A few more comments on the Republicans’ Corporate Tax Plan

January 3rd, 2017 at 11:18 am

I didn’t want to jam too much into my piece last week on the interesting Border Adjustment Tax—come on peeps, you know that BAT is a much better acronym than DBCFT (destination-based-cash-flow tax)—that House R’s want to use to replace the current corporate tax. Like I said, it’s a complicated bit of work about which we know little, particularly regarding its impact on consumer prices (and thus, its distributional impact) and on exchange rates.

That said, it’s hard to imagine a scenario in which a tax that clearly favors net exports would not lead to some degree of dollar appreciation. Ed Kleinbard, a guy who thinks deeply about such things, makes the intuitive point that a multi-trillion-dollar side effect of the dollar appreciation is a transfer of wealth from US investors with foreign holdings to foreign investors holding US assets. He explains here using Freedonia to symbolize not-the-US:

It also follows from this that the transition to a destination based profits tax, and with it the appreciation in the U.S. dollar, will work a one-time very large wealth transfer from U.S. investors to foreign investors. Foreign investments held by U.S. investors overnight will be worth less in dollar terms, and U.S. investments held by Freedonian investors overnight will be worth more in Freedonian pfennig terms. Carroll and Viard have estimated that at the end of 2010 the wealth transfer attributable to the introduction of border adjustments without any transition relief would have amounted to a $7.88 trillion loss to American investors and an $8.85 trillion pickup in wealth for foreign investors. As of the time of this writing, I am reasonably confident that policymakers have not weighed the implications of this.

Those are many more trillions than I would have guessed, but note that the analysts Ed’s citing are strong proponents of the tax, so I don’t think their thumb would be on the scale.

I’m not saying this is or should be a deal killer—any transition to a better corporate tax system will create winners and losers. But I share Ed’s “reasonable confidence” that policy makers haven’t thought much about this, and you can add US investors holding foreign assets to the retailers and other producers that depend on imported inputs to the list of those who will fight hard against the BAT.

One more point on this dollar appreciation business. I enjoyed this useful oped in today’s NYT about how Trump will probably have to go through Congress if he wants to increase tariffs (I’ve seen some counter-arguments, but the NYT piece made more sense to me). But this part seemed off (my italics):

A border adjustment tax is a far better option than tariffs. It would eliminate incentives in the current tax system to manufacture abroad, and to shift income abroad. Unlike a tariff, it aims to be trade neutral, with any changes in consumer pricing of imports and exports being offset by a rise in the dollar. And with strong support in the House, it could be enacted in full compliance with the Origination Clause, lending it legitimacy that a unilateral tariff would lack.

If the dollar fully adjusts, then the trade balance, which is measured in dollars, not quantities, is unaffected. Tariffs, of course, are designed to improve the trade balance. I’m not sure they would, and, in fact, I suspect our trading partners would retaliate against either tariffs or a tax scheme that subsidized exports, so the impact on the trade balance of either of these interventions is not clear. But a selling point by BAT proponents is that the balance of trade would be unaffected, which is a very different selling point than the one offered by proponents of tariffs.

It’s here: CBPP’s top graphs of last year!

January 1st, 2017 at 12:00 pm

Happy new year and welcome to the Center on Budget and Policy Priorities top graphs of 2016 special! I’ll be your host, joined later by musical guest…whoops, sorry. What with the urgency of the moment, there’s no space for a band this year. So let’s jump into the facts and figures (and to be clear–and fair to my CBPP colleagues–this is but a small sample of our best stuff; take my advice and, if you haven’t already, bookmark our site and visit it often; current threats have us shifting into overdrive).

This year’s theme is a somber one: the fragility of the gains we’ve made.

First, the GOP appears poised to engage in a War on Poverty Programs. In order to help finance their highly regressive tax cuts, they’re likely to target programs like Medicaid and SNAP (food stamps), e.g., by turning them into block grants to states. This robs these programs of their vital countercyclical impact, like that shown in the figure below. Back in 2010, as the Great Recession was pummeling low-income households, the safety net did what it’s designed to do: catch people when the market fails.


What’s that? You’re skeptical that block grants would truly undermine the effectiveness of our anti-poverty programs. Well, observe this next figure, showing the growing failure of cash assistance to reach needy families since it was turned into a block grant back in the mid-1990s.


Here’s another huge gain to low- and middle-income households that’s at risk of being lost: the decline in the share without health coverage. It seems increasing clear that president-elect Trump and the GOP Congress are firmly united in repealing the Affordable Care Act. When it comes to replacing it to stave off the lost coverage that will then beset millions of households…well, that they’re not so sure about.


I’ve got a theory: Team Trump jams through a big, wasteful supply-side tax cut based on trumped-up growth assumptions. When offsetting growth fails to appear of the scene, they throw up their hands in despair and insist that Social Security and Medicare must be cut to stave off the rising debt.

Of the many figures we’ve published showing the importance of social insurance programs, this one showing Social Security’s poverty-reduction impact on seniors is particularly intuitive. Absent Social Security income, there’d be about 4.5 times more elderly poverty than there is today.


But aren’t Social Security and Medicare unsustainable? It’s a titled question. If we’re cutting taxes and running deficits than why not ask if anything that depends of public resources is sustainable. Defense? A trillion a year in tax credits, exemptions, and preferences? The correct questions are: a) do a majority of Americans want amply funded Mcare and Soc Sec, b) are we willing to pay for them? A is definitely ‘yes.’ Regarding B, the National Academy of Social Insurance reports: “About 8 in 10 (77%) say it is critical to preserve Social Security even if it means increasing the Social Security taxes paid by working Americans. An even higher percentage (83%) say it is critical to preserve Social Security even if it means increasing the Social Security taxes paid by wealthy Americans. These findings hold true across party lines, age groups, race and ethnicity, and income levels.”

A good place to start is raising the “tax-max”: the salary threshold above which the payroll tax no longer applies. Because of the rise in earnings inequality, an increasing share of earnings is above the cap. The next figure shows that used to be about 10 percent; now it’s about 17 percent.


You know what else is at stake? The increase in the overtime threshold. A Texas judge blocked the rule from going into effect last month, but his decision was so obviously flawed, one hopes it would be reversed on appeal. But Republicans and even some Democrats have long been trying to repeal or dilute the rule change, which as the figure shows, is but a partial update to the salary threshold under which workers must be paid time-and-a-half for overtime. The figure plots the overtime threshold in real terms against a measure of the rise in inequality. The point is less that one caused the other than to show the joint evolution of eroding labor standards and much less equitable economic outcomes.

f_otAnother thing at stake going forward is any sense of fiscal accountability. We’ll see what the ultimate Trump tax plan looks like but we’ve produced a number of figures showing the extent to which they’re heavily tilted toward the wealthy, though cutting rates and business taxes, cap gains and dividends, and repealing the estate tax (now there’s an idea to reach his blue-collar base…).

Here’s one showing that while millionaires comprise less than 1 percent of all households, they end up with close to half of Trump’s tax cuts while the bottom 80 percent get less than a fifth.


Same with the repeal of the ACA. Like I said above, repeals whacks those with coverage, but we also show that the taxes supporting the program are progressive, so repeal also delivers more than half of the tax benefits to…wait for it…that same itty-bitty group of millionaires.

To state the obvious, this is a pretty chilling example of Trump’s faux populism: take from the poor/middle-class and give to the rich.


What about the trickle-down claims? I suspect that in coming months we’ll see a fair bit of dynamic-scoring abuse: model-based estimates of the growth effects of the coming tax cuts. Such models cannot generate reliable point estimates of their macro impacts and worse, they’re easily gamed to show large growth effects. So our best move is to look at the history of tax cuts and growth.

Ben Spielberg and I did so in a series of scatterplots comparing the history of top tax rates and variables allegedly targeted by supply-side, trickle-down tax cuts. The predicted correlation is negative: higher tax rates hurt growth, jobs, etc. and vice versa. Yet none of our plots reveal that relationship. We’re careful not to overclaim: this is very simple evidence re complex variables. But the burden of proof is clearly on those claiming the negative correlation, and trust me, they got nothin.’



Then there’s Kansas. They’ve gone all in on supply-side, trickle down, and they’ve got bupkis to show for it. This figure is from my own recent work, so it’s not as cute as the others, but it makes the point. It plots job growth in Kansas, the nation, and as a control for regional economic conditions, the four states surrounding KA (MO, NE, CO, OK). Once again, supply-side growth effects are beyond nowhere to be seen–KA employment growth has significantly underperformed its neighbors and the rest of the country.

Source: BLS

Source: BLS

From the perspective of progressive political economy, last year was an awfully tough one on many fronts. OTOH, that makes it a good year for interesting graphics, which reminds me of the old saying: “may you live in uninteresting times.” Either way, you can count on me and my CBPP colleagues to continue to produce accurate, timely analysis that I suspect will be even more important this year as we document the pending threats to much that we value.

Thoughts on the theme of fragility at the close of a very tough year

December 31st, 2016 at 9:58 am

As 2016 stumbles towards the finish line, it seemed timely to offer a few reflections on a tough year from the perspective of political economy.

For myself, and I’m sure I’m not alone, reflections on 2016 can be summed up in one word: fragility.

Hard-fought gains that we considered, perhaps naively, to be on their way to becoming solid parts of our policy architecture are likely to be destroyed by the incoming president and Congress. Obviously, the Affordable Care Act is at the top of the list, but it’s not alone. There’s financial market reform (Dodd-Frank), the overtime rule, progressive tax changes, the protection of vulnerable classes, including immigrants, minorities, and women, along with a spate of rules pushing back on climate change.

But this theme of fragility goes well beyond individual policy measures. It extends to fundamental institutions including democracy itself. I’m sure political scientists can do better, but my working definition is a system of majority rule that takes input from reality to make necessary course adjustments in the interest of its citizens, especially the most vulnerable.

The fragility of every link in that chain is glaringly obvious. Fact-based analysis is more threatened than I’ve ever seen in my long career of empirical analysis. Our media institutions, mainstream and social, seem not only unable to deal with this breakdown, but at least on the social side, the incentive to pursue clicks and views overrides that of pursuing truth.

For the second time in a mere five presidential elections, the winner lost the popular vote. This is not simply a violation of majority rules in some abstract sense. It is a threat to representative democracy, and as such, it is at the root of the fragility with which we’re currently faced. Political institutions are poised to make lasting changes—think of the courts—that may well work against inclusiveness, opportunity, and even the pursuit of happiness, health, safety, and justice of the majority.

The opposite of fragility is robustness. What is yet to be seen—the big, existential question of 2017—is whether our institutions are robust to the threats that confront them. Democracy, like a jetliner, is replete with safeguards against crashing, but planes do fall out of the sky. Can the media and the analytic community find the road back to Factville? Can they/we hold the new administration accountable for the promises Trump made to the part of his electorate that’s been left behind? Can the Congressional minority block the threats to the vulnerable that appear to be coming from the unrepresentative majority?

The coming year will begin to reveal the extent to which our democracy, our nation, is robust to these threats. In coming months, we’ll learn just how fragile we—that’s the inclusive “we,” not the top 1 percent, not the politically connected, but those with the least power and clout—really are.

In fact, I and my colleagues will be documenting precisely these developments through this lens, while fighting to boost the robustness and stabilize the fragility. So stay tuned, and happy new year!

The R’s corp tax plan

December 30th, 2016 at 1:53 pm

A number of folks asked me what I thought of this part of the Republican’s tax plan–their corporate tax replacement–and that required some thought, as it’s very different than what we have. Here’s what I got, over at WaPo.

I couldn’t fit it in the piece, but I wanted to reference the more jaundiced take on the proposal–I’m pretty skeptical of some of the claims of proponents, but find a few attributes worth considering–from Senate Democrats, who summarize the replacement as follows:

The key feature on the business side of the plan—a destination-based cash flow corporate income tax with “border adjustments”—is confusing, untested, leads to bizarre results, and is possibly illegal under WTO rules.

Other than that, they’re OK with it…

I also predict that the increased costs that this proposal implies for retailers and other major importers will kill its legislative chances. That said, given recent developments, I pretty heavily discount such predictions, by myself and anyone else.

Is any bit of positive fiscal impulse worth the money?

December 26th, 2016 at 9:26 am

I’ll be brief because I’m on vacation this week in an undisclosed location, but the hotel has solid wifi and the family’s still snoozing away, so let’s quickly talk a bit of fiscal impulse (FI).

The discussion starts with ‘G’ in the GDP identity: Cons+Inv+Gov’t+Net Exports. An increase in G raises GDP, all else equal, and that’s positive fiscal impulse (FI). It’s nothing more than “the delta”–the change–in fiscal policy from one period to the next.

What can be confusing to people is that it’s not the level, it’s the change. So, if you’re stimulus program spends $150 bn in year one and $100 bn in year two, FI in year two is negative.

I raise this because I’m encountering progressives who are compelled to be at least somewhat supportive of wasteful, regressive tax cuts, like those proposed by Trump, or the ones I just wrote about in Kansas, that happen to spin off some positive fiscal impulse. While we’re closing in on full employment, there’s still slack in the job market, such FI could help absorb remaining slack.

That’s true, but there are two relevant questions: bang for the buck (multipliers), and the impacts of the cost of the tax cuts.

The Kansas cuts–particularly the zeroing out of the pass-through income–are instructive as these cuts have very low bang-for-buck in terms of jobs or incomes for middle and lower income folks. They just lower taxes for those who are already “highly liquid,” i.e., they’ve got a bunch of money already and giving them more shouldn’t be expected to boost spending (C) or investment (I) much. And since states must balance their budgets, they constrain G as well.

In terms of poor targeting, Trump-style cuts are similarly lame in terms of growth effects, as I discussed recently re the GW Bush tax cuts in the early 2000s. However, because they involve deficit spending–as I’m sure you’ve seen, the federal gov’t can run deficits–they will generate some positive FI, which we could use.

But at what cost? The opportunity costs are twofold. First, there’s the cost of tapping small versus larger multipliers: were team Trump to spend the money on infrastructure or target those with high consumption propensities, the FI would be stronger (btw, it should be noted that multipliers are smaller when the Fed’s raising rates, albeit slowly and by small increments, than when they’re lowering them).

Second, “permanent” tax cuts will mean a worsening of the revenue shortfall I’ve long worried about (the scare quotes are there because the R’s may build some BS cliff into their tax plan to accommodate arcane budget rules, but the intention is permanence). That will provide an excuse for whacking Medicaid, Medicare, Social Sec, and much other spending that’s important to the poor and middle-class. And yes, those folks are income constrained, so that part of ‘G’ gets spent and feeds back into growth.

To be clear, I’m not worried about higher budget deficits because I fear they’ll crowd out private borrowing and lead to higher interest rates. That’s not at all my reason for opposing a big tax cut. And I’m confident that even a highly regressive cut will generate some needed FI.

My reason for opposing such cuts, in the nation or in the states, is that they do little to boost demand and they whack desperately needed revenues. And while I recognize the argument that “hey, this is the best we’re gonna get from team Trump,” I will not go gently into that good tax fight.


Hey, I’m #10 on this list of allegedly influential economists. I’ve got no idea what that means, but I’ll take it!