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Thread: Why cut taxes?

  1. #211
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    Quote Originally Posted by Moliere View Post
    I think they are trying to say that if there are $100 each year of tax cuts in the bill, the top 1% collectively get$31 of those tax cuts in 2017 and $48 of those tax cuts in 2027
    That's what I thought at first and then I read the accompanying text and I am not so sure. The numbers are based on "percentage of their income" so it seems to be comparing apples and oranges.

    And 2027? How is that projected?
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  2. #212
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    Quote Originally Posted by Jeff Lebowski View Post
    That's what I thought at first and then I read the accompanying text and I am not so sure. The numbers are based on "percentage of their income" so it seems to be comparing apples and oranges.
    Yeah, given that the richest 1% pays about half the taxes this "revelation" doesn't seem all that surprising.
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  3. #213

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    Quote Originally Posted by Jeff Lebowski View Post
    That's what I thought at first and then I read the accompanying text and I am not so sure. The numbers are based on "percentage of their income" so it seems to be comparing apples and oranges.

    And 2027? How is that projected?
    Moliere's got it right. 2027? To allow the senate to just need a simple majority to pass, the plan can't keep most of the cuts (deficit neutral after 10 I believe). Essentially republicans are planning on only trying to keep the corporate and business pass through stuff after 2027. The provisions on the individuals levels (e.g., the expanded child tax credit) will revert to 2017 law. Additionally, the parts that raise taxes (e.g., loss of state and local taxes as deductions) won't revert after ten years. Consequently, most of the distribution of tax payers after ten years will see a tax increase.
    Last edited by pelagius; 11-06-2017 at 06:14 PM.

  4. #214
    Trump-hating snowflake Jeff Lebowski's Avatar
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    Quote Originally Posted by pelagius View Post
    Moliere's got it right. 2027? To allow the senate to just need a simple majority to pass, the plan can't keep most of the cuts (deficit neutral after 10 I believe). Essentially republicans are planning on only trying to keep the corporate and business pass through stuff after 2027. The provisions on the individuals levels (e.g., the expanded child tax credit) will revert to 2017 law. Additionally, the parts that raise taxes (e.g., loss of state and local taxes as deductions) won't revert after ten years. Consequently, most of the distribution of tax payers after ten years will see a tax increase.
    Aha... Thanks.
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  5. #215
    Trump-hating snowflake Jeff Lebowski's Avatar
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    WSJ graphic:

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  6. #216

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    Quote Originally Posted by Jeff Lebowski View Post
    WSJ graphic:

    I think that graphic would be more meaningful if it used percentages.

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    Quote Originally Posted by Bo Diddley View Post
    I think that graphic would be more meaningful if it used percentages.
    If I am reading that correctly, it looks like a deficit bomb.

    But more revenue will magically appear, right?
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  8. #218

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    Quote Originally Posted by Jeff Lebowski View Post
    If I am reading that correctly, it looks like a deficit bomb.

    But more revenue will magically appear, right?
    Without question.

  9. #219
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    Quote Originally Posted by Jeff Lebowski View Post
    WSJ graphic:

    So much winning!! Anyone tired of winning yet?


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  10. #220

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    Quote Originally Posted by Bo Diddley View Post
    I think that graphic would be more meaningful if it used percentages.

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    uh wouldnt it look exactly the same?

  11. #221

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    Quote Originally Posted by Maximus View Post
    uh wouldnt it look exactly the same?
    No

    Consider that you can't tell what proportion of the rich people are winners and losers. Going with a ratio or a percentage would give you a better idea of who are the winners and losers, and what your odds are in a particular income bracket.
    Last edited by Bo Diddley; 11-06-2017 at 09:26 PM.

  12. #222
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    Quote Originally Posted by Jeff Lebowski View Post
    If I am reading that correctly, it looks like a deficit bomb.

    But more revenue will magically appear, right?
    Magically, no... but there is a good chance there would be more tax revenue given the history:

    The Historical Lessons of Lower Tax Rates

    There is a distinct pattern throughout American history: When tax rates are reduced, the economy's growth rate improves and living standards increase. Good tax policy has a number of interesting side effects. For instance, history tells us that tax revenues grow and "rich" taxpayers pay more tax when marginal tax rates are slashed. This means lower income citizens bear a lower share of the tax burden - a consequence that should lead class-warfare politicians to support lower tax rates.


    Conversely, periods of higher tax rates are associated with sub par economic performance and stagnant tax revenues. In other words, when politicians attempt to "soak the rich," the rest of us take a bath. Examining the three major United States episodes of tax rate reductions can prove useful lessons.
    [...]
    http://www.heritage.org/taxes/report...ower-tax-rates

    Reducing the corp tax rate could maybe help with economy growth. Especially if it encourages companies like Apple to bring some of their offshore cash reserves onshore to invest domestically. Who knows about the other tax cuts.

    The top 1 percent saw their share of the income tax bill climb even more dramatically, from 17.6 percent in 1981 to 27.5 percent in 1988.
    LOL, the top 1 now pay about half of the tax bill now.
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  13. #223

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    Quote Originally Posted by Uncle Ted View Post
    Magically, no... but there is a good chance there would be more tax revenue given the history:


    http://www.heritage.org/taxes/report...ower-tax-rates

    Reducing the corp tax rate could maybe help with economy growth. Especially if it encourages companies like Apple to bring some of their offshore cash reserves onshore to invest domestically. Who knows about the other tax cuts.



    LOL, the top 1 now pay about half of the tax bill now.
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  14. #224

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    Quote Originally Posted by old_gregg View Post
    n=4
    No doubt (old_gregg is right, people need to step up their citation of empirical work game) ... I think this is probably the best case: https://papers.ssrn.com/sol3/papers....act_id=3028135

    The empirical relation between lowering corporate taxes and real wages (for example, internationally ... and that is where you get the richest variation in changes in corporate tax rates) is typically positive in most past empirical papers. However, in my view the best empirical studies (those with the best empirical design and data) find a very small relation. A relation that's so small that it's hard to justify the republican's approach based on this empirical work.

    That said, one mechanism I think is plausible is something like the following: Lowering the corporate tax rate shifts the optimal capital structure for most firms to a smaller leverage ratio (less debt). This would be a prediction of capital structure models that highlight the trade-off between the tax advantage of debt over equity and the costs of financial distress as first order effects on capital structure (we teach basic forms of these models to MBAs). They are not as strongly supported by the data as one would like, but there's probably something to them. If optimal capital structure shifts to less debt -> lower probability of default -> less employment disruption and layoff -> higher real wages. I doubt this is a very big effect, but channels like this and a few other could lead to some positive effect with respect to wages and employment.
    Last edited by pelagius; 11-07-2017 at 01:42 AM.

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    Quote Originally Posted by pelagius View Post
    No doubt (old_gregg is right, people need to step up their citation of empirical work game) ... I think this is probably the best case: https://papers.ssrn.com/sol3/papers....act_id=3028135

    The empirical relation between lowering corporate taxes and real wages (for example, internationally ... and that is where you get the richest variation in changes in corporate tax rates) is typically positive in most past empirical papers. However, in my view the best empirical studies (those with the best empirical design and data) find a very small relation. A relation that's so small that it's hard to justify the republican's approach based on this empirical work.

    That said, one mechanism I think is plausible is something like the following: Lowering the corporate tax rate shifts the optimal capital structure for most firms to a smaller leverage ratio (less debt). This would be a prediction of capital structure models that highlight the trade-off between the tax advantage of debt over equity and the costs of financial distress as first order effects on capital structure (we teach basic forms of these models to MBAs). They are not as strongly supported by the data as one would like, but there's probably something to them. If optimal capital structure shifts to less debt -> lower probability of default -> less employment disruption and layoff -> higher real wages. I doubt this is a very big effect, but channels like this and a few other could lead to some positive effect with respect to wages and employment.
    What do you believe if the lowering of the corporate rate were tied to reinvestment in certain sectors or a requirement for employment in the US? Would that increase the probability of some success? I haven't refined how to make the ties but hopefully you get the idea.
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  16. #226
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    On the corporate taxes... Apple would rather borrow billions rather than pay corporate taxes:

    Apple borrowing billions while sitting on huge overseas cash pile

    Apple has fat stacks of cash stashed overseas, but that hasn’t stopped the company from borrowing billions to give money back to shareholders.


    Why borrow when sitting on $240 billion in cash?


    “One five-letter word: taxes,” said Steven Rosenthal, a senior fellow at the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution. Apple has $240 billion in cash held overseas, out of total cash reserves of $256.8 billion, according to Securities and Exchange Commission filings.


    So far in 2017, the Cupertino tech giant has issued unsecured notes three times: on May 5 for $7 billion; on Feb. 15 for $1 billion; and on Feb. 3 for $10 billion, according to company filings with the SEC, for a total of $18 billion.


    The money, in all three cases, would be used for “general corporate purposes, including repurchases of our common stock and payment of dividends under our program to return capital to shareholders, funding for working capital, capital expenditures, acquisitions and repayment of debt,” Apple said in its filings.


    That borrowing followed $23.9 billion in unsecured debt raised last year.
    [...]
    Apple’s borrowing this year carries interest rates of 1.6 to 4.3 percent, a fraction of the cost of repatriating hoarded funds.


    Apple appears to be waiting on a one-time tax holiday widely expected from Congress, which would let companies bring overseas money home at a far lower rate than 35 percent, Rosenthal said.


    “They’re betting that they’ll get tax relief in the near term, and rather than incur the expense of repatriating their offshore earnings, they’d like to defer and hope for another holiday,” he said.
    [...]
    http://www.mercurynews.com/2017/05/0...eas-cash-pile/
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  17. #227

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    Quote Originally Posted by Topper View Post
    What do you believe if the lowering of the corporate rate were tied to reinvestment in certain sectors or a requirement for employment in the US? Would that increase the probability of some success? I haven't refined how to make the ties but hopefully you get the idea.
    In general, I think doing that is a bad idea because it would likely force companies to invest in negative NPV projects (you likely haven't lowered the cost of capital or you wouldn't have to make the reinvestment mandatory). These distortions in investment can lead to big costs of adjustment in the long run.

  18. #228

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    Quote Originally Posted by Uncle Ted View Post
    On the corporate taxes... Apple would rather borrow billions rather than pay corporate taxes:


    http://www.mercurynews.com/2017/05/0...eas-cash-pile/
    unless repatriation is tax free, the usfg ain’t going to beat the real cost to apple of debt
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  19. #229

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    Quote Originally Posted by pelagius View Post
    That said, one mechanism I think is plausible is something like the following: Lowering the corporate tax rate shifts the optimal capital structure for most firms to a smaller leverage ratio (less debt). This would be a prediction of capital structure models that highlight the trade-off between the tax advantage of debt over equity and the costs of financial distress as first order effects on capital structure (we teach basic forms of these models to MBAs). They are not as strongly supported by the data as one would like, but there's probably something to them. If optimal capital structure shifts to less debt -> lower probability of default -> less employment disruption and layoff -> higher real wages. I doubt this is a very big effect, but channels like this and a few other could lead to some positive effect with respect to wages and employment.
    I've thought about this post for several days. I think what you are saying is that it would be good to structure tax laws to provide incentives for companies to borrow less, thereby making them more stable and making layoffs less likely. I don't think I agree.

    First, reducing debt would have a huge braking effect on the economy. The fed uses interest rates to encourage or discourage borrowing as a way to speed up or slow down economic growth and inflation, so a widespread deleveraging would be equivalent to an enormous interest rate increase. The end result would be a massive economic slowdown. This actually brings up another point, which is the ability of the Fed to regulate economic growth if we change incentives to borrow. They could still use interest rates, but there would be a painful learning curve to adjust to new borrowing habits.

    Second, reducing risk by reducing leverage would also imply reduced returns. Greater risk requires higher returns, so an economy full of de-levered businesses would presumably grow slower due to the lower returns these businesses are realizing as they assume less debt.

    Maybe I'm thinking about this wrong, so please tell me what I'm missing. In a broader sense, the question is really about who allocates capital more effectively. Money saved from tax cuts doesn't disappear. It is spent on either consumption or investment. Thus , when considering who to tax and who to give a tax break to, the question is more than one of fairness. It's also one of who will spend money that would otherwise be taxed in a way that has the greatest turnover and grows the economy the most

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  20. #230

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    Quote Originally Posted by cowboy View Post

    Maybe I'm thinking about this wrong, so please tell me what I'm missing.
    Sorry, you are. Riskiness of an economy's real assets (the projects firms invest in) determines the overall risk in the economy. firm level investment (e.g., investing in new banana stands) -> creates assets and determines risk level. Financing (mix of debt/equity) simply splits the risk between different claim holders. The preceding is basically the core theorem of corporate financial economics. All your points hinge on that not being true. I don't mean this to be harsh. I hope it doesn't come across that way.

  21. #231

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  22. #232

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    Quote Originally Posted by old_gregg View Post
    miller modigliani dawg
    Yeah, MM was the first to really show it, and it's usually thought of as part of MM but it holds much more generally (as opposed to capital structure irrelevance which only holds given a set of very restrictive assumptions).
    Last edited by pelagius; 11-10-2017 at 11:49 PM.

  23. #233

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    The Senate version appears to be less rough on the middle class in general, than the House version.

  24. #234

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    One disturbing issue with the tax "reform" ideas is the plausible theory that it's the super-rich donors of Republicans in Congress who are really driving this: give us a massive tax cut or we stop giving you money! I don't care what you have to do to soak the middle class to get it done!

  25. #235
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    Quote Originally Posted by pelagius View Post
    Sorry, you are. Riskiness of an economy's real assets (the projects firms invest in) determines the overall risk in the economy. firm level investment (e.g., investing in new banana stands) -> creates assets and determines risk level. Financing (mix of debt/equity) simply splits the risk between different claim holders. The preceding is basically the core theorem of corporate financial economics. All your points hinge on that not being true. I don't mean this to be harsh. I hope it doesn't come across that way.
    I'm interested in how a multi-national like Apple, with more cash on hand than many national economies, employs that capital. From what I understand, they aren't investing in new banana stands as much as they are derivatives. If we cut taxes and they repatriate the funds they've been pooling....the borrowing to pay dividends to shareholders will likely cease, as they won't have the incentive to hold back anymore...so what then? Will Apple's stock become a dividend king and that money flow into shareholders' pockets and the economy? That'd be great, but it seems unlikely to me (I'm becoming a bitter skeptic instead of an optimistic skeptic). Apple is basically a tech company and a financial management company now...probably getting up there in size with the 2big2fail banks in terms of assets under management, only all the assets are theirs.

    I like low corporate taxes, but where's the incentive now to take big risks? Are low taxes a guarantee of bigger risk taking? Do we really expect Apple, to build more banana stands, or, if they do, will they build more banana stands in the USA?

    I wish this tax cut had some mechanism to encourage--but not compel--investment in domestic entrepreneurship, research, development, urban/rural renewal, employment, and education. Also, importantly, corporate conservation and land stewardship--good stewardship, should be rewarded with tax breaks. If we want to protect the environment from over-development, the only way to get the GOP on-board is to incentivize conservation, maybe some kind of tax amortization scheme against the developed value/capitalization vs. the undeveloped value, probably something the economists should figure out.
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  26. #236

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    Quote Originally Posted by BlueK View Post
    One disturbing issue with the tax "reform" ideas is the plausible theory that it's the super-rich donors of Republicans in Congress who are really driving this: give us a massive tax cut or we stop giving you money! I don't care what you have to do to soak the middle class to get it done!
    That makes no sense--stop giving them money so the democrats can win and raise their taxes?

  27. #237

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    Quote Originally Posted by old_gregg View Post
    miller modigliani dawg
    You are right to bust me on this. I mean this as a compliment when I say your posts in this thread indicate that you clearly have more knowledge than you're drive-by posting style suggests. I would be interested in knowing the reasons behind your opinions more often.

    Quote Originally Posted by pelagius View Post
    Sorry, you are. Riskiness of an economy's real assets (the projects firms invest in) determines the overall risk in the economy. firm level investment (e.g., investing in new banana stands) -> creates assets and determines risk level. Financing (mix of debt/equity) simply splits the risk between different claim holders. The preceding is basically the core theorem of corporate financial economics. All your points hinge on that not being true. I don't mean this to be harsh. I hope it doesn't come across that way.
    Maybe old gregg is right and I am dumb. I read your post wrong, and should have spent more time reading and less time thinking. I was reading while driving across Oklahoma, saw you agreeing with og about the lack of empirical evidence that tax cuts help the economy, and then the last part about less debt being a stabilizing factor and assumed you were against tax cuts and instead in favor of eliminating deductions for mortgage interest as a way to encourage less borrowing. Doing that would seem to result in all betas being essentially unlevered, hence the risk discussion. I know, dumb. Please don't tell Hal Heaton.

    But I will argue that all my points did not hinge on the cost of capital. My primary concerns were with money supply. It may not be relevant to the discussion, but that's never stopped us on this board so I'll ask my questions and maybe you can help me. First off, is a money supply question: If debt is reduced in the economy, would that decrease money supply and have a deflationary effect? I'm trying to wrap my brain around the interaction between capital allocation vs the multiplying effect that borrowing and lending the same dollar has on supply. Second is a debt market question: Given that the Fed uses interest rates to control money supply, if reducing leverage reduces the money supply is there any way that tax rates would impact aggregate debt without the Fed stepping in and making debt more attractive to maintain debt levels?

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  28. #238

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    Quote Originally Posted by BlueK View Post
    One disturbing issue with the tax "reform" ideas is the plausible theory that it's the super-rich donors of Republicans in Congress who are really driving this: give us a massive tax cut or we stop giving you money! I don't care what you have to do to soak the middle class to get it done!
    This is an area where Democrats have won the spin game. They have as much big money behind them, and as many rich donors, as Republicans. I haven't researched the site, but assuming their information is correct, here are the breakdowns of donor demographics.

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  29. #239

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    Quote Originally Posted by wuapinmon View Post
    I'm interested in how a multi-national like Apple, with more cash on hand than many national economies, employs that capital. From what I understand, they aren't investing in new banana stands as much as they are derivatives. If we cut taxes and they repatriate the funds they've been pooling....the borrowing to pay dividends to shareholders will likely cease, as they won't have the incentive to hold back anymore...so what then? Will Apple's stock become a dividend king and that money flow into shareholders' pockets and the economy? That'd be great, but it seems unlikely to me (I'm becoming a bitter skeptic instead of an optimistic skeptic). Apple is basically a tech company and a financial management company now...probably getting up there in size with the 2big2fail banks in terms of assets under management, only all the assets are theirs.
    Probably way too much here for me to try to answer in a helpful way, but I will try do say something useful. Apple does hold onto a lot of cash. As you note, it's not really cash. I don't think it's primarily derivatives. I believe they end up investing a lot in corporate bonds with the money (I think primarily US corp bonds too). It's on odd equilibrium (as you note). On the hand, it is leading to investment; it's just not Apple directly investing in banana stands. They are buying the bonds of companies that want to invest in banana stands.

    Could the corp tax cut (or more likely repatriation) change that? Yes, at least a little (maybe only a little); it should lead to more disbursement of money directly to claim holders. Would this have a big effect on overall investment in the economy? I think there could be some benefit, but I tend to think it's small. The marginal propensity to invest in real assets or the efficiency at which that happens could increase (apple's incentives are leading to distortions). That said, I tend to think it's a smallish effect because Apple is mostly already investing it back into the economy.

    Quote Originally Posted by wuapinmon View Post
    I like low corporate taxes, but where's the incentive now to take big risks? Are low taxes a guarantee of bigger risk taking? Do we really expect Apple, to build more banana stands, or, if they do, will they build more banana stands in the USA?
    So lower corporate taxes should provide some incentive to increase investment. If you want to build a banana stand, you might not pull the trigger because your projected average rate of return is lower than the cost of capital (which is determined by the risk of project). In other words, the project is slightly negative NPV. Lower corp taxes will increase the average rate of return some. Future cash flows get bigger because less go to the government. That could shift your project from negative to positive NPV (but likely only for projects that were slightly negative NPV).

    On the other hand, it's an expensive approach to get this incentive because you are also lowering taxes on current cash flows where real investments have already been made. It would be more bang for the tax cut buck to do a more targeted approach. For example, you can accelerate depreciation schedules (I believe the gop plan does this but the provision only lasts a few years). That gives you bigger tax shields earlier in the life of a project which helps given time value of money. It also wouldn't reward past investment.

  30. #240
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    I feel like I’m in some melange of Dr Kearl and Dr Pinegars classes, which is a good thing.


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