Tapering and Taxes

Episode Summary

Executive Summary: The episode centers on a wide-ranging fiscal policy discussion with Brookings economist Bill Gale, framed by a quick review of Fed Chair Powell’s Jackson Hole speech and Moody’s real-time macro indicators. The hosts and Gale argue that pandemic-era fiscal support was appropriately large and fast, that the Build Back Better agenda is directionally sound despite deficits, and that low interest rates materially change the tax and spending calculus.

Main Topics: Powell's Jackson Hole speech and Fed tapering outlook (Priority: 5/5): Ryan Sweet argues Powell signaled tapering of asset purchases later in 2021 while keeping a dovish stance on inflation and labor markets, and clearly separating tapering from rate hikes. Real-time macro data and near-term growth (Priority: 4/5): The hosts discuss Moody's tracking estimates for Q3 GDP and the upcoming jobs report, with growth still strong but slowing as Delta affects activity. Corporate profits and margins (Priority: 3/5): Mark Sandy highlights surging corporate profits and historically high profit shares of national income, linking this to equity strength and business investment capacity. Pandemic fiscal response assessment (Priority: 5/5): Bill Gale defends the pandemic fiscal response as fast, broad, and necessary, including unemployment support, PPP, eviction moratoriums, and health coverage protections. Build Back Better, infrastructure, and inflation concerns (Priority: 5/5): The conversation evaluates the bipartisan infrastructure bill and the larger social infrastructure agenda, with Gale arguing these investments are justified and unlikely to cause problematic inflation given their timing and composition. Taxes, deficits, and fiscal space (Priority: 5/5): Gale argues there is room to raise taxes without major damage to growth, supports higher corporate rates if paired with base reform, and says deficits are manageable while rates remain low. Tax policy in a low-rate environment (Priority: 4/5): The episode closes with a lightning round on wealth taxes, carbon taxes, investment incentives, and consumption taxes, emphasizing that near-zero rates alter standard tax policy tradeoffs.

Key Arguments: Powell's speech implies tapering should begin in December 2021, but rate hikes remain distant; the Fed is deliberately separating balance-sheet policy from short-rate policy. The economic recovery remains strong, but Delta and supply disruptions are starting to reduce Q3 growth and could weigh on payroll gains. Corporate profits are booming, suggesting firms have earnings strength to support investment and absorb some cost pressures. The pandemic fiscal response was broadly correct because the shock was sudden, severe, and required rapid relief rather than perfect targeting. Infrastructure and social spending can raise productivity, labor-force participation, and fairness without necessarily overheating the economy if phased over time. Trump-era tax cuts produced little evidence of major supply-side gains in investment, growth, or wage acceleration, implying room to raise revenue. Low interest rates reduce the perceived cost of debt and weaken the case for panic over deficits, though spending quality and future fiscal discipline still matter. Wealth taxes become more distortionary when returns are low, while carbon taxes become more attractive because future benefits are discounted less heavily. A corporate rate in the mid-20s, especially with base-broadening reforms, could raise revenue with limited economic damage. Fiscal space is uncertain and context-dependent; markets will ultimately signal when debt becomes problematic.

Data Points: Fed asset purchases: $120 billion per month - Current QE pace discussed during the Jackson Hole speech analysis Q3 GDP tracking estimate: 5.7% - Moody's real-time estimate after weaker data on durable goods, consumer spending, and inventories Earlier Q3 GDP tracking estimate: 7.2% - Estimate before recent data revisions and soft prints Later revised Q3 GDP tracking estimate: 6.5% - Intermediate revision before the current 5.7% reading Expected August payroll gain: ~500,000 to 700,000 jobs - Ryan Sweet's forecast range for the next employment report, leaning below consensus Federal income tax nonpayment rate: 61% - Tax Policy Center estimate of people who did not pay federal income tax in 2020 Share of sole proprietorship and farm income not reported: 55% - IRS-related estimate of unreported income in those categories Estimated annual tax revenue gap: ~$1 trillion - Bill Gale's reference to the IRS commissioner's estimate of annual revenue lost to evasion Q2 corporate profits growth: 9.2% quarter over quarter - Increase in corporate profits in the GDP release Annualized corporate earnings: $2.7 trillion - Q2 level cited as roughly half a trillion above pre-pandemic levels Corporate profits share of national income: 14.3% - Near the high end of the post-WWII range Average corporate profits share of national income: ~11% - Historical average cited by Mark Sandy Lowest corporate profits share of national income: ~8% - Recession-era low cited in the discussion Pandemic fiscal support: $5+ trillion - Approximate total from CARES through the American Rescue Plan Pandemic fiscal support as share of GDP: ~25% - Scale of fiscal response relative to GDP Financial crisis fiscal support: ~10% of GDP - Comparison point for the Great Recession response Bipartisan infrastructure plan: ~$550 billion - Additional traditional infrastructure spending discussed Social infrastructure plan: $3.5 trillion - Larger family/social spending package moving through Congress Revenue in budget resolution: $1.75 trillion - Revenue offset proposed over the 10-year budget window Corporate tax rate pre-2018: 35% - Top statutory rate before the Trump tax cuts Corporate tax rate after 2017 tax law: 21% - Current top statutory corporate rate referenced Suggested corporate tax rate: 25% to 28% - Bill Gale's preferred range, especially with base reform Interest payments as share of GDP: 1.6% - Ryan Sweet's cited current burden of federal interest costs 10-year nominal Treasury yield: ~1.35% - Market rate cited as very low by the speakers 10-year TIPS yield: Negative - Used as evidence that real rates are unusually low

Pivotal Quotes: "There wasn't a big market reaction because everyone was focused on what he was going to say about tapering." — Ryan Sweet: Assessing Powell's Jackson Hole speech and the Fed's communication strategy "They did the right thing. They went big, they went fast, they went in a lot of different areas." — Bill Gale: Evaluating the pandemic fiscal response "Let's make good spending choices and good tax choices and keep an eye on interest rates." — Bill Gale: Summarizing his view on deficits, debt, and fiscal policy

Implications: The episode suggests policymakers should prioritize high-return public investment and better tax design while low rates persist. Listeners should expect continued debate over inflation, deficits, and tax hikes, but little appetite for austerity unless markets force the issue.