Should-Read: Larry Summers and Jason Furman: A modest proposal part II: the debate over US tax reform

Should-Read: Larry Summers and Jason Furman are back, with their response to the non-response from the Nine Unprofessional Republican Economists. What did I do in a previous life to deserve this fresh hell? What did any of us do?: Larry Summers and Jason Furman: A modest proposal part II: the debate over US tax reform: “We appreciate… you are backing off from the statement… that ‘the gain in the long-run level of GDP would be just over 3 per cent, or 0.3 per cent per year for a decade’… [and] ‘not offer[ing] claims about the speed of adjustment’…

…The only three studies you explicitly called out in your original letter do, however, provide specific estimates… 0.1-0.2 percentage points per year for the next decade… not…close to paying for the cost of the tax cut. Even these growth rates, however, are likely to be too high. We have honest differences with you on how the economy operates, including how responsive behaviour is to tax changes. But these are not the source of the differences here. Instead, much of the difference appears to be that you continue to mis-cite your sources while failing to consider the actual Tax Cut and Jobs Act (TCJA)….

Your use of the OECD study is flatly erroneous and we request that you publish an explicit correction….

Your letter to Secretary Mnuchin reported only one of the three models the Treasury used to assess the… Growth and Investment Tax Plan… the one that reported long-run output effects more than twice as high as the other two Treasury models. Your new letter asserts this was because you “believed [this model] most accurately reflects likely saving responses and thus capital accumulation”. Do you have any basis for this belief?

Your original letter emphasised the importance of analysis that reflects the fact that “the United States operates in an international capital market” while the Treasury model you chose to present “do[es] not account for international trade or capital flows”…. It is hard for us to escape the conclusion that you cherrypicked the highest reported estimate in the Treasury report instead of making a considered economic judgment….

Your letter admits that you did not model the specific provisions of the TCJA….

You did not address one specific question we asked: if your estimates are correct would the tax bill result in a large increase in the trade deficit? We assume you agree that it does….

Our sense that you are implying substantially larger growth effects than are warranted is reinforced by the fact that your conclusions appear to be at odds with… the Chicago Booth IGM Panel….

Given that we are not likely to reconcile our differences any time soon, all of us should instead send a clear and united message that encourages Congress to rely on estimates from the expert and non-partisan Joint Committee on Taxation.


Brad DeLong


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