Should-Read: Greg Leiserson: The Tax Foundation’s treatment of the estate tax in its macroeconomic model

Posted on by Brad DeLong

Should-Read: Greg Leiserson looks to me to be correct here: the structure of the Tax Foundation’s model is inconsistent. Or, rather, the only consistency is: “what assumption about this piece will produce a result more to the liking of our Republican political masters?”: Greg Leiserson: The Tax Foundation’s treatment of the estate tax in its macroeconomic model: “Notably, this justification for the assumption that the marginal investor is domestic even as the rate of return is fixed…

…because the United States is appropriately modeled as a small open economy—appears to exist entirely outside its model. As best I can determine… the Tax Foundation model itself appears to include no explicit model of markets in government debt (or other low-risk assets), the composition of savers’ portfolios, and the allocation of assets between domestic and foreign investors. Thus, while the Tax Foundation asserts that a difference in risk tolerance between domestic and foreign investors justifies its modeling assumptions, it is simply impossible to consider these issues…

Gains from Trade: Is Comparative Advantage the Ideology of the Comparatively Advantaged?

Posted on by Brad DeLong

And the video from October is up:

INET Edinburgh Panel: Gains from Trade: Is Comparative Advantage the Ideology of the Comparatively Advantaged?:

My notes and slides:

Ricardo’s Big Idea, and Its Vicissitudes

https://www.icloud.com/keynote/0QMFGpAUFCjqhdfLULfDbLE4g

Ricardo believes in labor value prices because capital flows to put people to work wherever those things can be made with the fewest workers. This poses a problem for Ricardo: The LTV tells him that capitalist production should take place according to absolute advantage, with those living in countries with no absolute advantage left in subsistence agriculture.

The doctrine of comparative advantage is Ricardo’s way out. For him, the LTV holds within countries. Countries’ overall price levels relative to each other rise and fall as a result of specie flows until trade balances. And what is left is international commodity price differentials that follow comparative advantage. Merchants profit from these differentials, and their demand induces specialization.

Thus Ricardo reconciles his belief in the LTV with his belief in Hume’s “On the Balance of Trade“ and with the fact that capitalist production is not confined to the industry-places with the absolute advantage. His doctrine reconciles his conflicting theoretical commitments with the reality he sees, as best he can.

By now, note that we are far away from the idea that “comparative advantage” justifies the claim that free trade is for the best in the best of all possible worlds. There are a large number of holes in that argument:

  • Optimal tariffs.
  • The fact of un- and underemployment.
  • Externalities as sources of economic growth, in any of the “extent of the market”, “economies of scale”, “variety”, “learning-by-doing”, “communities of engineering practice”, “focus of inventive activity”, or any of its other flavors.
  • Internal misdistribution means that the greatest profit is at best orthogonal to the “greatest good of the greatest number” that policy should seek.

Given these holes, the true arguments for free trade have always been a level or two deeper than “comparative advantage”: that optimal tariff equilibrium is unstable; that other policy tools than trade restrictions resolve unemployment in ways that are not beggar-thy-neighbor; that countries lack the administrative competence to successfully execute manufacturing export-based industrial policies; that trade restrictions are uniquely vulnerable to rent seeking by the rich; and so forth.

The only hole for which nothing can be done is the internal misdistribution hole. Hence the late 19th C. “social Darwinist” redefinition of the social welfare function as not the greatest good of the greatest number but as the evolutionary advance of the “fittest“—that is, richest—humans.

Hence “comparative advantage” takes the form of an exoteric teaching: an ironclad mathematical demonstration that provides a reason for believing political-economic doctrines that are in fact truly justified by more complex and sophisticated arguments. And, I must say, arguments that are more debatable and dubious than a mathematical demonstration that via free trade Portugal sells the labor of 80 men for the products of the labor of 90 while England sells the labor of 100 men for the products of the labor of 110.

But even if you buy all the esoteric arguments that underpin the exoteric use of comparative advantage on the level of national political economy, there still is the question of the global wealth distribution. Stipulate that the Arrow-Debreu-Mackenzie machine generates a Pareto-optimal result. Stipulate that every Pareto-optimal allocation maximizes some social welfare function. What social welfare function does the Arrow-Debreu-Mackenzie machine maximize.

It maximizes the social welfare function with Negishi weights. When individual utilities are weighted before they are added, each individual’s is waited by the inverse of their marginal utility of wealth. If the typical individual utility function has curvature that corresponds to a relative risk aversion of one, then Negishi weights are proportional to each individual’s wealth. For a relative risk aversion of three, Negishi weights are proportional to the cube of each individual’s wealth.

“Comparative advantage” is the market economy on the international scale. And the market economy is a collective human device for satisfying the wants of the well-off. And the well-off are those who control scarce resources useful in producing things for which the rich have a serious Jones.

Thank you.

2017-10-22 :: 673 words

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Dan Alpert, et al: Sales Factor Apportionment and International Taxation

Posted on by Brad DeLong

November 29, 2017

The Honorable Orrin Hatch, Chairman
US Senate Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20510

The Honorable Kevin Brady, Chairman
US House Committee on Ways & Means
1102 Longworth House Office Building
Washington, DC 20515

The Honorable Ron Wyden, Ranking Member
US Senate Committee on Finance
219 Dirksen Senate Office Building
Washington, DC 20510

The Honorable Richard Neal, Ranking Member
US House Committee on Ways & Means
1106 Longworth House Office Building
Washington, DC 20515

Re: Support for sales factor apportionment for international corporate taxation

Dear Chairmen Hatch and Brady, and Ranking Members Wyden and Neal:

We are writing to urge you to adopt a sales-based formulary apportionment (also called sales factor apportionment) regime for international corporate taxation as you proceed with your tax reform efforts. Solidifying the tax base should receive as much attention as setting the corporate tax rate. This is a once in a generation opportunity to improve the tax code. It should not be wasted.
Sales factor apportionment (SFA) is, in our view, the best way to tax all firms-domestic, multinational and foreign-fairly in an integrated world economy.

The current tax system has incentivized corporate inversions, profit shifting, recognition deferral and other notorious ills. It relies upon separate accounting of profits on a location by location basis so that multinational corporations (MNCs) strategically allocate earnings and costs in each location in which they operate. Though our current system purports to tax MNCs worldwide income, profit-shifting allows them to evade taxation on the basis of where their net income “lands” rather than where their gross income originates. The result is tremendous incentives to “earn”-i.e. to declare-income in low-tax countries. It is a classic race to the bottom causing the US corporate income tax base to erode at an alarming rate.

Tax competition between countries is highly incentivized by the current regime. While the effective US corporate income tax rate is estimated at 27%, it is mostly avoided by MNCs which are thus systematically advantaged relative to domestic US producers. Tax haven jurisdictions, where a large proportion of corporate earnings are reported, have very low effective rates between zero and five percent. Those countries include the Netherlands (2.3%), Ireland (2.4%), Bermuda (0.0%), Luxembourg (1.1%), Singapore (4.2%), UK Islands Caribbean (3.0% and Switzerland (4.4). Lowering the US corporate tax rate to 20% does not materially change the incentive to allocate profits to these “Cayman-style” jurisdictions.

 

Congress cannot confidently set a tax rate until it solidifies the tax base.

Profit-shifting continues to rise dramatically. In 2001, estimated profit-shifting by US MNCs to tax haven jurisdictions reduced corporate tax haven jurisdictions reduced corporate tax revenue by less than $15 billion. In 2012, that number rose to nearly $120 billion. In 2016, the number is at least $134 billion. These estimates do not include revenue loss from corporate inversions or profit shifting by foreign MNCs.

Domicile (country of incorporation) should not matter, but it does under the current tax system, creating troubling taxation distinctions. US domiciled MNCs use deferral to delay paying US taxes on overseas profits so long as they keep those profits offshore. Less sophisticated US companies pay taxes on all their profits. Foreign domiciled corporations doing business in the US pay taxes on a territorial basis. In other words, they pay taxes on profits actually recognized here. This territorial, versus worldwide, tax differences incentivizes corporate inversions – the practice of relocating a corporation’s legal domicile to a lower-tax jurisdiction, usually while retaining its material operations in the US and continuing to sell to US customers.

Ending deferral has been suggested as a solution. It would level the playing field between US domiciled companies that are primarily domestic versus MNCs. But it does not resolve the problem of inversions or profit shifting by foreign MNCs. The House bill includes a minimum tax of 10% on overseas profits. But the 10% domestic versus foreign earned profits differential maintains strong incentives to allocate profits offshore.

Redefining the source of income is, in our view, the key to correcting the current dysfunction. This is what the sales factor apportionment system, already in use by most US states, does. Corporations earn income from sales. Therefore income should be allocated based upon the destination of those sales. MNC income should no longer be allocated based upon the location of a a subsidiary that allegedly earned it. The location of sales is much more difficult to manipulate than the “origin of income” under the current system.

The US tax base for corporations would be calculated on the basis of a fraction of companies’ worldwide income. This fraction would be the share of each company’s worldwide sales that are destined for customers in the United States. The taxpayer, under SFA, is the whole unitary business, including all evasion-motivated subsidiaries over which the parent corporations exercise legal and economic control.

The SFA system we support is similar to the method used by many US states to allocate national income. These states adopted SFA to solve the difficulty of assigning profits, for state corporate income tax purposes, from national or international corporations to individual states. They faced an additional problem in that taxing based upon property or employees located in the state created incentives to move production out of that state. Using a sales-based taxation method solved this problem because locations of sales if far less responsive to tax differentials. Customers are far less mobile than the firm’s assets or employees.

What we are advocating is a change of the US corporate tax base that replicates the changes the states have made in relation to the nation. In effect, firms should be taxed on their access to a specific consumer market-from which they generate revenue—rather than on their cleverness at artificially allocating expenses and revenue in tax havens in which their subsidiaries “incorporate”.

By focusing upon sales as the measure of taxable economic activity, the SFA system does not rely upon or incentivize artificial legal distinctions among types of firms. Subsidiaries, branches and hybrid entities are all considered a unitary business for tax purposes-which, after all, is what they are. Whether a parent or a subsidiary is incorporated in the US or elsewhere makes.

 

No practical difference to production, sales or distribution. Hence it should make no difference to taxation.

An SFA system would improve America’s trade competitiveness because it provides domestic producers a further incentive to export. Profits from sales oversees would not be subject to taxation. Foreign producers who sell goods and services here would pay taxes on profits arising from the privilege of accessing our market. No corporate tax benefit would arise from moving a US plant oversees.
A recent study by the Coalition for a Prosperous America (CPA) found that SFA would deliver 34% more tax revenue from US corporations in 2016 at the current tax rate. CPA further estimated that a switch to SFA at a 20% rate would add an estimated $1.04 trillion uplift to tax revenue over the next 10 years. While these numbers would have to be verified by the Joint Committee on Taxation, there is no doubt that tax revenue can be substantially improved with a solidified tax base.

SFA has features that can bridge the partisan divide to establish meaningful corporate tax reform. It achieves the Republican goal of a territorial tax on corporate income and the Democratic goals of raising revenue. SFA will eliminate tax competition because the corporate tax rates in other countries become largely irrelevant. It will treat all types of firms the same.

It is for these reasons that we ask you to establish sales factor apportionment as the basis for corporate income tax reform.

Sincerely,

Daniel Alpert
Founder, Westwood Capital
LLC Fellow, The Century Foundation

Dean Baker
Co-Director
Center for Economic and Policy Research

Robert Hockett
Edward Cornell Professor of Law
Cornell School of Law

Marshall Steinbaum
Research Director and Fellow
Roosevelt Institute

Brad DeLong
Professor of Economics
University of California, Berkeley

Gabriel Zucman
Assistant Professor of Economics
University of California, Berkeley

Michael Stumo
Chief Executive Officer
Coalition for a Prosperous America

The Tax Foundation’s treatment of the estate tax in its macroeconomic model

Posted on by Ed Paisley

I recently wrote a critique of the Tax Foundation’s macroeconomic model in the context of the organization’s score of the Tax Cuts and Jobs Act as introduced by House Committee on Ways and Means Chairman Kevin Brady. In that critique, I identified two flaws in the Tax Foundation model. First, the interaction between federal and state corporate income taxes in the model was—at the time the critique was published—incorrect. Second, the organization’s approach to modeling the estate tax is incorrect and, moreover, inconsistent with other assumptions made in its modeling.

The Tax Foundation subsequently acknowledged the first error. However, the organization also published a response in which the authors assert that the organization’s approach to modeling the estate tax is reasonable. In this note, I evaluate the Tax Foundation’s response to my critique and conclude that it does not justify the organization’s current modeling approach. There appear to be important flaws in the Tax Foundation’s treatment of the estate tax that affect every dynamic score the organization has produced for the Tax Cuts and Jobs Act.

As noted in the original piece, I am unable to offer a complete assessment of the Tax Foundation model, which would require information about the equations that make up the model that is not publicly available. I continue to have substantial concerns about the Tax Foundation model beyond those described in the original piece or this update. These concerns are not merely about the appropriateness of the individual assumptions the Tax Foundation relies on in its modeling, but also about whether the seemingly ad hoc collection of equations that make up the Tax Foundation model form a coherent whole. The Tax Foundation’s response to my concerns about its modeling of the estate tax highlights the importance of this second concern.

The Tax Foundation’s assertion that the marginal investor is subject to U.S. taxes on savings likely cannot be reconciled with its small open economy assumption

The most striking element of the Tax Foundation’s response regarding the estate tax is its assertion that the marginal investor in the U.S. capital stock is a domestic investor and thus subject to U.S. taxes on saving. That assumption is consistent with a closed economy, or one in which there are no international capital flows or trade. In a closed economy, domestic investment is necessarily financed entirely by domestic savings.

Yet the Tax Foundation has repeatedly endorsed the idea that the United States is appropriately modeled as a small open economy. In a small open economy model, there is no necessary relationship between domestic investment and domestic savings, as any required funds can be obtained from investors abroad. The classic small open economy model is thus one in which the marginal investor is foreign. As a result, the rate of return on investment (after accounting for taxes imposed at the business level) is determined by global capital markets and is unrelated to the particular circumstances of the domestic economy. There is an obvious tension between the assumption that the marginal investor is domestic and the assumption that the United States is a small open economy.

The Tax Foundation justifies this inconsistency on the grounds that the marginal business investment is higher risk and foreign investors are relatively more risk averse. Thus, even though foreign investors could invest in U.S. business assets, they choose not to do so. The Tax Foundation further asserts that in response to a reduction in the tax rate on capital income foreign investors increase their holdings of low-risk U.S. assets, such as government debt, and domestic investors shift into higher risk assets, such as corporate stock. As a result, the Tax Foundation explains, “the United States can have strong financial inflows while the marginal investor remains a domestic investor.”

Notably, this justification for the assumption that the marginal investor is domestic even as the rate of return is fixed—because the United States is appropriately modeled as a small open economy—appears to exist entirely outside its model. As best I can determine from the information publicly available, the Tax Foundation model itself appears to include no explicit model of markets in government debt (or other low-risk assets), the composition of savers’ portfolios, and the allocation of assets between domestic and foreign investors. Thus, while the Tax Foundation asserts that a difference in risk tolerance between domestic and foreign investors justifies its modeling assumptions, it is simply impossible to consider these issues rigorously in the organization’s macroeconomic model.

Notwithstanding the impossibility of a direct assessment of these issues in the Tax Foundation’s model, a model that seriously grapples with these issues would likely work quite differently from what the Tax Foundation suggests, for at least two key reasons:

  • If the marginal investor is domestic then the supply of capital is likely to be far less elastic that the Tax Foundation assumes. If domestic savers are the sole source of funds for business investment at the margin, then reference to the global supply of savings is not sufficient to justify a fixed after-tax return on that investment—the cornerstone of the Tax Foundation’s modeling approach. Instead, the relevant question is whether domestic investors are willing to provide the necessary capital and at what return. Moreover, if business investment is riskier than other types of investment, then it suggests that domestic investors would require a higher return to compensate them for taking on that risk as they increase their investment in these relatively higher-risk assets. (A precise evaluation of the latter issue would require a model of the supply of savings in which the potential impact of changes in wealth on risk aversion and other issues could be weighed against the effect of an increased exposure to higher-risk assets.)
  • The claim that foreign investors are never marginal for business investment decisions is empirically untenable. The assumption that foreign investors are unwilling to invest in relatively higher-risk assets regardless of the differential between the U.S. return on investment and the foreign return is difficult to justify. In the Tax Foundation’s model, this differential appears to be large and determined solely by the parameters of the U.S. tax code. Yet recent empirical analysis suggests not only that foreigners own U.S. corporate equity, but also that the share of corporate equity owned by foreigners has grown markedly in recent years. In addition, the U.S. corporate sector includes foreign-parented firms. The implicit assumption that foreign-parented firms are unable to access capital abroad is likewise difficult to justify.

In short, the Tax Foundation assumes a fixed after-tax return consistent with a small open economy model, assumes an effective marginal tax rate consistent with a closed economy model, and explains the inconsistency between these two assumptions by reference to an argument about risk and ownership that appears to exist only outside its model and that suffers from at least two major weaknesses.

The Tax Foundation’s response thus raises the question of whether a rigorous justification for the apparently ad hoc collection of equations that make up the model has been—or even can be—constructed.1

The Tax Foundation’s response does not justify its assumption that the estate tax affects the marginal investor

The Tax Foundation model features homogeneous capital. In other words, there is nothing unique about assets held by one business relative to those held by others or about the capital provided by one investor relative to another. If capital is homogeneous, then there is no reason the marginal supplier of capital is necessarily subject to the estate tax. This is particularly true if the marginal investor is foreign, as would be the case in a small open economy model. But it can also be the case if the marginal investor is domestic, as in a closed economy model or as the Tax Foundation suggests.

Suppose all individuals discount future consumption at the same rate (an assumption broadly consistent with the style of modeling the Tax Foundation adopts), the supply of savings is infinitely elastic (as the Tax Foundation would likely need to assume to justify its other results), and only a small minority of the population with wealth far above average is affected by the estate tax (as is the case in practice). Then the estate tax would likely not be marginal to the supply of capital even in a closed economy model. In such a model, the estate tax would cause some households to reduce their savings, but other households would be willing to increase their savings to exactly offset this reduction, leaving the overall supply of savings and the return to the marginal investment unchanged on net. The marginal investment, therefore, would be financed by an investor who is not subject to the estate tax.

The Tax Foundation’s response on this point ignores the fundamental issue. The Tax Foundation explains how the estate tax can affect financial incentives for a hypothetical household and, therefore, may affect that household’s savings decisions. Yet the issue I raised—and the one that matters for the effect of the estate tax on the economy—is whether and how changes in behavior by households translate into a change in the equilibrium rate of return, the return that generally prevails in financial markets. As the example above illustrates, the mere fact that the estate tax affects the incentives of a given household does not necessarily imply that the estate tax has any effect on the equilibrium return.

Thus, when the Tax Foundation incorporates an average estate tax rate into its cost-of-capital formula, it is making implicit assumptions about the distribution of the increase in domestic savings that would finance an increase in the capital stock and whether those assets are held at death (probabilistically). These are the assumptions in question. The Tax Foundation’s response does not discuss these assumptions and is thus inadequate to address the issue I raised.

The weakness of the response may reflect that (as noted above) the Tax Foundation appears not to explicitly model the sources of savings in any way. If this is the case, then the Tax Foundation cannot justify its assertions about the source of savings as they relate to the relevance of the estate tax in its model because the model does not address these issues.

The Tax Foundation’s justification for treating the estate tax as a nondeductible property tax paid by businesses is incorrect

Finally, there is the issue of treating the estate tax as a nondeductible property tax paid by businesses. As I discussed in my original critique, this treatment can generate spurious interactions between the statutory corporate tax rate and the estate tax rate that could cause the Tax Foundation to overstate the growth that would result from a reduction in the statutory corporate tax rate.

In response, the Tax Foundation argues that because the estate tax is akin to a property tax and because the estate tax is not deductible against income taxes, it is appropriate to model it as a property tax paid by businesses that is not deductible against the corporate income tax. This argument is incorrect because it ignores the distinction between a property tax paid by individuals and a property tax paid by businesses.

If, as the Tax Foundation asserts, it is appropriate to model the estate tax as a property tax paid by individuals, then the estate tax would increase the equilibrium rate of return required by investors in financial markets. The estate tax would thus have a negative impact on the capital stock, but would not interact with the statutory corporate tax rate in the manner that it currently does in the Tax Foundation model. A modeling approach that treats the estate tax as a property tax paid by individuals would not generate the spurious interaction I identified in my critique because decisionmakers within a firm would not analyze potential investments under the assumption that the firm itself pays the estate tax.2

The Tax Foundation itself acknowledges this issue elsewhere in its response to my critique. The Tax Foundation states that as “estate taxes are not paid by the firm, they only affect the discount rate of the individual.” In contrast, in their modeling, the Tax Foundation treats the estate tax as having no effect on individual discount rates and a direct effect on the investment decisions made by firms that behave as if they pay the estate tax. These two approaches are not equivalent.

Conclusion

A complete assessment of the Tax Foundation model is not possible given the limited information about the model available. Nevertheless, my original critique identified two flaws in the model. The Tax Foundation has acknowledged the first while arguing that the second is not actually a flaw. This analysis evaluates the Tax Foundation’s response to my critique and finds it lacking.

Moreover, the Tax Foundation’s response raises further questions about the organization’s macroeconomic model, including whether a rigorous justification for the seemingly ad hoc collection of equations that make up the model has been—or even can be—constructed. As noted in my original piece, these issues with the Tax Foundation’s model raise questions about the reliability of the organization’s estimates of economic growth and suggest that policymakers and the press should be skeptical of the results.

Must-Read: Paul Krugman: La Trahison des Clercs, Economics Edition

Posted on by Brad DeLong

Must-Read: I would note that the Trumpublicans are unweaving the web of neoconservative foreign policy facts-on-the-ground even as we write: their anger, rage, and… “shrillness”, to coin a word, has substantial policy deviation causes. By contrast, the Trumpublicans “always cut taxes when you can, and rely on the Democrats to clean up your mess” has been Standard Operating Procedure for the Republican Party and for Republican policy economists (with the very honorable exception of Marty Feldstein, when he felt he could afford to be brave) since November 1980. You might say: “but this time there is a 1% of GDP transfer to the top 1% without any growth benefit at all”. The question is: Is that a substantial policy deviation from SOP of the same magnitude as the ones the neocons are facing?: Paul Krugman: La Trahison des Clercs, Economics Edition: “A former government official… asked… have any prominent Republican economists taken a strong stand against the terrible, no good, very bad tax legislation their party just rammed through the Senate?…

…I couldn’t think of any. And this says something not good about the state of at least that side of my profession. We can divide Republican economists into three groups here…. Those enthusiastically endorsing the specific bill… the 137 signatories… a… motley crew….

Second… the Nine Unprofessional Economists…. As Jason Furman and Larry Summers pointed out, they misrepresented the research they claimed supported their position, then denied having said what they said…. Explicit aid and comfort to tax cutters, with an extra dose of dishonesty and cowardice….

A third group, people like Greg Mankiw and Martin Feldstein, who have written in favor of the general idea of lower corporate taxes, which is OK…. But have any of them spoken out about the reality of the actual legislation?… I may have missed some condemnations, but I haven’t seen any. You may say that this is how everyone behaves–if your political side does bad stuff, you go silent….

Consider… neocon foreign policy types. Nobody can accuse me of having a soft spot for the likes of William Kristol, Max Boot, Jennifer Rubin, David Frum, and others…. But… under Trump they have shown real courage: they have proved willing to criticize, harshly and even shrilly, the disastrous governance of our current regime…. The foreign-policy neocon intellectuals, however wrongheaded I may find their ideas, turn out to be men and women with real principles. I wish I could say the same about conservative economists. But I can’t.

Must-Read: Rich Yeselson: Senator Susan Collins and Three Highly Unprofessional Republican Economists

Posted on by Brad DeLong

Must-Read: And Glenn Hubbard and Larry Lindsey plumb the depths of unprofessionalism to a degree I find genuinely surprising in private (oh, I am not surprised by Douglas Holtz-Eakin here.): Rich Yeselson: Senator Susan Collins and Three Highly Unprofessional Republican Economists: “Sen[ator] Collins on @MeetThePress today said that she had talked to [Holtz-]Eakins, Lindsay, and Hubbard and they believed that the supply side stimulus would produce an increase on government revenue…

…This is a problem when other side’s alleged serious people are really hacks.

Matt O’Brien: Wow. I guess I shouldn’t be surprised, but still, wow.

Rich Yeselson: I thought it was interesting for several reasons:

  1. Unlike most Rs, she felt she needed purported technical expertise;
  2. She needed it because three extant models did not give her the result she wanted;
  3. She is as much of a reflexive supply side as the rest of the R[epublican]s;
  4. R[epublican] experts are indeed hacks, not willing to puncture this delusional bubble;
  5. It would never occur to her to speak to any economist who hadn’t worked in an R[epublican] administration—her “moderation” is still locked with an extremist ambit.

Should-Read: Matt O’Brien: Republicans are looking for proof their tax cuts will pay for themselves. They won’t find it

Posted on by Brad DeLong

Should-Read: Why are the Tax Foundation’s numbers so much different than everybody else’s? And why do I now classify their model as “unprofessional”? Because the U.S. is not a “small open economy with perfect capital mobility” and because the neoclassical long run takes much more than 30 years to arrive. Here we have a good, short explainer: Matt O’Brien: Republicans are looking for proof their tax cuts will pay for themselves. They won’t find it: “The Tax Foundation… starts from the premise that the United States isn’t a big open economy like it actually is, but rather a small open one like Ireland…

…How does that change things?… Corporate tax cuts would make foreign investors send mountains of money into the country until, very quickly, the only investments left were ones that offered the same after-tax return as everywhere else in the world. On top of that, it doesn’t think tax cuts could ever be bad for growth by leading to, say, higher debt or higher interest rates from the Fed…. Even then, it’s hard to figure how it gets its numbers. “I’ve always been puzzled by their model,” Kent Smetters, a former Bush economist who is now the director of the Penn Wharton Budget Model, told me, “but there aren’t enough details for me to understand it.”… Greg Leiserson… has pointed out… the Tax Foundation made a number of mistakes, one of which it’s since corrected.

But there’s also what seems to be a more fundamental problem: The foundation seems to be assuming things that shouldn’t be assumed together…. The estate tax. The Tax Foundation thinks getting rid of it would help quite a bit… 0.7 percentage points of the 3.5 points of extra growth…. You can say taxing uber-wealthy heirs is bad for growth, because they’re the ones who have the money to make the investments we need. What you can’t do, though, is say that about a small open economy. In that case, people overseas would step in…. So repealing the estate tax shouldn’t matter…. The second red flag…. [In] the small open economy model… you’d expect the share of investment income going to foreigners to go up…. The Tax Foundation, though, assumes that the share of investment income going to foreigners wouldn’t increase at all, even though the share of investment coming from foreigners would….

It seems like the Tax Foundation has taken a simple idea and applied it in ways that don’t quite work together…. The assumptions built into the idea that the corporate tax is particularly bad for growth are different from the ones that tell you the estate tax is…. To make it all fit… ad hoc justifications…. I asked the foundation if… it could mathematically reconcile these things—and it doesn’t…

Should-Read: Jason Furman: @jasonfurman on Twitter

Posted on by Brad DeLong

Should-Read: Can this possibly be correct? I know that they are incompetent. But can they be this incompetent?: Jason Furman: @jasonfurman on Twitter: “The effective marginal tax rates on equipment investment in the Senate bill are really weird…

…A huge incentive to pull investment forward into 2018. And then higher EMTRs in 2023 & beyond than today (assuming expensing expires)”

METR on Investment in 7 Year Equipment

Weekend reading: “Last minute edits” edition

Posted on by Nick Bunker

This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth published this week and the second is the work we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

Equitable Growth round-up

Is there a trade-off between growth and equity? It’s hard to measure that question without determining how we measure growth in the first place. Austin Clemens and Heather Boushey look at how we could measure growth by taking equity into account.

Last month Equitable Growth co-hosted an event with the Program on Law and Government at the Washington College of Law on the untapped potential of current antitrust law. With the U.S. Department of Justice suing to block AT&T Inc.’s purchase of Time Warner Inc., the event has even more relevance. Liz Hipple summarizes some key takeaways from the conference.

One of the key questions of the current tax policy debate—perhaps the key question—is whether a cut in the U.S. corporate income tax will lead to a significant increase in wage growth for most Americans. A new infographic from Equitable Growth shows how tenuous the connection between the tax cut and wage growth is.

According to the National Bureau of Economic Research, the Great Recession started 10 years ago this month. A decade later, perhaps it’s time to rethink whether the long-run potential of the economy isn’t affected by recessions and booms.

Links from around the web

Some statistics might give you the impression the U.S. economy is back to where it was before the Great Recession, but it doesn’t feel that way for millions of U.S. families. The ramifications of foreclosures, job loss, and deferred dreams are still being felt. Alana Semuels tells the story of one California family as just one example of this reality. [the atlantic]

Retail jobs are generally not regarded as “good” jobs. But looking at new research from the Russell Sage Foundation, Eduardo Porter concludes that “[t]here is nothing inevitable about dead-end jobs.” [nyt]

High profit margins might be a sign of market power but a company might not need to have high profits in order to draw policymakers’ attention. Alexandra Scaggs advances this argument, looking at the timely example of the AT&T Inc.’s proposed purchase of Time Warner Inc. [ft alphaville]

In the latest round of a debate about the growth impact of the tax plan making its way through Congress, Lawrence H. Summers and Jason Furman find that the evidence provided by supporters of the bill is weak. [wonkblog]

One benefit of tight labor markets is that they will help pull people back into work who might otherwise find it difficult to find a job. The labor market in New Hampshire is currently a good example. As Jennifer Levitz documents, employers and the government are working to help workers in recovery from drug addictions get jobs. [wsj]

Friday figure

Figure from “U.S. corporate tax cuts and wage growth.”

Should-Read: Jagdish Bhagwati: “I agree with the main thrust of the Letter I signed, but I do not think it is likely that tax cuts will produce revenues that offset the initial loss of revenue from the tax cuts…

Posted on by Brad DeLong

Should-Read: More on Douglas Holtz-Eakin, James Miller, Jagdish Bhagwati, and a few more than 100 Unprofessional Republican Economists. I confess I am flummoxed by this: Statement by Jagdish Bhagwati: “I agree with the main thrust of the Letter I signed, but I do not think it is likely that tax cuts will produce revenues that offset the initial loss of revenue from the tax cuts…

…Incentives work but it is dangerous to assume that the results are huge. The mistake on the part of the supply-siders way back was that they did assume that the incentives result in implausibly huge responses. To assume this is to ‘bet the company’.”

Jagdish: The A Few More than 100 Unprofessional Republican Economists letter that you signed makes only three quantitative claims. What is “the main thrust of the letter” that you agree with, if not these three claims?

  1. The tax “reform” bill “will ignite our economy with levels of growth not seen in generations…”
  2. It will “produce a GDP boost ‘by between 3 and 5 percent…'”
  3. “Sophisticated economic models show the macroeconomic feedback generated by the TCJA will… more than… compensate for the static revenue loss…”

I read letters I sign. I do not sign letters I disagree with. If I cannot at least say, of every paragraph, “that’s true—but I would phrase it differently”, I do not sign. It would never occur to me to sign on.

Please. Retract your signature.