Tag: Tax “Reform”

Six Tax “Reform”-Related Appeals to Various People to Do Their Jobs for Their Country’s Sake—and Even, in the Long Run, Their Selves’ Sake

Posted on by Brad DeLong

Tax Foundation Score of the Tax “Reform” Conference Report

Posted on by Brad DeLong
Mnuchins

Alan Cole: @AlanMCole on Twitter: “Don’t think this one’s gonna pay for itself, guys:”

John Buhl: @jbuhl35 on Twitter: “Because of the nonstop work of @ScottElliotG @NKaeding and others, we have a dynamic score of the conference committee version of the #TaxReformBill https://twitter.com/jbuhl35/status/942735485566365698 Full report to come later today.”

Alan Cole: @AlanMCole on Twitter: “1.7% change in long-run GDP is a pretty bad score from @taxfoundation all things considered, given how large the tax cut is. One problem is they got rid of the shortened asset life for structures in conference…”

The rules of thumb I find myself applying to Tax Foundation numbers these days are:

  1. Their “small open economy with perfect capital mobility” assumptions together bias and triple the long run boost to the level of GDP relative to the baseline. The US is a large economy: global interest rates are not unaffected by it. International capital mobility is not perfect: home bias is a huge thing.

  2. Their “1/e time to the long run is 10 years” assumption biases and doubles their estimate of the initial growth rate boost..

  3. Their failure to distinguish between Gross Domestic Product and national income causes an additional substantial bias that depends sensitively on the details.

  4. Their failure to take account of how the tax “reform” is going to be financed—what will be the effects on economic growth of the services and public investments cut, or of the additional taxes elsewhere in the economy that will be levied—causes an additional substantial bias that depends sensitively on the details.

So if you are talking about the impact on the growth rate of national income, divide the Tax Foundation by more than six and you have what is probably a sensible estimate.

Thus take the Tax Foundation’s 0.17%/year. Cut it down. To less than 0.03% per year. Not 0.3%. Less than 0.03%.

The claim was the 0.4% per year on the growth rate would get you 1 trillion dollars in revenue over 10 years. That was always stretching it: it was 0.5% per year. But we do not have that. Even if we were a small open economy in a world with perfect capital mobility–which we are most definitely not–the Tax Foundation grants you only 350 billion dollars over 10 years. And applying my rule of thumb haircuts makes me expect 60 billion.

Monday Smackdown: Treasury Document Translation: Steve Mnuchin Is Not a Professional Treasury Secretary. He and His Personal Staff Are Grifters

Posted on by Brad DeLong
  1. The U.S. Treasury’s Office of Tax Policy (OTP) and Office of Monday Smackdown: Steve Mnuchin Is Not a Professional Treasury Secretary. He and His Personal Staff Are Grifters

Tax Analysis (OTA) agree with the Congress’s Joint Committee on Taxation (JCT) that the Republican Senate tax “reform” bill as written will raise the debt by 1.5 trillion dollars over the next decade, and boost growth by 0.08% per year

  1. OTP does not believe that growth will be 2.9% per year over the next decade.

  2. If growth were to be boosted from the baseline 2.2% per year over the next decade to 2.9% as a result of the tax “reform”, it would pay for itself. But it won’t.

  3. No office in the Treasury Department is willing to go on record as having written this one-page document.

  4. No official in the Treasury Department is willing to go on record as having written this one-page document.

  5. Not even Steven Mnuchin has put his name on this one-page document.

Mnuchin

Economics as a Professional Vocation

Posted on by Brad DeLong
Real GDP Growth Rate

Should-Read: The very sharp Binyamin Applebaum had an interesting rant yesterday: Binyamin Applebaum: @BCAppelbaum on Twitter: “I am not sure there is a defensible case for the discipline of macroeconomics if they can’t at least agree on the ground rules for evaluating tax policy…

…What does it mean to produce the signatures of 100 economists in favor of a given proposition when another 100 will sign their names to the opposite statement? How does Harvard, for example, justify granting tenure to people who purport to work in the same discipline and publicly condemn each other as charlatans? How are ordinary people, let alone members of Congress, supposed to figure out which tenured professors are the serious economists?…

I would say, first, that journalists (and others) are supposed to use their eyes and their brains. They can take a look at the Nine Unprofessional Republican Economists who placed their letter in the Wall Street Journal last Saturday containing:

A conventional approach to economic modeling suggests that such an increase in the capital stock would raise the level of GDP in the long run by just over 4%. If achieved over a decade, the associated increase in the annual rate of GDP growth would be about 0.4% per year…

And note that by Wednesday they were saying:

Our letter addresses the impact of corporate tax reform on GDP; we did not offer claims about the speed of adjustment to a long-run result…

That degree of—four days later—”who are you going to believe: us or your lying eyes?” is a definite tell.

Similarly, they can take a look at the Hundred Unprofessional Republican Economists who placed their letter in Business Insider containing:

The enactment of a comprehensive overhaul—complete with a lower corporate tax rate—will ignite our economy with levels of growth not seen in generations… produce a GDP boost ‘by between 3 and 5 percent’…. Sophisticated economic models show the macroeconomic feedback generated by the TCJA will… [be] more than enough to compensate for the static revenue loss…

They should then ask: would a boost to GDP of 3% over 10 years—0.3% per year—generate growth “not seen in generations”? No, it would not. That claim is simply false, as a glance at the GDP growth graph immediately reveals.

They should then ask: what are the “sophisticated economic models [that] show the macroeconomic feedback generated by the TCJA will… [be] more than enough to compensate for the static revenue loss…” And, when the response is “[crickets]”, understand that there are no such models.

These tells of unprofessional behavior will inform them who to trust.

And they should go to organizations that at least have a track record of surveying a consistent group of well-regarded economists, like the IGM Panel. When only one economist on the panel—Stanford’s Darrell Duffie—says that they agree with the statement that the tax bill will make “US GDP… substantially higher a decade from now than under the status quo…” you can conclude that economists claiming it letters that it will are far outside the professional consensus.

Now there is the question of where this unprofessional behavior by economists comes from, and what should be done about it.

Professional economists simply should not say on Saturday that the long run of their forecasts could come in as short a time as a decade (“if achieved over a decade, the associated increase in the annual rate of GDP growth would be about 0.4% per year…) and then the following Wednesday deny what they had said (“we did not offer claims about the speed of adjustment to a long-run result”). They should have not made the might-be-ten-years claim in the first place. Having made it, they should have withdrawn it—hell, they should still withdraw it: they could use the <strike>…</strike> html tag. Having made it, they should not deny that they made it.

Professional economists should not say that an 0.3%-point increase in economic growth would carry us to “levels of growth not seen in generations”. Professional economists should not say that “sophisticated economic models show the macroeconomic feedback generated by the TCJA will… [be] more than enough to compensate for the static revenue loss…” for their are no such models. They are, as one Twitter wit said and as I endorse, the equivalent of the girlfriend-who-lives-in-Canada.

In universities—and thinktanks—concern for one’s academic reputation and the good opinion of colleagues in the context of a community that places the highest value on truth-seeking, truth-telling, and high-quality debate is supposed to keep such unprofessional behavior to a minimum.

Just before he was canned from Berkeley during the Red Scare, medieval history professor Ernst Kantorowicz argued that the academic robe worn by scholars on formal occasions was a sign of this dedication to truth-seeking, truth-telling, and high-quality debate: academics had placed themselves under a geas to think hard and say what they believed to be true, and that in carrying out this geas they were responsible to “their conscience and their God”.

But what if we find that there are large numbers of university professors and thinktank fellows who fear neither God nor their consciences—and who value the support of donors and the approval of partisans more than their internal academic reputations? The process of socialization and acculturation was supposed to keep such people out of universities and thinktanks, and in law and lobbying firms where it was understood that people were simply offering arguments rather than claiming to be setting forth truths, and from which their arguments could be assessed with boatloads of salt. What if this process fails?

It is a serious problem.

I do not have an answer.

Calling out people who I judge behave unprofessionally and cross the line, so that I can no longer credit that they are trying as hard as they can to think and to tell the truth—that is one small thing I can do.

You Just Cannot Be an Honest Neoclassical Economist and Make the Trumpublican Tax “Reform” a Winner for U.S. National Income Growth…

Posted on by Brad DeLong

…or, especially, after-tax real median growth. Or even 2%-ile income growth. Let alone well-being after cuts in public services.

You just can’t.

It doesn’t add up at any level. As a matter of arithmetic…

Just too much of existing capital income flows to foreigners. Too much of extra production generated by a capital inflow would be credited to foreigners. And domestic savings supply is relatively inelastic. Even if you put both hands on the scale and lean hard, it just doesn’t work, even without noting how much of payments to capital are monopoly rents and payments to other forms of capital that are not interest sensitive…

And Paul Krugman has been on fire this fall:

Figure 2 Accurate Diagram

(Plus the salmon (on my machine) rectangle, minus the… what color is that? (on my machine) brownish-gold rectangle—that’s the long-run change in U.S. national income from a budget neutral tax “reform” like that Trumpublicans are proposing. The effects of a deficit-increasing one are… less favorable.)

Krugman this fall:

  • (2017-10-05) Paul Krugman: The Transfer Problem and Tax Incidence: “Assuming I’ve done the algebra right, I get a rate of convergence of .059–that is, about 6 percent of the deviation from the long run eliminated each year. That’s pretty slow: it will take a dozen years to achieve even half the adjustment to the long run. What this says to me is that openness to world capital markets makes a lot less difference to tax incidence than people seem to think in the short run, and even in the medium run…”

  • (2017-10-21) Paul Krugman: Some Misleading Geometry on Corporate Taxes: “What’s wrong with this picture?… Four reasons I can think of…. A lot of what we tax with the corporate profits tax is… monopoly profits and other kinds of rents…. Capital mobility is far from perfect…. The US isn’t a small open economy…. Finally… capital inflows… have to be created by a temporarily overvalued real exchange rate… meaning very big trade deficits, meaning a strongly overvalued dollar…”

  • (2017-10-24) Paul Krugman: The Simple and Misleading Analytics of a Corporate Tax Cut: “The claim here is that the wage gains from a corporate tax cut exceed the revenue loss by a ratio that depends only on the initial tax rate, not at all on the degree to which capital can be substituted for labor, which in turn should (in this model) determine how much additional capital is drawn in by the tax cut. This feels wrong–and it is…”

  • (2017-10-25) Paul Krugan: Trump’s $700 Billion Foreign Aid Program: “A simple point, but one everyone—myself included—somehow missed: the Trump tax plan is a huge giveaway to foreigners. Among other things, this means that the tax plan almost certainly reduces U.S. welfare even if you ignore distributional issues…”

  • (2017-10-29) Pul Krugman: Tax Cut Fraudulence: The Usual Suspects: “A revival of some more traditional, Bush-era fraudulence…. In particular: First, the claim that the rich pay practically all the taxes, so that of course they have to get the bulk of the tax cut. Second, claims of vast growth, because Reagan…”

  • (2017-11-01) Paul Krugman: The Gravelle Geardown: “Why does Gravelle-type analysis ‘gear down’ the wage effects of lower corporate taxes so much?…. Four reasons, three of which are conceptually easy…. First, a lot of the profits we tax are rents…. Second, corporate capital is only part of the U.S. capital stock; half of fixed assets are residential, and a lot of the rest isn’t corporate…. Third, America isn’t small…. Finally, and this is the one that I find takes some work, we’re very far from having perfectly integrated markets for goods and services…. So how great an idea is cutting corporate taxes? About as great as Dow 36,000…”

  • (2017-11-08) Paul Krugman: Leprechaun Economics and Neo-Lafferism: “Not incidentally, Kevin Hassett appears to be confused about the economics here, imagining that a paper reduction in the US trade deficit due to changes in transfer pricing would bring in real jobs. It wouldn’t. There are really two bottom lines…. The true growth impacts of Cut Cut Cut would be even more pathetic than the numbers you’ve been hearing. The other is that if you’re going to make international capital flows central to your arguments, you really need to think about the implications for future investment income…”

  • (2017-11-09) Paul Krugman: Leprechaun Economics, With Numbers: “The TF model… I don’t believe for a minute…. 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…. 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…”

  • (2017-11-11) Paul Krugman: The Tax Foundation Has Some Explaining To Do: “I’m hearing from various sources that the Tax Foundation’s assessment of the Senate plan… is actually having an impact on debate in Washington. So we need to talk about TF’s model…. During… large-scale capital inflow, you must have correspondingly large trade deficits…. Second… foreigners aren’t investing in America for their health…. Most of any gain in GDP accrues to foreigners, not U.S. national income. So how does the TF model deal with these issues? They have never provided full documentation (which is in itself a bad sign), but the answer appears to be—it doesn’t…”

  • (2017-11-14) Paul Krugman: Tax Cuts And The Trade Deficit: “If you believe the TF analysis, you also have to believe that the Senate bill would lead to enormous trade deficits—and massive loss of manufacturing jobs. What would adding $600 billion per year to the trade deficit do?… The U.S. manufacturing sector would be around 20% smaller than it would have been otherwise. How would this happen? Huge capital inflows would drive up the dollar, making U.S. manufacturing much less competitive…”

Republican Politicians, Non-Technocrats, and Technocrats on Tax “Reform” Edition…

Posted on by Brad DeLong

How did we get here?

The Republicans Are Huge Liars

First, where are we?

Matthew Yglesias: If the GOP tax plan is so good, why do they lie so much about it?: “Democratic programs may or may not be… good idea[s], [but] the bills they write that they say will expand the provision of social services in the United States really do expand the provision of social services…

…Not so… with the Republican plan…. Trump ran on promising a middle-class tax cut…. At the beginning of the month, Trump was on the same page, saying…. Treasury Secretary Steve Mnuchin made an unambiguous promise that there would be “no absolute tax cut for the upper class”…. Trump went so far as to phone up a group of Senate Democrats to tell them, “My accountant called me and said, ‘You’re going to get killed in this bill.’” This is all a bunch of lies…. Rather than own up to the reversal and defend it on the merits, Trump’s team is now engaging in bizarre deflections….

A telling thing about the cavalcade of lies Republicans are telling about taxes is the party can’t quite get its story straight as to what the policy agenda even is here. They are telling deficit hawks that the bill is fiscally responsible… revenue-neutral in the long term. They’re telling others that… PAYGO… will be suspended, and the bill won’t really lead to the automatic cuts in Medicare and other programs that, by law, will result from its passage. They’re telling some people the middle-class tax hikes written into the Senate bill will never be enacted… the opposite of what they’re telling deficit hawks. So then some Republicans are telling some deficit hawks that the follow-up to the tax bill will be a return to entitlement reform….

The good news—if you’re inclined to see it as good news—is that Trump is a huge liar, so you can always hope it’s someone other than you who’s going to get betrayed…

I guess we are allowed to use the “lie” word now, are we not?

As to how we got here, let me turn the microphone over to Fritz Hollings:

Senator Howard Baker, the majority leader, sat right down there at that first desk and he shrugged his shoulders and said: “This is a riverboat gamble…”

The thing about a “riverboat gamble”, is that if it goes wrong, you tell your counterparty that you need to get the money from your room, and then you jump overboard in the dark and swim to shore.

The time was 1981. Howard Baker was then characterizing the 1981 Reagan tax cut that he was shepherding through the Senate.

It worked—in a “riverboat gamble” sense. As a policy, it was a disaster: no acceleration of economic growth, a significant increase in wealth inequality and degradation of opportunity, and the first of the dollar cycles that devastated America’s manufacturing market share. But the Republican Party was able to swim to shore, collect campaign donations and win seats, and leave the Democrats to pilot the riverboat through the snags.

Ever since, that has been the strategy of the Republican Party: make riverboat gambles. Tell bigger and bigger whoppers about them until they get called to account by the media and by the electorate—and then, with the post-2010 gerrymander and rise of Fox News, by that not general election but primary electorate.

If America is going to remain great, they will have to be called to account. And the only bright future for America is one in which the Republican Party is now on the same slow-motion track to long-term electoral defeat that then-governor Pete Wilson set the California state Republican Party on back two decades ago.

But, in the meantime, here we are, in the cycle of bigger and bigger whoppers. This serves as a good example:

Scott Lemieux: “I Am Sick And Tired Of People Saying That Utah Does Not Share A Border With Belgium”: “At the Senate Finance Committee…

…Sherrod Brown said some indisputably true things about the Republican plan to increase taxes on many non-affluent people to massively cut taxes for the extremely affluent:

I think it would be nice just tonight to just acknowledge that this tax cut is really not for the middle class; it’s for the rich. And that whole thing about higher wages, well, it’s a good selling point, but we know companies don’t just give higher wages—they don’t just give away higher wages just because they have more money. Corporations are sitting on a lot of money. They are sitting on a lot of profits now—I don’t see wages going up…

In response, Orrin Hatch said something indisputably irrelevant:

I come from the poor people, and I have been here working my whole stinking career for people who don’t have a chance, and I really resent anybody who says I’m just doing this for the rich—give me a break. Listen I have honored you by allowing you to spout off here, and what you’ve said is not right…. I come from the lower middle class originally. We didn’t have anything, so don’t spew that stuff on me. I get a little tired of crap…

It’s worth watching the video at the link; the pitch of furious indignation Hatch works himself into because someone pointed out that a tax cut for the rich is a tax cut for the rich is striking. And note that he does not say anything substantive about the bill, because he can’t—he talks about his background. I believe this is what we call a tell. No matter how much spittle Hatch emits, it doesn’t change the fact that he’s trying to ram a massive tax cut for the rich paid for on the backs of the poor through Congress…

Are there any economists out there saying that this is, policywise, a good idea? If there are economists of note and reputation who are taking the plunge, the natural place to find them is among the former Republican CEA chairs. So let’s take a look:

  • On the side of reality, we have Alan Greenspan and Greg Mankiw:
    • Alan Greenspan: “Economically, it’s a mistake to deal with sharp reductions in taxes now. We are premature on fiscal expansion, whether it’s tax cuts or expenditure increases. We’ve got to get the debt stabilized before we can even think in those terms…” (Nov 10)

    • Greg Mankiw: “The business tax plan being promoted by President Trump, and its close cousin released by House leadership this week, start with a good idea but then descend into an unworkable mess. Fortunately, the flaws can be fixed, if policymakers are willing to be bold…. O.K., O.K., I know that I have now come a long way from the Trump plan. And I know that, given the dysfunction in Washington, what I am proposing is a political nonstarter right now…” (Nov 3)

  • On the side of silence, we have Ben Bernanke, Harvey Rosen, and Michael Boskin…

  • On Team Riverboat Gambler, we have Eddie Lazear, Glenn Hubbard, and Martin Feldstein:

    • Eddie Lazear: “Will it boost the economy enough to cover most of the revenue cost? And will it help the middle class? The answer to both questions is yes, although some key changes can make achieving these goals likelier…” (Oct 16)

    • Glenn Hubbard: “Economists’ technical fouls of each other on the tax basketball court make good copy. But a hole-in-one of the wage increase the CEA report describes is what should grab the attention of congressional tax writers…” (Nov 6)

    • Martin Feldstein: “I have long been a deficit hawk…. An extra 1.5 trillion dollars of debt…. But I believe the advantages of corporate tax reform outweigh the adverse effects of the relatively small debt increase… raise the capital stock by 5 trillion dollars within a decade, causing annual national income to rise by 500 billion dollars…” (Nov 5)

There are, I believe, three important errors in Feldstein.

First, he says “causing annual national income to rise…” But that is wrong. The right phrase, in his analytical framework, is “causing annual domestic product to rise…” The difference is that a lot of the increase in domestic product he counts on from increased investment is not an increase in the income of Americans, is not an increase in national income. My first reaction was that half of it is an increase in the incomes of foreigners. Paul Krugman’s second reaction was that two thirds of it is an increase in the incomes of foreigners. Long experience has taught me that, whenever I disagree with Paul, he is probably right.

If Paul is wrong, the effect of this first error is to lower the assessment of the boost to Americans’ annual incomes from 500 billion to 170 billion dollars.

The second error is that Feldstein assumes that the tax cut on already built and installed capital is 100% a cut that flows out of the Treasury and into Americans’ pockets. It doesn’t. Steve Rosenthal estimates that 70 billion dollars of it flows into foreigners’ pockets each year. The effect of this second error is to further lower the assessment of the boost from 170 down to 100 billion dollars a year.

The third error is that Feldstein’s calculation assumes that the bill is deficit neutral, and thus that the 200 billion dollars a year in extra corporate retained earnings it produces is free to be devoted to increased corporate investment without countervailing factors. But, later on, he notes that the proposal involves “an extra 1.5 trillion dollars of debt” over the next decade. That is a subtraction from the funds available for investment. Remove that 10% return on the investment displaced from national income, and so we are down not to 170 billion dollars but to -50 billion dollars as the annual change in national income.

And, of course, not all of extra retained earnings will go to boosting investment. If we trust the CEO Council event that led to White House advisor Gary Cohn “ask[ing] sheepishly, ‘Why aren’t the other hands up?’”, A bunch will go to stock buybacks. A bunch will go to cash hoards and acquisitions. Some will not flow into retained earnings at all but go to dividends. Those wealth flows will boost elite consumption, rather than investment.

We are definitely in minus territory for economic growth here. And we are definitely in minus territory even without noting that Feldstein’s framework is already pretty far on the optimistic side as far as the economic benefits of low capital taxation are concerned. As Matthew Yglesias noted, you might get such a boost from:

a tax plan that was specifically designed to reduce taxation of new investments…. But most corporate profits are… the result of activities undertaken in the past…. A broad cut… is a windfall for what in tax policy jargon is called “old capital,” as well as for monopoly and quasi-monopoly rents and various other things that have nothing to do with incentivizing new investment…

And if we do note that a corporate tax cut is badly targeted—and a passive passthrough even worse targeted—as an investment incentive, we are in very negative territory as far as likely effects on economic growth are concerned.

And Feldstein’s arguments are the only game in town for supporters of the Trumpublican plans. Lazear, Hubbard, the Tax Foundation where Greg Leiserson has been correcting their modeling are all basically Feldstein with or without various bells and whistles.

Two of eight calling it a “mistake” and an “unworkable mess” is great. Three being quiet is OK—but, Harvey and Mike, ex-CEA chairs do not have the privilege of being silent on important policy questions and, Ben, although perhaps it would be better if ex-Fed chairs were to restrict their comments to monetary and financial policy, there is no such rule in operation.

But three offering support, even qualified support, is disappointing. I realize it is asking a lot to ask people who have spent their lives playing for Team Republican to cross the aisle—especially since they (rightly) believe that their principal societal value as is moderating technocratic voices within the Republican Party’s internal discussions, and they fear (rightly) that they put that at risk by failing to support the Republican Party’s legislative priorities. Marty gets a pass for having been very brave in stressing the dangers of the riverboat gambles in the early 1980s.

But may I please ask Glenn and Eddie to come over to the side of technocracy here?

“Stockmanism” or “Magic Asteriskism” Is Bad Economics. Period

Posted on by Brad DeLong

I find myself extremely annoyed this morning with the good-hearted and usually reliable Jim Pethokoukis on Twitter:

@jimpethokoukis: Reminder: Consensus economics view is that lowering corporate income taxes would increase the wages of workers. That isn’t Laffer-ism.

@de1ong: Lowering corporate income taxes and replacing the lost revenue with lump-sum taxes would raise average wages. not what you said…

If you require that the government’s budget constraint be met in your model, consensus economics says “it depends”. Given that raising worker standards of living is not a terribly high priority goal in the Repub House caucus, the way to bet is that when you add in whatever policies they would enact to meet the government budget constraint, the Republican House bill, if enacted, would not raise wages at all.

Saying that replacing a distortionary with a distortionary-free revenue source will (probably) raise some category of income is not “Lafferism”. But it is something not good. What name would you suggest for an analysis that is badly flawed by its inclusion of magic asterisks and its neglect of the government budget constraint?

I would suggest “Stockmanism”, after Reagan’s budget director, known most famously for saying “none of us understand what is going on with these numbers”.