerges that makes the bipartisan consensus makes a whole bunch of this bill permanent. my guess is that there's not enough academic work that i can envision that would make that a political reality on the death tax. mr. samuels: there's a fellow over here. go ahead. >> good afternoon. mr. samuels: the microphone doesn't seem to be working. >> my question is about paying

for the tax plan if and when the next economic downturn comes. there are some theories that the economy is doing well, so when the economy tanks, you can pull back and be less fiscally tight. my question is -- are there countries that have this corporate tax rate pretty high individual tax income rates? my question is how are we going to offset our lowered corporate tax rate in the same way that those countries do? if and when there's another downturn or a bubble, are we going to be in a position where we can do something about it given that now that the economy is improving our debt is still growing? mr. hassett: thanks for the question. i think that again the first

step and the president prioritized list from the very first time i ever talked to him was to make the u.s. competitive again so that plants would locate here and capital would be there for productivity growth. he did not may be exactly say it that way the first time, but i share that vision. if you have the self-inflicted wound, you need to fix it. if you consider that the static cost of the corporate tax hike, which was the real self-inflicted wound, was so low and even a joint taxes growth estimates were bigger than the cost of the corporate side, then really it's the individual side stuff that costs a lot and potentially the growth would add to the deficit.

in europe, what has happened over time -- and here is where i respectfully disagree -- is that they have increasingly relied on value added taxes to replace taxes both corporate and individual. their tax rates tend to be below ours. looking ahead, i think attack scholar would not predict that the u.s. would rely on the same strategies. the question arises -- what would you do if you decide to fix the long run balance? my guess is that any and this is not the administration's position. this is kevin the economist talking. people will be looking at the entitlement programs and progressively adjust them and make policy changes to restore them to balance in ways that require a bipartisan consensus. the last time this happened was the greenspan commission a long

time ago. if growth disappoints and the deficit disappoints, then i would expect that a commission like that would be called to start envision changes like that that would fix the long run deficit. there's not an income tax thing that you can do to fix the imbalances that alan and bill talk about. these programs have promised so much relative to the revenue they are raising that much more fundamental changes would be required to fix the long run deficit. mr. samuels: mindy? someone had a really interesting long mic that seems effective. [laughter] >> i wanted to follow up on your example. can you hear me? mr. samuels: we need to get a boom mic. [laughter] >> so your example of ireland and the u.s. now being more competitive in manufacturing

maybe because of the lowering of the difference between the corporate rate in the u.s. and ireland. while i agree overall it's a very good thing to minimize that difference, the reality is that most manufacturing doesn't take place in ireland. it takes place in other much lower wage countries. the difference between the labor costs for low skilled workers between the other countries with lots of low skilled labor available is much greater than the difference in changing the corporate tax rate. i don't understand how your example on ireland fits into that global market.

mr. hassett: that's a great question. again people might locate a plant and some other countries for lots of reasons. there's an aluminum smelting boom going on right now in iceland because there figured out that the geothermal allows them to have cheap energy to make aluminum with it. the point is that there are lots of reasons why stuff can be located in this place or that. the difference between the average u.s. wage and the wage of the foreign worker has certainly been an important contributor as well over time although a diminishing one as other countries ramp up and get their per capita income closer to the u.s.. when you're talking about what is the impact of a change like this on a location decision, then you have to think about the

tax rate certainly is important, but we have to control other factors, too. if you look at the work of mike in the room, that's the kind of stuff that they do. they throw stuff at the margins with the tax effect. jim has a paper where he shows the elasticity of the location of taxable income is pretty high and there are other people who criticize them and say it's lower. his work is generally reliable. [laughter] but the point is that they are adjusting to things at the margin. i think the irish wage has grown a lot and that they have received a lot of positive wage demand from location decisions there. locating activity in the tax haven is the easiest way to get the income there, not the only way. mr. samuels: i was gone to help you out on this a little bit with using our shampoo business. it is an either or. it doesn't have to be low-cost

labor or low taxes. they can complement each other. in our shampoo business, what we would have in ireland is the patents around our shampoo. we would maybe be manufacturing the shampoo in taiwan with a contractual relationship between it and ireland and shipping it to the united states, but the profits would all be in ireland. that is where we would attribute the value of our great shampoo to that. that is where the rate arbitrage comes in. the question is if the patents are in ireland, i can manufacture anywhere in the world except for the united states. i can't manufacture in the united states the way our tax laws work. mr. hassett: under the old law. mr. samuels: there is less reason now for me to manufacture in ireland than there was before. this still may be a reason. we may be halfway to shore, but we have moved in the right direction.

>> we have met before. [laughter] mr. hassett: we are quite positive that this bill is positive for ireland. no one should go out and short ireland. >> your irish-american heritage, there are many reasons why u.s. firms invest in ireland. one of them that we frequently site is level of educational payment and demographic strength of the country. we are the youngest nation and the eu and third-highest educational rate. mr. samuels: and the only english-speaking country in the eu. [laughter] >> there's clearly some tacit advantage to locating and investing for u.s. companies and ireland if they are going to access the eu single market.

it's a little disingenuous to characterize so much of the investment raised solely or principally untaxed profits. mr. hassett: the question is whether just taxes that brought people to ireland? no, there were some of things including an educated workforce and so on. their was a world bank study a while ago that i would have to re-sign the reference that looked at -- and i'm not saying that we want to call ireland a tax haven -- but look at what happens to economic growth at tax havens over the intermediate term. what happens very often is that people as johnson just it will locate and the actual property in a low tax averment. in order to do that, you have to

locate the experts and the people who developed the software and so on. the world bank report found that there tends to be a big increase in total factor productivity growth in countries that start out as sort of attractive tax locales because although smart people that get sent to ireland to do apple and google -- i know there are a lot of irish mark people recruited, but they also relocated people there. they tended to stay there and start their own businesses and so on. are seeing an island right now with the very high growth rate. the final thought that i was serious is if you run through the technicalities of the international tax rules, then it does seem like this is going to be a net positive for countries like ireland still. there's going to be more activity moved from other eu countries put ireland given the

tax rules. may be john could walk you through that. >> one final point to make. the world bank study also shows that ireland's tax rate, our corporate tax rate is 12.4% so the difference between headline and effective rate is extremely small and ireland as we apply the rate so broadly. mr. samuels: i thought it was 6.5%. >> like the other factors recited earlier, it's important to be compliant. >> what's next? apparently the president has mentioned tax reform again. what would be on your list of things to address next? mr. hassett: i think that the president has a very ambitious view ahead for us. since i started in the white house last summer, i've been involved in principle meetings on a million things. i think that he's about to make a big announcement that i think is going to include a a lot of really interesting ideas about our nation's infrastructure. i know your question is about what is next for taxes.

after this tax bill passed, i moved on to infrastructure and welfare reform and the other things we have been talking about. i really have to get a creative writing prize to come up with how i would change the tax code. there are definitely things in the final tax bill that were not the things that we thought we wanted at the beginning. i thought the president showed really kind of intuitive strong leadership when he said here are the nonnegotiable. the nonnegotiable stuck. it was relatively small. i think the tax bill continues legislative success and i don't anticipate tax legislation this year given how ambitious our agenda is elsewhere, especially in infrastructure. please join me in thanking kevin. i had forgotten that the itpf

did supercharge his career early on but seriously, we are all lucky to have someone with intelligence, and fresh perspective serving our country. and anything we can do to help you and help us, we are happy to do. please join me in thanking kevin for taking time out of his schedule. [applause]

what is the parent company reported weaker earnings. a contributing factor. with north korea defector at the white house, president trump talked about his decision to authorize the release of a memo, alleging misconduct of the fbi is part of the investigation into russian and appearance -- russian interference in the election. president trump: thank you very much everybody. thank you.

president trump: congress will do whatever they are going to do, but i think it's a disgrace. you see that and so many other things, a lot of people should be ashamed of themselves and worse than that. i sent to to congress. they will do what they're going to do. it was declassified. happens. what a lot of people should be ashamed. thank you very much. thank you very much. you, you figure that one out. >> brad heath is an investigative reporter for usa today covering law and justice.