Must-Read: Paul Krugman: Leprechaun Economics, With Numbers

Must-Read: Paul Krugman: Leprechaun Economics, With Numbers: “8% is a reasonable number for after-tax required return…

…with a 35% tax rate, this means a pre-tax rate of 12.3%. Cut the tax rate to 20%, and the pre-tax return should fall to 10%. The increment of capital should have a rate of return roughly halfway between, 11.15%. Tax Foundation asserts that capital inflows will be enough to raise GDP more than 3%, which is wildly implausible. But let’s go with it for the sake of argument. This means inflows of around 30 percent of pre-CCC [annual] GDP. So how much does this raise foreign investment income? The answer is, 8% times 30%, or 2.4 percent of GDP out of a GDP rise of 3.45 percent in my example. In other words, the true gain to the US is 1.05%, not 3.45%. That’s a big difference, and not in a good way….

Even if you believe the whole “we’re a small open economy so capital will come flooding in” argument, it buys you a lot less economic optimism than its proponents imagine…