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

April 19th, 2017 at 10:38 am

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.

OTEpc #7: Inclusive immigration policies

April 18th, 2017 at 4:23 pm

Episode #7 of the On the Economy podcast, on the fiscal and economic impacts of immigration, is yours for the clicking. Our guests–Erica Williams and Meg Wiehe, take us through their timely, important research about the benefits of inclusive immigration policies for unauthorized immigrants. And violinist virtuoso Hilary Hahn “joins” us (I can dream, can’t I?) to crush a cadenza.

Enjoy, and feel free to submit questions to


Tax day! And does anybody, other than the obvious suspects, really want a big regressive tax cut?

April 18th, 2017 at 9:28 am

Here’s a useful editorial from the WaPo on a long-time CBPP theme: fully fund the damn IRS, damnit! Stiffing the agency is increasingly a back-door way for R budget cutters to provide an implicit tax cut to their funders:

Attacking the IRS is a particularly expensive way to play to the crowd. It rewards tax cheats at everyone else’s expense. Commissioner John Koskinen estimates that the government loses at least $4 for every $1 cut from the IRS and is losing some $4 billion to $8 billion a year due to inadequate funding.

Which raises the issue of tax “reform,” or more accurately, as I’ve written, tax cuts. When President Trump was elected, I thought that many people were vastly overestimating his administration and Congress’s ability to legislate their agenda, in part because there was no real, organized, coherent agenda.

To be clear, that was often going to be a feature, not a bug. On health care, for example, it’s long been clear that they really have no idea what they want, other than no Obamacare.

But on taxes, I thought, they’re solidly on the same page: cut taxes, mostly for the wealthy, and don’t worry about the deficit (to the contrary–big deficits mean they can argue for cutting entitlements/shrinking gov’t). But this too has turned out to be a heavy lift.

Why? Part of it is, like health care, a lack of policy clarity–understanding, explaining, and arguing about their border adjustment tax sucked a lot of oxygen out of the debate. Surely their funders have to be wondering why in the name of the top 0.1% they’re having endless arguments with economists about potential currency movements in the face of a BAT. “Just cut our damn taxes and be done with it!”

Then–really, now–they started lurching from plan to plan unlike anything I’ve seen in decades of experience with this sort of thing.

Fundamental fairness issues are also in the air. Conservative tax cutters may have overplayed their hand when, in their recent attempt to repeal and “replace” Obamacare, they proposed to cut taxes for the richest of the rich by $600bn (over 10 years) while cutting Medicaid by 25% in 2026. Our research showed that, once it was fully phased in, almost all of the benefits of the earlier House tax cut plan would accrue to the top 1%.

Perhaps, end of the day, they’ll manage to pass a GW2-style tax cut, maybe 1%-1.5% of GDP, that sunsets to meet reconciliation rules. But remember, Bush the 2nd inherited a budget surplus, so even that path could be bumpy given today’s more negative fiscal outlook.

I certainly hope so, re the bumpy path. Not only do I see no compelling economic or distributional rationale for a big tax cut, but I’m not sure that many other people, outside of Congressional Republicans, do either. I think many of us who follow this sort of thing do see a need to simplify the corporate code, fund the IRS, and push back against tax avoidance.

But beyond that, FWIW, my antenna are not picking up a strong signal from the American people that regressive tax cuts is the thing they want their gov’t to be working on. They’d rather have them thinking about jobs and (pretax) wages and they don’t believe, because it’s not believable, that cutting taxes for rich people helps them on that front.

Finally, for those of you struggling with last minute filing, there’s this, from the New Yorker, of course.

Just a little free-floating nervousness re the business cycle to start out your week…

April 17th, 2017 at 4:57 pm

Over at WaPo, re current economic conditions.

I mention the slowing of real, blue-collar wages in the piece as something that’s important in terms of a constraint on consumer spending (70% of GDP, fyi). Their hourly pay has been flat over the past year, same with their weekly earnings. Basically, in 2015, their nominal pay accelerated as the job market tightened while inflation went south, riding on energy-price declines.

Since then, it’s reversed: the pace of their nominal wage growth has trailed off a bit, while inflation has picked up.

Take note, Yellen and co.!

Source: BLS

I’m concerned re the lack of nominal acceleration of the blue-collar wage.

April 14th, 2017 at 2:28 pm

I said I’d get back to my tweet from this AM showing the deceleration in real wage growth, particularly for blue-collar workers. This is not exactly the stuff of 140 characters.

One can decompose the change in real weekly earnings for private-sector workers into three parts: changes in nominal hourly earnings, inflation, and average weekly hours worked. As the table below shows, the growth in real weekly earnings equals nominal wage growth – inflation + hours growth. See data note for details, particularly for how to compute the white-collar wage, which, unlike the rest of these data, is not an official BLS series, but a backed-out residual.

Source: BLS, our calculations.

Of course, someone could look at these numbers and declare that the problem is price growth, and that the Fed must continue to tap, if not smack, the brakes. I think that’s wrong. What’s happened on the price side is that, as energy prices have normalized, inflation has also climbed back to more normal levels. Pursuing deflation to boost real earnings won’t work, as it will undercut the demand needed to give middle- and low-wage workers the bargaining clout they otherwise lack.

I don’t want to make too much out of this as these data are noisy and the patterns can flip. Also, a lot of my work shows tight labor markets deliver more bargaining clout to less-advantaged workers, so I tend to think that, as we close in on full employment, the nominal pay of lower-wage workers should accelerate. Still, we know that wage inequality is still embedded in our labor market and need to keep a close eye out for the type of divergent trends you see in the table.

In this regard, the key unsettling number in the table is the one in bold showing no acceleration in the blue-collar wage. That bears close watching.

[h/t: Ben Spielberg]

Date note: The wage series for “white-collar” workers is derived from the following relationship:

Emp_a * W_a = Emp_bc * W_bc + Emp_wc * W_wc

Emp represents private employment and W the average wage (either hourly or weekly), with the subscripts a, bc, and wc representing all workers, “blue-collar” workers (production and nonsupervisory workers), and “white-collar” workers (those who are in the private sector but excluded from the production and nonsupervisory series), respectively.  That is, the total hourly wage bill for all private sector workers is equivalent to the total hourly wage bill for “blue-collar” workers plus the total hourly wage bill for “white-collar” workers.  Performing simple algebra and noting that Emp_wc = Emp_a – Emp_bc, we can solve for the average wage for white-collar workers.

Note that “blue-collar” and “white-collar” workers are not perfect descriptions, as which workers are counted in the production and nonsupervisory series varies by industry; a worker in sales in manufacturing might fall in our “white-collar” series, for example, while a worker in sales in a different industry might fall into the “blue-collar” series.