Justin Answers Your Questions on Trump Accounts | The Professor Is In

I'm not very good at Texas. I know that I'm
an economist, and I know I'm standing up here as
if I'm an expert, but actually my household, Betsy does
our Texas. I find the whole thing overwhelming. Some Blanke
was talking to me about his five X one C
three the other day. What language is this?
I'm Megan Connors.
And I'm justin Wolf's and this is the professor is in.
Think of this as officeurs and Meghan's here to bring
me your questions.
Your recent diving in debunked some of the hype around
Trump accounts. This episode inspired a lot of debates and
follow up questions, and I'd like to dig into some
of that with you. Okay, So, first up, you described
these accounts as a temporary populis giveaway that stitched onto
a permanent tax break for the already wealthy. This seems
to be kind of a go to strategy for the
second Trump term, and I was wondering if you could
speak to some of the other ways we've seen this
fake populism.
You know, I described it that because that's what it is.
And you're absolutely right, Megan, to see that this is
a theme. It's really a theme mostly for the stuff
coming out of the One Big, Beautiful Bill otherwise known
as the Trump Budget, otherwise known as the one major
piece of fiscal policy, the Administration Guide. Look, we saw
this in a whole bunch of other ways. The President
went on the campaign trail and promised no tax on tips.
It turns out you do tax tips if you're in
certain tip prevalent occupations, though there'll be no tax on
tips until the end of twenty twenty eight. He talked
about no tax on overtime. It turns out he does
tax overtime. So if you work at extra five hours
and you get time and a half, you'd be due
to get seven and a half times your hourly wage.
So it's only the extra half that's not taxable, only
up to a limit, only for certain occupations. And guess what.
That also runs out at the end of twenty twenty eight.
He talked about no tax on Social Security. In fact,
they still tax social Security. They did something else in
the tax code to help older people, but social Security
is still tax Hey, guess what, it runs out at
the end of twenty twenty eight. You know there's one
thing that didn't run out at the end of twenty
twenty eight. The other major part of the Trump budget,
it was these populist parts. Then there was tax cuts
for the rich. The tax cuts for the rich are permanent.
So as it stands, if the next president in Congress
don't renew any of the gimmick populist giveaways, I think
each of these are actually, by the way, bad policy
for a whole range of reasons discussion for another day.
Then they are literally just going to disappear. That's probably
a good thing in terms for like economic policy. It's
probably a bad thing in terms of the president being
relentlessly dishonest, which is I'm going to pass something briefly,
let it go away once I'm gone, and have more
permanent tax cuts that help me and my mates.
You said that for many families, Trump accounts simply add
further complexity to an already complex saving system. And I
was wondering if you could kind of explain what are
the economic costs of complexity when it comes to personal finances,
or you could also extend this to taxes or tax
system as well.
So that's the funny thing at the end of this.
So remember, the Trump accounts are two things here's a
three thousand bucks last for four years. Small number of
babies get it. There's a permanent tax break for the
upper middle class, basically helping you pass your wealth onto
your kids. Now, it turns out there's already a bunch
of ways that you can pass wealth onto your kids.
There's so called five twenty nine plans for saving for education.
There's roth iras, and there's a whole army of tax
lawyers who know even more acronyms and funny numbers than
I'll ever know. There's a sense in which I'm actually
remarkably well qualified to answer your question about complexity, which
is I'm not very good at taxes. I know that
I'm an economist, and I know I'm standing up here
as if I'm an expert, But actually my household, Betsy
does our taxes. I find the whole thing overwhelming. I
come from another country, So when someone says to me,
I reckon, you should really go open a five twenty nine,
I'm not sure if they're talking about like a bed
on a Roulette wheel or a highway in Maine, or
what the heck it is. And by the way, who
came up with four oho one k some bloke was
talking to me about his five A, one C three
the other day. What language is this? But actually that's
one of the most important problems, which is you've all
of a sudden noticed I'm a PhD economist and I
find this too hard. So now what I'm going to
have to do is either think it's too bloody complicated
I'm going to leave it alone. And by the way,
there's a lot of evidence that that's how working middle
class families feel about tax breaks. So if you want
things to be hard to get, you address them up
with all the authority of the sets of institutions that
people are already inherently mistrust and don't like to be around.
The IARS is one of them. So it turns out
they already could have just seent you a check. They
just want you to do that. Along the way, it
leads program participation to fall away. That's an overwhelming observation
from the literature, and tax breaks and other forms of
social assistance as well. Worse than that, the folks who
it scares away are often the folks who can't afford
to be scared away. I earn enough I can afford
an accountant at some point, probably will call an accountant,
and an accountant will charge me a lot of money
to look up the tax code, and then I'll be
able to get it. But what I worry about is
the folks out there who literally don't have a PhD
in economics find it hard to navigate. The only reason
my accountant's going to be helpful, by the way, is
because I know to ask him. If I didn't even know, that,
there's no way I get the tax break. So what
it does is it takes an already somewhat regressive system,
and this form of complexity makes it even more aggressive.
There are other forms of complexity which have different problems.
My brother, bless him, is a tax lawyer. He gets
paid a lot of money to find clever ways for
corporations to pay less tax I love my brother. It's
not a judgment on him, but I wonder sometimes if
he thinks, am I making the world a better place?
So tax complexity keeps him fully employed. It helps some
of his clients get a log up relative to other clients,
But I wonder if we wouldn't all be better off
if he was off doing teach for America and the
operations he represents better off paying higher taxes.
My sister has a tax accountant, so we have a
similar so I had plausible deniability.
I'm one of six kids, so I didn't say which brother,
so that from one of the big firms. Don't worry,
it's not that brother, it's one of the other ones.
She has a different last name now, so that will
be helpful.
Okay, great, let's not get out siblings fired.
Well, she does my taxes, so I can't complain too much.
That is helpful for me.
One thing that I found interesting about the Trump accounts
was kind of how those employer contributions have a much
more generous tax treatment than direct family contributions. And I
know you didn't write this bill, but do you have
any theories about why that might be or who benefits
from that structure.
So this is just an incredibly complex structure, and so
I need to rewind because even I forget what it is. Okay,
there's one thousand bucks that's Plan aid that's over there
in the corner. That's populous, that short term, it's temporary,
it disappears. Then there's you're allowed to put up to
f five grand per year into your account. By the way,
it doesn't have to be mum or dad that does that.
It could be grandma or grandpa and other family members.
When you put that money in, you get a small
tax advantage. The small tax advantage is what we call
a tax deferral, which is basically grandma or mom or
dad can put the money in and the dividends that
you get each year, you're not forced to call that income,
so therefore you're not forced to pay taxes on it.
So therefore the magic of compound interest can go on
uninterrupted by the tax man. Right, That's what's going on
with families. That's actually quite important to understand that, because
it turns out that's a fairly small tax deferral. It's
just not that big of a deal. Your sister Meghan
will likely say to you, Hey, Meghan, I really really
enjoyed the video as you did with Justin on this,
but I'm still going to advise that you don't do this.
Your sister knows other parts of the tax code which
would help you if or when you have kids, which,
by the way, then means we've just added a whole
stack of extra pages to tax code without helping you.
So that's the foundation that's the basis of it. How
far I can explain all of this right, which is
the populist part, was the veneer, the window dressing, the
political cover. Let's do it in a way that has
a minimal budget impact. Let's do it while Trump is
still president. Let's get liberals talking about something, because liberals
used to love baby bonds, so they can't be against
the whole thing. And over here we're going to implement
different tax break. It is fairly easy to see how
that came out of the process. The employer part is
frankly more puzzling. So basically, I'm allowed to put five
grand in, but actually what I can do is I
can ask my boss to put in up to half
of that, up to twenty five hundred bucks. When the
boss does that, when I put money in, my boss
gives me money, I pay taxes, and then out of
what's left I can put that into my baby's account.
But if my boss does it, they just put it
straight in the baby's acount. No tax gets lost along
the way. That's a huge tax advantage. The money that's
going in and accumulates was untaxed on the way in
much much much better. So then why are we only
allowing that for twenty five hundred dollars. My guess is
the budgetary cost of this is actually really large. Right
when you give people a tax cut, your less revenue,
and so this is actually a pretty serious fiscal issue.
They had to under the process, They had to not
blow out the budget too much. They went through reconciliation
rather than being passed through normal process. It's one of
those bills you read it and you're like, wow, this
is so complex, with so many ins and outs. It
could have been written by a Democrat. And by the way,
that is a dig at my friends. The Democrats who
love infinite complexity is they just want to prove exactly
their wonky bona fides. I don't have a theory of
the case. One thing that's really worrying though, is does
your employer provide a way for you to take advantage
of this tax cut? Now it turns out, I know
in your case, Meghan, because your employer is Platipus Economics.
Platiticpal S Economics is a very small business that does
not have set up direct employer contributions to these accounts.
So not because I don't care for you, I do
deeply you're amazing, but because I'm a small business and
so you're going to miss out. It's weird the ways
we do readistribute in this country.
Yeah, I think that's a really important point there.
Okay, So we had a few different comments from people
that were basically acknowledging some of the flaws of these
accounts but talking about how they could still be really
useful in helping give kids an introduction to investing in
the stock market. And I just wanted to see if
you had a response to that, like, is there some
value there or is there a better way to go
about teaching those skills.
I saw this too, and I was of so many
different minds and there are so many ways to think
about it, And Megan, you might have your own ways
as well. One we live in tremendously partisan times and
being able to wake up in the morning and say
something nice about one side and the other side not
be one of those partisan you know, firebrands who heights
everything always and everywhere. I think it's good for the world,
good for the soul, sometimes, good for your intellectual honesty.
But I can understand the desire to say, hey, you
know what, this program sucks, But it's kind of a
cousin to something that doesn't. Yeah, but it just kind
of fell for the old bait and switch, which is
the programmers that actually exists, small temporary goes away. That's
the thousand bucks. That's the part that all those comments were, like,
I reckon this thousand bucks, you know, giving kids a
steak in the stock market. It's a pretty good idea.
Helping the working class understand and learn and come to
terms with not just the market, but the magic of
compound interest, giving us all a stake in the future
of American business. All that's a really good idea. I
have no view about the rest of this stuff, ways
in which the upper middle class can more easily transfer
their funds to the next generation. If we were talking
pure and the abstract, you know, I'm sort of okay
with that. But what if one of them is this
big and the other one's that big, then you just
got suck it. And so this is a case where
if they had just passed a baby bond, just the
thousand bucks, none of the rest of it, I think
I would have said, you know, it's not my idea.
I would have insisted my friends on the left to
a very progressive who loved this idea, I would have
insisted that they say, well, if they loved it under
a democrat, they should love it under a Republican. I
think I would have said, this idea actually does have
the kernel of genius in it. In fact, it's just
not what they've implemented. So the colonel of genius, I
think is twofold one. Let's teach the power of compound interest,
let's get people in stocks. But there's actually something far deeper.
Through centuries, one of the biggest political fights has been
labor versus capital, and that can lead to some very
destructive fights where labour goes on strike, for instance, and
then capital can't get anything made, or where capital tries
to get certain laws passed in order to restrict the
returns to labor, and they're each at each other. Well,
if workers all owned a share of the economy, like
a really substantial share, then all of a sudden, workers
have an interest in American business get in the head.
It no longer becomes workers versus capital. It becomes workers
and capital because workers own capital. Now, Restructuring society in
that way takes a lot of work. In Australia, we
actually do it through retirement savings, which is workers put
their money aside. Their money goes into the stock market,
unlike American social security that I think is actually kind
of helpful. Now, four generations each having one thousand dollars
in the stock market doesn't do anything for anyone. Like,
what was your emotion all response to this or analytic?
Yeah, I mean I think I fell into the camp
a little bit of. I was somewhat familiar with baby
Bonds by no means an expert, and I knew they
held promise, so I understood the kind of hesitance by
I think most Democrats to criticize this because there is,
like you said that colonel of genius or colonel of
what they maybe originally wanted. But that made me, I guess,
all the more sad when I realized just like how
kind of inequality exacerbating this would wind up being, And.
I went from sad to mad. Yeah, it really was
a tice of reading and thinking hot and being like
a holy cow. All of the media coverage of this
was wrong. Yeah, I very rarely say that, but everyone
was like baby bonds, how exciting, let's to bite this
progressive idea. Oh, there's a permanent structure over here that's
not for the folks you care about so well.
I think that kind of leads into our next comment.
You acknowledge kind of at the end of your piece
that this thousand dollars giveaway it's free, but it's not
really free, nor are the tax expenditures wealthy families primarily
will receive. And I was just hoping you could kind
of like expand on that a bit, like, how are
we going to.
End up paying for this?
Like?
Is there any world where the benefits could be worth
the cost?
Okay, so let's actually get some terminologs. You're right, this
is why these segments are great because we can actually
go to that next level. Could the benefits succeed the
costs benefits to the world or to Americans? Absolutely, that
could already be true, right if what we have is
progressive taxation and then we take it and we send
one thousand dollars to every baby. You might think, given
that most of the money we raise comes from wealthier individuals,
that this is more equitable. You might think that by
introducing people to stocks, it provides useful education. You might
think that by giving people their own nestig and a
way to get ahead that it's actually going to be
efficient that generation of babies. Maybe if that thousand it
becomes ten thousand and they start a small business. Who knows, right,
So the benefits could have said the cost. That's different
than asking could to pay for itself. When you're asking
you to pay for itself. Now you're saying, does the
tax revenues raised by all of the activity caused by
the baby bond? I've set the cost of the baby bonds?
The answer is almost certainly not. It's just taking money
from one pocket and putting another. So that's what a
transfer payment is. We call it a transfer payment, right,
it's we're not providing an incentive to do anything. The
thing is you get this bond just for being a baby. Now,
the thing about being a baby is when you're one
year of age, you have no choice. Taxes and subsidies
work or what they do is provide an incentive to
make a different choice. So if this were, for instance,
like the earned income tax credit, we'll give you money
for working, that would lead more people to work. This
is giving you money for being a baby. It's not
going to lead more people to become babies. So I
don't see how it's going to create huge efficiencies one
way or the other. The broader question is an important one,
which is where are we on our fiscal situation, And
the answer is we're in a terrible, terrible state. The
US deficit, as we've talked about before, is at a
level that you would normally expect if we're in the
midst of a major recession, and so part of that's
what's keeping the economy going right now, and so now
is not the time for populist giveaways. Now's the time
for a little bit of responsibility.
Okay, one last question for you, Despite all the criticisms
we've talked about, do you think the next administration, whether
they're a Democrat or Republican, do you think they will
extend the one thousand dollars and maybe more importantly or
and said should they.
Let me start with should I think whoever the next
administration is, should just get rid of the whole damn thing,
get rid of the one more pointless tax break for
the upper middle class. And while you're at it, get
rid of the giveaway. You're actually asking a much harder question,
which is should we just get rid of the pointless
giveaway to the upper middle class and keep the thousand
bucks per kid. Maybe actually it's about providing a political
foundation for this form of redistribution. If inequality in opportunity
exists on the day of your birth, this form of
redistribution stuff that occurs on the day of your birth,
is the best time and the best place to start
addressing it. It's a different question if a future democratic
administration came to me and said, you've got a bunch
of money to spend, would you like to spend more
of it on baby bonds or other things? I might
choose other things. But this at least sort of opens
a political window which allows a conversation about redistributing to
the very young. By the way, I am deeply colored
here by the fact that I'm one of six kids.
When I was young, I always used to think, you know,
we got by. We had a middle class income, but
a middle class income divided by eight because there's also
mum and dad doesn't go as far. And so I
remember thinking as a kid, how deeply and profoundly unfair
that was. Then I went to graduate school and became
an economist, where instead of thinking about children as people,
he came to think of them as things that people
decide to have consumption goods. I think often my younger
self might have been the more moral, truer, more reliable
self in that. You then asked me one more question.
You said, do you think it will get renewed? And
I think it won't because it's dumb. I talked to
my better half, Betty Stevenson, who's worked in white houses before,
and she said, this is how it always works, and
she thinks it will get renewed. I'm not sure whether
publicly I should be quoting a walk on the beach
with my better half, but there you have it, Hi, Betsy,
It's just a forecast. Her forecast is this stuff seems
kind of popular. In four years time, Senators and congressmen
are going to say, well, we have to renew this.
It would be unfair if the next generation of babies
didn't get it. And if that's the case, that's how
we make policy. That actually means that we're often making
budgetary policy with a lie, which is we have to
write the law as if there's not going to be
future costs, and the political reality is everything gets renewed,
which speaks to that deeper problem with how we write budgets.
We write stuff as if it's temporary, and then allow
political forces to take hold, and predictably they become permanent.
So Betsy thinks they'll still be here. I don't think
they will be if. If she turns out to be right,
you can come back in full years and write lots
of comments saying Bitsy was right, Bitsy was right, you
were rooming again?
Justin sounds good.
I have a feeling some people might be setting that
alarm in their phone right now. Thank you to our
audience once again for your thought provoking questions and comments.
We really hope that you enjoyed this episode of the
Professor is in. If you like your question answered in
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