1) Will Britain’s Tax Cut Blow Up The U.K. Budget? No!
The big debate in Britain and here in America is whether Prime Minister Liz Truss’s tax cut will expand the debt and crash the economy. So far investors think so – and the British Sterling has gotten hammered since the tax cut’s announcement. It hasn’t helped that the Bank of England has launched a public campaign to sabotage the Truss agenda.
But they should look at the historical evidence more closely.
Arthur Laffer reminds us that back in 2010, then-UK Labour Prime Minister Gordon Brown increased the highest tax rate on income from 40% to 50%, the first increase in 30 years. Brown said this would raise £2.5 billion in additional tax revenue.
But the revenues never materialized. In 2012, the British Revenue and Customs office issued a report called “The Exchequer effect of the 50 percent additional rate of income tax.” Here are some of the memorable findings of that report:
“The conclusion that can be drawn from the data is...that the underlying yield from the additional rate is much lower than originally forecast (yielding around £1 billion or less), and it is quite possible that it could be negative.”
Evidence from the U.S. suggests that the behavioral responses could be even higher… The adverse effect of high rates on personal taxation on both inward and outward migration to the UK and tax revenues can be significant.
The total income of the affected group in 2009-10 and 2010-11 combined was £203 billion. This was 5 percent below the combined total in the years prior to the tax cut.
High tax rates in the U.K. Make its tax system less competitive and make it a less attractive place to start, finance, and grow a business.
Truss is basically reversing the disastrous effect of the tax rate increase from a decade before. That can only be highly positive for the British economy. Why the bond vigilantes don’t get this basic truism is still a mystery to us.
We don’t agree with everything Giorgio Meloni, Italy's new Prime Minister, says - particularly her stupid comments about Mussolini - but we do admire her courage to speak out for the love of the country and against woke culture. This video is worth watching and you can make up your own mind. She certainly makes more sense than Biden.
Our friend Jason Trennert of Strategas warns of an earnings recession through 2023. This chart from Strategas gives good reason to worry. For many months now producer costs (the PPI) have been rising faster than the prices they charge (CPI). This trend isn’t sustainable obviously.
Since earnings/profits are, as Larry Kudlow has always reminded us, “the mother’s milk of the stock market,” if Strategas is right, stocks may have further to fall or consumer prices have further to rise – unless this is already all priced into the market.
4) Manchin’s Energy Amendment Is Worse Than Doing Nothing
Just as we suspected. Joe Manchin cut a deal with Chuck Schumer and he didn’t even get a lousy tee shirt.
The Manchin “deal” with Chuck Schumer actually further undermines fossil fuel development in the U.S. - despite the minor permitting provisions and the West Virginia pipeline - which we predict will never get built as long as Democrats control Washington.
The fatal provision of the deal is it forces electric utility customers in red states to bear the high prices of blue-state green energy transmissions on the electric power grid - whether the red state residents want it or not.
The WSJ explains:
The Manchin bill... gives FERC the power to permit an interstate transmission line if the Energy Secretary says it promotes “national energy policy” or the ability of “intermittent energy to connect to the electric grid.” FERC could override states and approve a line merely because it reduces CO2 emissions or encourages renewable power...
States today consider how transmission lines affect their power supply when they decide whether to permit them or not. FERC wouldn’t be required to. West Virginia could be forced to take power from New Jersey offshore wind farms that drives its coal plants out of business. Worse, under the bill FERC could order a utility to build a transmission line.
The bill would also allow FERC to stick the costs of transmitting renewable power on states that don’t want it. FERC would have broad discretion to socialize costs based on “reasonably anticipated benefits,” however it defines them, such as reducing CO2 emissions.
We note that National Journal last night printed an almost comical heads-I-win-tails-you-lose story – almost surely at Schumer's request – repositioning for a likely failure of the bill.
...and that doesn't include the Income-Driven Repayment changes, which could dwarf the initial $10 to $20,000 giveaways, by incentivizing many graduate programs to raise tuitions through the roof with the full confidence that their students will pay no more than 5% of their disposable income regardless and dump the rest onto taxpayers.
CBO rules also, of course, didn't consider the high likelihood that the Biden plan would be a new precedent for periodic similar bailouts or any other likely behavioral response.
So this $400 billion cost – dwarfs the phantom deficit savings from the “Inflation Reduction Act” – should be considered an extreme lowball estimate:
As one of our favorite members of Congress points out, this isn't how our system of government is supposed to work:
