Supply-side, trickle-down nonsense on the NYT oped page

There’s a robust debate to be had as to why the NYT published this op-ed on the alleged economic benefits of trickle-down tax cuts, as virtually every paragraph touts an alternative fact. It is the opinion page, I guess, and the authors advise (or at least advised) the president, so I can see why it’s there. But it does require debunking, so thanks NYT, for some make work.

Here’s much of the article’s text, followed by my comments in italics:

In the aftermath of the health care blowup, President Trump and the Republicans need a legislative victory. Tax reform probably should have gone first, but now is the time to move it forward with urgency.

By tax reform, as they admit below, the authors mean tax cuts. This is no such urgency at all. If anything, based on simple demographics alone, we’re going to need more, not less, revenue. This is a typical ploy in this space: create an emergency that can only be solved by tax cuts on the wealthy. If you listen carefully, you hear their fear that their tactics aren’t working, and the tax debate has gotten gummed up. That’s music to my ears, but cacophony to theirs.

Unfortunately, the White House seems all over the map on the subject. One day there is a trial balloon for a value-added tax. The next, the idea of a carbon tax or a reciprocal tax. And now we are hearing the curve ball of a payroll tax cut. Steve Mnuchin, the Treasury secretary, has thrown cold water on the idea of any tax bill meeting the August deadline.

One sure lesson from the health care setback is the old admonition “Keep it simple, stupid.” The Republicans tried to fix the trillion-dollar health insurance market instead of keeping the focus on repealing Obamacare.

I take their point re the lurching of the White House on taxes, which really is remarkable and reveals the lack of not just any planning or coalition building, but even a clear sense of what they want to do on taxes. The idea that “keeping the focus on repealing Obamacare” would work, however, makes no sense, and reveals that the authors’ magical thinking extends beyond tax cuts to health care. Republican voters don’t want Obamacare to be replaced with nothing. They want more health care at less cost, which was what Trump promised them.

…Instead, the primary goal of Mr. Trump’s first tax bill should be to fix the federal corporate and small-business tax system, which has made America increasingly uncompetitive in global markets and has reduced jobs and wages here at home. The White House and the Treasury already have a tax plan that we were involved with last year. The three most important planks of that plan are:

First, cut the federal corporate and small-business highest tax rate to 15 percent from 35 percent, which is now one of the highest corporate tax rates in the world.

Our statutory business rate is a globally high 35 percent. What companies actually pay—their effective rate—is about 10 points lower, because of all the loopholes. Also, because so many businesses are now pass-throughs (where you claim your business income as personal income), you can’t talk about corporate taxes without noting a new loophole these guys are including in the plan they wrote for Trump: take the pass-through rate down to 15 percent as well. This creates a huge incentive for every high earner to become a pass-through.

Second, allow businesses to immediately deduct the full cost of their capital purchases. Full expensing of new factories, equipment and machinery will jump-start business investment, which since 2000 has grown at only one-third the rate recorded from 1950 to 2000.

Here we have the first in a series of trickle-down claims. The alleged sequencing is: cut taxes of business and the wealthy, they invest more, that raises profits and productivity, and the benefits trickle down to the middle class. Every link in that chain is broken: tax cuts, even on investment income, do not correlate with greater investment, and they certainly are uncorrelated with faster productivity growth. Businesses already receive very favorable tax treatment on their investments; in fact, their tax burden on debt-financed investments can be negative. No question, tax cuts raise after-tax profitability, but absent much more worker bargaining power, those profits stay in the pockets of those at the top of the income scale.

Third, impose a low tax on the repatriation of foreign profits brought back to the United States. This could attract more than $2 trillion to these shores, raising billions for the Treasury while creating new jobs and adding to the United States’ gross domestic product.

To help win over Democratic votes in the House and Senate, we would also suggest another component: What many workers across the country want most from President Trump is infrastructure funding. As part of this bill, we should create a fund dedicated to rebuilding America’s roads, highways, airports and pipelines, and modernizing the electric grid and broadband access — financed through the tax money raised from repatriation of foreign profits.

We at CBPP have done a lot of work on this question of “tax holidays,” where multinationals are offered a much-reduced tax rate if they “repatriate”—bring back to the US—their foreign earnings, which they’ve long held abroad to avoid US taxes. When the program is voluntary with no strings attached, it’s a big revenue loser, and you can’t pay for something (infrastructure) with less than nothing. That said, required (vs. voluntary) repatriation as part of a transition to broader reform of how we tax our MNCs would constitute real tax reform.

As much as possible, this bill should include private financing for projects like toll roads and energy drilling. We also favor “user pays” financing, such as toll roads, and we would oppose any Fannie Mae-type financing structure for projects that would put taxpayers on the hook for hundreds of billions in potential losses.

This user-fee stuff is a terrible idea for infrastructure. The whole point of “public goods” is that they are projects that don’t generate the return on investment that would motivate private firms to make such investments. In other words, this is a thinly disguised privatization plan.

…We should emphasize that business tax relief is not a sellout to corporations but a boon for middle-class workers. A study by the Tax Foundation and Kevin A. Hassett, then at the American Enterprise Institute and now the chairman of President Trump’s Council of Economic Advisers, found that middle-class wages rise when business taxes fall.

The additional increase in real wages could be nearly 10 percent over the next decade, which would reverse 15 years of income stagnation for the working class in America. And, if we are right that tax cuts will spur the economy, then the faster economic growth as a result of the bill will bring down the deficit.

Here we have the “money” ‘graf: the straight-up claim that trickle down tax cuts will boost the earnings of the working class, which will help offset their cost—the Laffer curve in action. I guess I should give the authors credit for adding “if we are right,” though I’ll give you very long odds that the editors insisted on this addition. Because there’s no reason to ask if they’re right. They’re not, with the latest exhibit being the state of Kansas, an “experiment” derived by some of these very authors.

BTW, I’ve endorsed my friend Kevin Hassett for his new job as a voice of economic reason in this administration. But I’ve been careful to note this flaw in his work and his thinking. In fact, the study they reference here has been thoroughly debunked in various places.

…As for fixing the maddeningly complex individual income tax system — lowering tax rates and ending needless deductions — we are all for it, but that should wait until 2018. Jobs and the economy are the top priority to voters.

Republicans need to act with some degree of urgency. The financial markets and American businesses are starting to get jittery over the prospect that a tax cut won’t get done this year. A failure here would be negative for the economy and the stock market and could stall out the “Trump bounce” we have seen since the president’s election.

Again with the urgency, and “trust us, folks, it’s not the zillionaires for whom our hearts bleed—it’s ‘jobs and the economy.’” Not to mention the stock market, which is getting “jittery” over the possibility that Trump won’t deliver a tax plan like the one these guys wrote, which delivers fully half of its goodies to the top 1 percent (or even better, the Ryan plan, which, once fully phased in, delivers 99 percent of its cuts to the top 1 percent).

Puh-lease. How stupid do these people think we are (rhetorical question!)? Their simple scheme—Trump wins, the rich get big tax cut—has turned out to be harder to pull off than they’d hoped. That’s a feature, not a bug, of our current political moment, even if it means we have to read a WSJ oped in the NYT.


This was reposted from On the Economy.