Worth Noting

Tax Reform and the Swamp: The Empire Strikes Back

October 12, 2017

From The Lindsey Group - Tax Reform and the Swamp: The Empire Strikes Back

Last Thursday, recently confirmed CEA Chair Kevin Hassett (a TLG alum) gave a speech at the Tax Policy Center (TPC). The speech highlighted a number of significant discrepancies between the plan the TPC modeled and the publicly available parameters in the framework for tax reform. First, the TPC scored the static revenue cost of the plan they modeled at $2.4 trillion while the Senate budget resolution allows for only a static score of $1.5 trillion. Second, the TPC estimated that taxes for the rich would go down and those on the middle class would go up even though the Framework left the top bracket and the size of the child credit open in order to assure that the plan would be distributionally neutral. Hassett also challenged some of the TPC’s assumptions, notably about the distributional impact of changes in corporate taxes.
Hassett must have hit his mark. The big guns came out this week – Professors Krugman and Summers fired back in the New York Times and Washington Post. What was instructive about both rejoinders is that they did not take on the point-by-point analysis that Hassett went through but instead used the ad hominem style of attack that has become all too common in modern political discourse. You can find their pieces here and here. Neither the Times nor the Post covered Hassett’s original speech.  They just printed the rebuttals.
Krugman’s focus was to defend the TPC’s assumption that just 20 percent of the corporate tax is borne by labor. He begins by claiming that Hassett “offered a new analysis of corporate tax incidence – an approach that is novel, innovative, and completely boneheaded.” He went on to say, “Tax incidence, like macroeconomics, is a technical subject with a mainstream consensus that faces challenges from left and right. But a lot of hard work went into creating that consensus; this doesn’t mean that it’s right, but you have to come up with a really good idea to challenge it effectively.” It is unclear what consensus Krugman  is talking about. For example, a 2006 working paper by CBO economist William Randolph entitled “International Burdens of the Corporate Income Tax” declares, “Burdens are measured in a numerical example by substituting factor shares and output shares that are reasonable for the U.S. economy. Given those values, domestic labor bears slightly more than 70 percent of the burden of the corporate income tax.” The TPC is free to assume whatever it wants, but 20 percent is far from the “consensus” that Krugman asserts. Moreover, the focus of this particular tax reform is explicitly on international tax competitiveness that affects behavior like transfer pricing and the location of production, behavioral changes that would disproportionately benefit American labor.
Summers’ target was on the effect of the tax plan on economic growth. In particular he claims, “Hassett’s arguments about investment depend on the false premise that domestic investment will be spurred by corporate tax cuts.” False premise? Men should not necessarily be held accountable for everything they have said in the past, but back when we were colleagues, Summers had a paper, “Tax Reform and Corporate Investment: A Microeconometric Simulation Study.” From its conclusion: “The simulation results confirm that tax policies can have large effects on both stock market valuations and investment incentives in both the short and the long run.”
This tax reform debate is not your typical battle among eggheads; there is a lot riding on it. If the bill passes and Hassett is right, (a) economic growth will turn out to be far higher under Trump than Obama; (b) income inequality is likely to decline under Trump after having risen under Obama; and (c) real wages for ordinary workers will rise under Trump after having declined or stagnated under Obama. The political and economic policy implications will be massive and far- reaching.  A cynic might conclude that some are not really interested in taking a chance on running this experiment. Rather than go for academic name-calling, I propose a more market-oriented approach: a wager.  I am willing to bet $10,000 on each of the three points above with both Messrs. Krugman and Summers that if the Framework is passed, GDP growth will accelerate, real wages will rise, and income inequality will fall.  We will report on whether we have any takers.

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