There was some good pushback on yesterday’s article on taxes. But sorry, I’m still right.
Many people responded with generic low-tax anti-government positions. Fine. Let’s say the government is definitely bad and taxes are definitely too high. The current tax bill is still not the right way to do tax cuts.
Budget director Mick Mulvaney claims that the richest 20% of people pay 95% of income tax; the Wall Street Journal‘s numbers are a little lower, at 84%. Total income taxes are $1.8 trillion, so the poorest 80%’s share comes out to somewhere between 90 and 280 billion. This is around the same order of magnitude as the $100 billion in tax cuts in the current GOP bill. So it looks like one alternative to this bill, no more or less costly, would be to halve income taxes for the bottom 80% of the population, maybe anyone making less than $100,000.
Is there any reason to prefer the existing GOP proposal to this one?
The only argument I can think of is that corporations are good because they make investments are hire employees and stimulate the economy. But…
First of all, the IGM Forum asked the nation’s top economists whether the current tax bill would substantially raise GDP. 51% said it wouldn’t, 36% said they weren’t sure, and only 2% (= 1 economist) thought it probably would.
Second, as Marxist and anti-corporate a site as Forbes notes that A Corporate Tax Cut Won’t Boost Economic Growth, because they went around and asked a lot of CEOs whether they were going to invest the tax cut in cool economic-growth boosting stuff, and the CEOs mostly said no, they would probably just increase shareholder dividends.
Third, for the past few decades there’s been a weird uncoupling between economic growth and the fortunes of most people in the developed world. I won’t insult your intelligence by re-posting the same graph you’ve seen a thousand times, but this isn’t subtle. If all the economists and all the CEOs are wrong, and we get a 3% boost in GDP over a decade or something, I expect when I open a holo-newspaper in 2027 it’ll be about how mysterious it is that average middle-class salaries are still pretty close to their 1970s level. I don’t think you have to be a communist to believe that economic growth that just goes to a tiny subsection of the population isn’t all that useful. You just have to be a utilitarian.
(I guess expanding the economy can also give us cool technology, but I would like rather less cool technology for a while, actually).
But most important, if all of this is wrong – if the CEOs are lying and really they’ll spend the money on investment, and the economists are wrong and really corporate investment will turbo-charge the economy, and the past few decades of economic history are wrong and some of the gains of a turbo-charged economy go to the poor and middle-class – then the good thing that happens is that poor and middle-class people have more money.
…which is the same thing that would have happened if you had just lowered the taxes on the poor and middle-class directly, you moron. It’s also what would happen if we spent it on welfare for the poor, on health care for the middle class. God help me, even Bernie’s free college tuition would save a couple people from student loan debt.
For the corporate tax cut to be a better idea, it would have to turbo charge the economy so dramatically that even after accounting for the low chance it will work at all, the amount taken off the top by executives and shareholders, and the poor ability of economic turbo-charging to ever reach the working class, it still puts more money in the hands of people who need it than just giving them the money would. I am not an economist and I don’t know as much about multipliers as I should, but I have not heard anyone seriously assert this.
Last week I criticized socialists who prefer funding complicated government programs that might eventually help poor people, to just giving poor people the money. I feel like this is the same sort of issue. Some sort of complicated scheme in which we make corporations much richer and hope this is good for the poor and middle-class in some way is a lot less certain than just giving poor and middle-class people more money.
Spending the tax money on social welfare programs would help give poor and middle-class people more money. Expanding the EITC would give poor and middle-class people more money. Cutting personal income taxes in lower brackets would give poor and middle-class people more money. This tax bill doesn’t do any of those things, and it costs the money that would make doing any of those things easier.
It’s sometimes unfair to compare real government programs to the most effective possible government program; everything fails by that measure. But this tax bill seems so much worse than even other tax cuts that I think it’s fair to judge it as a tremendous opportunity cost.
For those of you that follow the process side of things, there’s a grimly ironic twist to the Republicans’ corporate tax cuts. The generally agreed status quo is that our nominal tax rate is too high and the effective rate too low, so you can “reform” the tax code by repealing deductions and making the business field less tilted towards corporations with high-priced tax accountants. But Republicans being Republicans (and having a slim majority) their bills (House and Senate) were mostly dessert and not that many vegetables.
Except during the last-minute horse-trading to get to 51 votes, McConnell accidentally kept the corporate alternative minimum tax to its old 20%. The new nominal tax rate is… 20%. He basically repealed all corporate tax breaks (by making them useless) and made Republicans live up to their “reform” ideals entirely by accident.
Needless to say, companies like the famously litigious Murray Energy that are used to having their dessert already and were looking forward to eating even more are aghast, claiming an effective rate of 20% would bankrupt them.
I heard it will get removed in reconciliation. Curious if anyone who understands the process knows – if they’d missed it in reconciliation, and it officially became law, what would happen? Would Congress just say “Oops” and pass another law immediately?
You’d need 60 until next year’s budget and the Democrats would most likely extend their middle fingers and refuse to fix it like the Republicans did with several drafting problems in Obamacare.
Reconciliation is the name for overall process that allows certain bills to bypass the filibuster in the Senate. I’m sure you meant to say in conference committee — which is a cross house group that takes to the version passed by the Senate and the version passed by the House and comes up with a final text. That text then has to go back and be voted on by both houses. In a bill subject to reconciliation such a conference bill is again not subject to filibuster in the Senate.
The smart money is indeed that this is going to be removed in conference. But there had been some speculation that the House would just vote on the Senate bill in order to avoid the possibility of the narrow victory in the Senate somehow turning into a defeat. That possibility now looks very unlikely because of this mistake. That reduces somewhat the overall chances of a bill being signed, though I’d personally still put it at over 95%.
(Sorry if all this is obvious and you just mistyped.)
It’s also not like they made this ‘mistake’ for no reason. Like, they didn’t just accidentally leave the Alternative Minimum Tax in there because someone forgot to X it out. It was put back in at the last second to pay for stuff they had to add to get some Senators to vote for it.
If they take it out, then they need to either find the same amount of money somewhere else, cut the stuff that got those Senators onboard, or cut costs somewhere else.
Is…is that thing I’m feeling actually hope? Dare I wish that it was stuck in there intentionally once he had plausible deniability?
I keep telling myself that politicians actually keep a few principles buried deep in their shriveled, black hearts, and that the fact that they only ever seem to express them after leaving office is just a sign of cowardice. But things like this might actually help me believe, instead of just saying it.
Most politicians, I think, want to do good. They also want to get re-elected, to move up within their party, and to live the life they think they deserve. Those things tend to require the opposite of doing good, and the human brain is very good at conflating “what is good for me” with “what is good for everyone else.”, especially when there are strong personal incentives to do so.
One of my favourite quotes from trashy sci-fi books is:
It made me think of politicians as people who try and carefully sacrifice their principles, hoping for some future good to come of it. But then, for many of them, that future never happens. The sacrifice becomes a habit.
There is a bit I remember from the Nixon tapes that fits that pattern. He’s discussing with one of his aids a proposal, I think to abolish the interest equalization tax, which was a restriction on capital movements. He comments that George Schultz and one or two other people are in favor of it, but there are no votes in it. The aid suggests that maybe there are some. Nixon’s response (by memory, far from verbatim)
“No. No. No votes in it.
What the hell, why don’t we do something because it’s good for a change.”
I had the feeling of a man who had spent his life seeking power in order to do good things and discovered that once he had power he was spending all his energy keeping it, not doing good things.
I see this time and again through my life with people in positions of power. It’s one of the reasons I both absolutely do not want power and have been told I lead well. Wouldn’t mind a dumptruck full of money, though…
“The thing that never ceases to be shocking about politics isn’t that people sell their souls, but how little they get in return.” — Dan McLaughlin
People already view government spending largely through the lens of “infinite pot of free stuff with no opportunity cost,” and I think this could be significantly worse for political attitudes if only 1-in-5 or so people paid federal income tax. It’s not clear to me how the problem scales with someone’s tax burden, so this is likely not a good argument against merely reducing lower tax brackets, but I’d be very hesitant to eliminate them for this reason alone.
If people didn’t have to pay income tax, they’d still have to pay payroll tax, corporate tax, sales tax, property tax, etc.
And concerns over the psychological effects of paying “zero” taxes don’t really go anywhere. You can just as easily that by giving say, the bottom 50% of people a stipend will make them more concerned with the fiscal responsibility of the government because that’s where they’re getting cash from.
As far as I know, in the US there are no federal personal property taxes or sales taxes, and most people don’t pay corporate tax. Payroll taxes are presented as “paying into” social security and Medicare, from which you later “take out” (whether or not this is ultimately the right way to think about it). The income tax is the only way most people directly pay for federal expenses like the military, infrastructure, the justice system, etc.
As far as psychological effects, I’ve (anecdotally) observed many people who don’t seem to grasp that government spending imposes an opportunity cost — people who believe that taxing and spending literally can’t be worse than neither taxing nor spending unless the spending is on something that does direct harm. The discomfort of actually paying taxes is concrete evidence against this wrong view, and I suspect (but would welcome better evidence either way) that it makes a dent in those attitudes. The argument is not really symmetric with your thought experiment.
Most people are not sophisticated in these matters, and would likely say “Yes, I pay a lot of taxes,” meaning sales tax and payroll tax, and not even know whether sales tax goes to the state or the federal government or what.
There are also a couple federal taxes normal folks pay such as the excise tax on gas and some of the taxes/fees with cell service. Though I believe taxes like that are typically spent on stuff directly related to the good/service (e.g. building interstates and 911 service).
One might also argue that tariffs the federal government collects on imported goods are passed on to the consumer.
But overall you’re right, poor folks don’t pay for the federal government other than income taxes.
The US is the only G20 without a VAT. There’s a lot more “well, why don’t we lower taxes on me instead of lowering taxes on him?” that goes on here.
So you’re arguing that when people pay “federal income tax” but not fica or state/local taxes it improves they’re “government fiscal responsibility index”. Then one consequence of this prediction is that if we eliminate fica/state/local taxes and replace their collection with federal income taxes we’d increase everyones “government fiscal responsibility index”.
I honestly don’t think most people would notice if the text on their payroll stubs changed from “FICA” to “Federal income tax”
Second your theory predicts that the “government fiscal responsibility index” would be much higher for the rich as opposed to the poor because they pay more taxes. And thus the party representing the interests of the rich would make less pro-deficit decisions, while the party representing the poor would make more pro-deficit decisions.
However when you look at the evidence over the past 30 years you see that consistently the pro-rich party has increased deficits while the pro poor party has been much more fiscally responsible.
You seem to be comparing the tax bill to other, conceivable, more rational tax policies. I don’t think that’s the right comparison. The right comparison is the tax bill to the status quo. Would you prefer things just stay the same or we have this tax bill?
Because it seems clear this tax bill was a ridiculous Christmas tree of compromises designed to be something that could actually pass the impossible-to-please GOP. It has to simultaneously allow them to campaign on having lowered taxes and be good for all their donors and special constituencies.
You suggest things that make sense on a rational, utilitarian level but fail to take into account optics: if no one paid any income tax before 100,000 what is that going to do to the legitimacy of the “government is what we do together” position?
Yes, it’s sad we have to settle for ridiculous, convoluted compromises instead of policies that make sense. I think this is the result of having an incoherent, oversized polity. In the meantime, we have to compare the status quo to the politically possible, not the politically possible to the rational.
The conceptual space called “conceivable tax policies (or health policies, or…) better than the one we have now” is vast, but the overlap between that space and “politically possible,” seems to be very small… and maybe shrinking.
“the internally divided GOP” would be more accurate. Pleasing any one GOP senator is easy, pleasing 51 is a lot harder, since they have a lot of mutually contradictory goals.
I know this is outrageous but stay with me: what about throwing a few more bones to the middle class so the bill doesn’t have to muscle through on a party-line vote? Say Scott’s notion of everyone making five figures paying no taxes is unrealistic. What’s not unrealistic is shaving a few points off the dramatic corporate tax cut and at least reducing them more for individuals.
If you think any Democratic Congressman is going to get in line with a GOP-drafted bill this high-profile in this political environment, I don’t know what to tell you.
There are a number of Democrats in heavily red states. Consider Jon Tester He signalled interest in working with the GOP on a tax bill, and was one of three Democratic senators who declined to sign on to the Democratic letter laying out their tax demands.
Speaking of which: the Democrats wrote a letter in August laying out their requirements for supporting a tax bill. They were:
a) pass it through regular order
b) don’t add to the deficit
c) don’t raise taxes on the middle class or lower them on the 1%.
This tax bill scores 0.5/3, but it seems like there should definitely be room there for a bipartisan bill. (If you think “don’t lower taxes on the 1%” is a deal-breaker, I will point out that the Democrats took that from Mnuchin.)
The story is similar in the House.
Sure, maybe it’s all a big bluff. It’s remarkable how the Republicans seem completely uninterested in calling that bluff. The Republicans could have written a hard bill for Tester to vote against. Instead, it looks like they never even bothered reaching out to red-state Dems.
In other words, they’ll pass any tax cut the republicans want, as long as it doesn’t cut taxes? That’s not exactly a generous offer.
The Republicans spent a lot of time talking about the need to reform the tax code. You know: “broaden the base, lower the rates”? Was I not supposed to take that seriously?
Iain: Given how much of a fight this one tax bill has been, do you think anyone wants to try fighting the same fight a second time?
They want to do that, they also want to lower overall taxes. They currently have the power to do both without democratic support, so why give up the one?
On the corporate side it is unclear to me that there is any net base broadening. At least unless the AMT mistake stays in.
> don’t add to the deficit
Since when have Dems cared about the deficit?
> Since when have Dems cared about the deficit?
Since about the same time Republicans did. (I.e., when they can bash their opponents and it doesn’t stop them from doing what they want)
Right, so why would the Dems use political capital to reduce the deficit? I suppose they could use the fact that the existing bill plainly adds to the deficit as a talking point to get popular support for the GOP to compromise, but they would be better off not trying to force the bill to be revenue-neutral, or so it seems.
@Alsadius: To be clear, I was saying that this tax bill could have been much less of a fight if the Republicans had considered passing a bill with bipartisan support.
Claire McCaskill claimed that permanent tax reform has 70 votes in the Senate for the taking. Is she wrong? Maybe. But it should would have been interesting to find out.
If you look up-thread, this entire conversation is in response to your claim that the Republicans are internally divided and have mutually contradictory goals. So, yes: the GOP has the power to both cut and reform taxes — provided that they are willing to do so via a pile of trash riddled with loopholes, because moving slowly and carefully would give their members too much time to examine the ugly compromises and defect.
the GOP has the power to both cut and reform taxes — provided that they are willing to do so via a pile of trash riddled with loopholes, because moving slowly and carefully would give their members too much time to examine the ugly compromises and defect.
Is it your contention that a sufficient Democrats would examine a different set of ugly compromises and cooperate?
To put it another way, it’s probably easy to get 70 votes for the words “permanent tax reform”, but you seem to be acknowledging that getting those votes to agree on what the words mean is a lot harder.
The compromises aren’t as ugly when you are allowed to lose more than three senators without the bill collapsing. It’s probably also a lot easier if you give up on the idea of slashing the corporate tax rate by 15%.
The absolute worst case scenario is that you can’t find any compromise and the Republicans are reduced to doing it alone — which is, you know, the status quo.
The compromises aren’t as ugly when you are allowed to lose more than three senators without the bill collapsing.
Not as ugly to whom? I might like them more, or less. But all compromises are fundamentally ugly to those making the concessions.
The absolute worst case scenario is that you can’t find any compromise and the Republicans are reduced to doing it alone — which is, you know, the status quo.
Didn’t you claim that the status quo isn’t possible without a rush?
I’d support this… if you rip up the current tax code BEFORE instituting this rule and make them build a new system from the ground up.
But I see no reason why the current complete cluster-fuck of a system should get permanently enshrined in this manner when it was never that popular in the first place itself…
I think that is an uncharitable way of looking at it. I would say that basically all of the members of the GOP agree that taxes should be lowered and simplified. They disagree, however, on which taxes should be lowered and which deductions eliminated, so the final bill came out as a relatively inconsistent hodgepodge. I don’t see how bringing in democratic votes would make that problem easier.
The Republicans indisputably passed this bill in an enormous hurry, and as a result it is full of problems, even from a Republican perspective. For example, the current bill effectively eliminates all corporate deductions, by forgetting to repeal the 20% AMT after reducing the corporate tax rate to 20%. (It is implausible that this is deliberate, because the tax bill also introduces new corporate deductions.) That’s not the result of differing opinions. It’s the result of a slapdash process.
Now, maybe it’s uncharitable to speculate that the bill was so rushed because they didn’t want their members to have time to defect. (Speaking of which…) On the other hand: what is the charitable interpretation?
And again: the benefit of working on a bipartisan basis is that you can afford to lose more than three votes in the Senate without tanking the entire bill.
I don’t think that’s uncharitable at all but I do think the same is true of most major legislation.
that’s accurate only if being bi-partisan is relatively costless. In actuality, being bi-partisan often requires introducing a whole new set of actors, agendas, and comprises, and likely makes the whole thing even more rube-goldbergy and likely to fall apart. Maybe that wasn’t true in this case, maybe there was an option for an NCLB like compromise, but I don’t think it’s fair to assume that as a given.
As has been pointed out elswhere, all tax burdens are borne by individuals. The CBO assumes that corporate taxes are born in a 75/25 split between shareholders and workers. Other estimates go as high as reversing that ratio. All those estimates are wrong, because customers also bear some of the cost, but in a way that is obviously very hard to calculate.
Putting that aside, though, I think it’s naive to assume that there is any tax cut bill whatsoever that the democrats would willingly sign up for. their coalition is ideologically geared towards thinking higher taxes are good almost ipso facto, the core of their coalition is constituencies built on ever greater government spending, and politically, it’s just too easy to make political hay by turning out charts like the one that Scott showed in the first post then bash the republicans for giving tax cuts to the rich.
I’ve touched on this topic before talking about carbon taxes. I think there is a very easy way for democrats to get one if they wanted to. They write a bill with a carbon tax of X dollars, cut other taxes by 110% of X, and dare the republicans to vote against it. If they do, go on TV and say the democrats are trying to save the planet and give you a tax cut, but the republicans would rather protect oil company fat cats. Those are actual reductions (preferably complete elimination) in taxes, not some new entitlement, not some sort of rebate, actual reductions in revenue.
The biggest problem with this approach is that the non-centrist left hates the idea. And that’s not hypothetical, this actually happened in Washington state. the democratic environmental groups didn’t get their cut of the money, and came out against it. The same problem, in less concentrated form, will plague any tax cut that seeks democratic votes.
All you have to do is get enough Democrats on board to stop a filibuster – they don’t even have to vote foryour bill. Is “she didn’t join the filibuster of Trump revenue neutral tax reform!” really a rallying cry in your mind? If it was a fully revenue neutral bill and didn’t touch individual tax rates, I think you could have avoided a filibuster.
In any case, I find it very frustrating to hear proposals like “raise a carbon tax of X, reduce other taxes by 110% of X”. If you want to change the qualitative structure of the tax code because you disagree with who gets taxed, that is a worthwhile proposition to debate. If you want to raise/lower taxes, that is also a worthwhile proposition to debate. Why do they have to be done together? Keep government revenue flat, exchange some existing taxes dollar for dollar with carbon / land value / excise taxes.
You keep making this argument. It continues to have a giant hole: the Democrats in Washington brought most of their voters out in favour of a revenue-negative carbon tax, and they got no uptake whatsoever from Republicans. Compare the vote totals by county here with the Clinton / Trump totals here: the R-squared of the correlation between Clinton’s share of the vote and support for the carbon tax is 0.93. Making the bill revenue-neutral very obviously did not succeed in creating bipartisan support.
Why should Democrats continue alienating their own voters in an attempt to capture Republican support that is evidently not forthcoming?
In practice, structure and quantity are not so easily separable. Should deduction X be gotten rid of? Well if you do just that, the quantity of tax will go up. If you change a rate here, it will have distributional effects over there, and so on. I suppose you could set an overall dollar limit for taxes in one bill, then debate rates within a limit in another, but that’s just as artificial as keeping them together.
With a carbon tax, though, grouping them is purely tactical.
The key to getting republican support is making it revenue NEGATIVE, not neutral. Not a lot, just a little, just enough to be able to sell it as a real tax cut.
That said, look at those vote totals. the measure might have gotten overwhelmingly democratic votes, but it got a LOT fewer votes than hillary. if all the democrats who voted for her voted for the tax, it would have passed by wide margins. Big swathes of the left turned out to vote for hillary, but not for the carbon tax. Now, were those the center left or far left voting hillary yes,carbon tax no? I couldn’t say, it would be interesting to find out, but on its own, I don’t think the correlation you’ve shown refutes my theory.
@cassander: Well, duh. If you move a proposal towards the right, you lose some of your support on the left. That’s inevitable.
Your claim requires the votes lost on the left to be outweighed by the votes gained on the right. That simply wasn’t the case. I can’t find any crosstabs, but it certainly looks like (to a first approximation) support for I-732 was distributed along partisan lines.
If Washington had given up on bipartisanship and put forward a carbon tax that appealed to all of Clinton’s voters and none of Trump’s, it would have passed easily. They did not need Republican votes. They tried outreach, and they got burned.
You seem to be modeling the Left as a monolithic entity, and complaining when the center-left can’t convince the rest of the left to vote for center-right policies. But the same argument works even more strongly on the other side: the Right apparently can’t get anybody out to vote for a carbon tax, even if it’s deliberately crafted to appeal to them.
So: tell me again why the Left should deliberately weaken its own policies and alienate its coalition in an attempt to capture Republican votes that will never come?
A revenue neutral carbon tax shouldn’t be seen as “moving to the right”. There’s nothing right wing about it, a carbon tax is something that the left wants and the right either doesn’t or is actively opposed to. At best, it’s crafted to avoid offending the right, not to get its support.
Almost everyone who voted for it was a democrat, yes. but lots of the people who voted against it were also democrats.
That this hasn’t happened anywhere seems to suggest it is not so simple.
That seems mutually contradictory to me. the left can’t be both monolithic and composed of multiple factions.
Again, this WASN’T crafted to appeal to them. The way to craft it to appeal to them is to make it a tax cut, something they actually want.
It’s not just a tax bill. The Republicans also included measures to mess up Medicare and ACA in the bill. These ensure that it has to be a party-line vote.
This probably makes me a terrible person, but the poetic justice of using the “it’s a tax” justification for the individual mandate to overturn the individual mandate in a tax bill is alone worth the price of admission.
But if all Scott is concerned about is who to vote for, which seemed like the point of the last post, then what he has to compare it to is the tax bill that the Democrats would pass, which I suspect would be better than this tax bill.
What makes you suspect that? I mean, if you think raising taxes is better than lowering taxes, I suspect you’d prefer a Dem-authored tax bill.
But is there any reason to suspect Dems would author a more rational tax bill, controlling for differences of economic philosophy?
If you think reducing wealth inequality is better than exacerbating it, rather – taxation is a means to an end, not the end itself. You can’t posit two rational tax bills while controlling for differences in economic philosophy because the economic philosophy that produced the currently proposed tax bill is fundamentally irrational.
As Qays points out, a large part of the philosophical difference here is considering raising or lowering taxes an instrumental, rather than terminal goal.
But more to the point, the pattern here has been that Republicans hypocritically excoriate Democrats for failing to adhere to standards, and Democrats take them seriously. So, if the situations were reversed, no, I don’t think that Democrats would be scribbling amendments on a bill at two in the morning, no.
Consider the time scale of negotiation and impact studies and so on that went into the Affordable Care Act. That’s legislation that was rushed, was passed along strict party lines, and was clearly imperfect in some places. But it’s just not comparable to the sort of rank incompetence on display here. (For extra fun, dig up some old videos of Paul Ryan agitating for the necessity of CBO scores and the vital importance of controlling the deficit. Principles!)
This is an extraordinarily generous description of the ACA process, legislation passed through out and out bribery and extreme procedural shenanigans.
I’m not that good at detecting shenaniganery, but the description linked to doesn’t seem to be worse than “accidentally doing the opposite of what you were trying to do, illegibly scribbling changes, and–especially–doing your best to ignore, outrun or undermine any objective analysis of the bill”.
(I don’t know what you mean by ‘out and out bribery’. There has been some of that here–Senators insisting on provisions that they or their families would very specifically benefit from.)
But more to the point, the shenanigans here are an explicit betrayal of the party’s mandate. It’s literally the reverse of the populist platform that (supposedly) defined Trumpism, the one where a mavericky outsider would hammer the idle rich and cut taxes on working people. And this is absolutely incomparable to the ACA; it would be as though Obama ran on a platform of providing universal healthcare, and instead the entire party zeroed out Medicare in order to lower the top marginal income tax rate. It’s that bad.
Passing a bill into conference, losing the one vote you needed to pass it, and getting around that by passing half of the bill then using the reconciliation process to pass the other half is definitely not “normal order.” It’s perfectly legal, but so is scribbling things in the margins of bills.
Obama ran on a platform of opposing a healthcare system with an individual mandate, and then passed one with an individual and an employer mandate. That is exactly the same sort of betrayal as trump running on tax cuts, then delivering somewhat different tax cuts.
First, the entire tax bill is going through reconciliation this time around, and second, “somewhat different tax cuts” is… seriously? At this point, I honestly question your good faith.
These are “somewhat different” tax cuts in the sense that nationalizing the hospitals is a “somewhat different healthcare policy” from a clean repeal of the ACA, or in the sense that disbanding the military is a “somewhat different military policy” than a universal draft. It is the exact opposite of the policy in question. I cannot think of a similar-magnitude betrayal of a central campaign promise, where the candidate does exactly the opposite of what they ran on. “Universal healthcare via an individual mandate” and “universal healthcare not via an individual mandate” isn’t the same kind of thing, no matter how much you squint.
Yes, and? Reconciliation was created explicitly for taxing and budget bills.
and I question yours when you say
immediately after I mention obama’s reversal on the ACA, entirely without irony.
If anything, calling these somewhat different tax policies is generous, because as far as I remember, trump didn’t actually offer specifics, he just promised middle class tax cuts. These cuts will do that, for large parts of the middle class. That other people will benefit more is fairly immaterial to living up to original claim. Obama, by contrast, spent months condemning the individual mandate, then turned around and passed one.
If you can’t tell the difference between “promising universal healthcare without an individual mandate, then delivering universal healthcare with an individual mandate”, and “promising tax cuts to the working class and nothing for the super rich, then delivering tax cuts to the super rich and nothing for the working class”, then I can’t help you.
I recognize that the man doesn’t seem to have stable opinions or a coherent view of the world, but to the extent that he had policies: “But hedge funds in particular — they pay very little tax. That’s going to end when I come out with my plan in about three weeks, could be sooner than that. We have an amazing tax plan. We’ll reducing taxes for the middle class but for the hedge fund guys they’re going to be paying up.”
He also planned to reduce the nominal corporate tax to fifteen percent, but this plan reduces it only to twenty. That’s not the sort of dramatic about-face I’m talking about here.
Due to accounting shenanigans–sunsetting the provisions to make the CBO scores come out better–the long-term analysis shows tax increases on majorities of each group of households making up to $225k per year., starting in 2027. (Additionally, I don’t think this counts changes in distribution from, e.g., taxing grad students’ tuition exemptions. I’m skeptical that even with the temporary cuts in place, working people are really going to do significantly better.)
Additionally, his campaign promise to avoid Medicare cuts is looking especially shaky. Again, that’s a campaign promise that he specifically used to distance himself from other Republicans.
Personally, I think that the status quo is better than this tax bill, except for the part about nailing the minimum effective corporate tax rate to 20%. That’s hilarious.
I think you misread the proposal:
Scott Alexander says:
And my preferred tax policy is eliminating everything but land value tax. Except that nobody is proposing that tax bill, the same way nobody is proposing Scott’s preferred tax bill.
Hypothetical tax policies do not exist. The only meaningful comparison, I think, is to compare the change to the status quo.
Your proposed tax policy would never pass. But if the Republicans came out with a tax policy that consisted of halving income taxes for the bottom 80% of the population it would pass immediately with broad bipartisan support, and it would be consistent with their stated aim of returning more money to the pockets of middle class people in order to stimulate economic growth
Good point. In fact, even the Democrats, when they were in power, apparently didn’t think it politically possible for them to pass what Scott proposes.
No, they just had other priorities. If the Republicans proposed Scott’s plan it would pass immediately with no controversy. They won’t propose it, though, because like the Democrats they have other priorities. The difference is that the Democrats are honest about their priorities (such as: providing healthcare for poor people), and those priorities have some public policy merit, whereas the Republicans are dishonest about their priorities (giving the ultra-wealthy more money), and those priorities have very little public-policy merit.
You are being inconsistent by taking one party at face value and judging the other by what you assume are its hidden, true motivations.
Point me to a Republican who literally says “we’re in favor of giving more money to the ultra-wealthy.” You may hear that when you hear what they do propose, but when I hear democrats say “we want to provide healthcare for the poor,” I hear “to intensify their dependence on us and strengthen our coalition.”
That’s probably too uncharitable of me. But you can see the problem if I assume bad faith about everything the Dems say they want while simultaneously assuming good faith and taking at face value everything the GOP says.
I’m not being inconsistent at all. It’s the Republicans who’re being inconsistent.
Democrats run every cycle on a platform that says, among other things, “we want to spend government money to give people health insurance.” When they are elected they tend to pass laws that spend government money to give people health insurance.
Republicans run every cycle on a platform that says, among other things, “we want to lower taxes so as to stimulate economic growth that will raise the standard of living of the middle class.” But when they are elected they tend to pass laws that lower taxes in ways that have nothing to do with increasing overall economic growth or the standard of living of the middle class – they pass laws that lower taxes on the ultra-wealthy with no concern for whether doing so is actually the most efficient way to stimulate overall growth. This is because lowering taxes on the ultra-wealthy is the end goal of Republican tax policy rather than a tactic for helping the middle class.
Both the Democrats and the Republicans want to strengthen their coalitions. The difference is that Democrats are honest about who in their coalition is likely to benefit from their policies (in this case: poor people who can’t afford health insurance + people with preëxisting conditions who can’t pass underwriting). The Republicans do not explicitly name the part of their coalition that their tax policies are designed to benefit (plutocrats), because to do so would be politically untenable.
There’s no need to assume good or bad faith. If the Republicans were acting in good faith they’d be legislating in good faith. They’re not: they’re trying to maximize the utility of their tax cut for their wealthy donors and using piffle about it eventually trickling down to the middle class as a fig leaf.
> Republicans run every cycle on a platform that says, among other things, “we want to lower taxes so as to stimulate economic growth that will raise the standard of living of the middle class.” But when they are elected they tend to pass laws that lower taxes in ways that have nothing to do with increasing overall economic growth or the standard of living of the middle class – they pass laws that lower taxes on the ultra-wealthy with no concern for whether doing so is actually the most efficient way to stimulate overall growth.
This is a flagrant lie. It may not be you doing the lying – a lot of people who know better lie about it for political reasons, and you might be repeating it. But it’s still a lie. If you compare the tax cuts to who actually pays taxes in the first place, the lower-income crowd usually gets larger cuts in these big Republican tax bills.
That’s not what any serious expert or news source says: https://www.npr.org/2017/10/04/555433641/who-will-benefit-most-from-gop-tax-plan-early-report-suggests-the-wealthy
“But analysts at the nonpartisan Tax Policy Center who studied the proposal reached a very different conclusion. They predict that nearly three-quarters of the savings from the tax overhaul would go to the top 20 percent of earners — those making more than $149,000. More than half the savings would go to the top 1 percent — people who earn more than $732,800. The tax breaks are even more tilted to the wealthy by the 10th year of the overhaul, when the Tax Policy Center projects nearly 80 percent of the savings would go to the top 1 percent of earners.”
The big cut this time seems to be in the corporate tax. Are you arguing that that is a tax on the ultra-wealthy?
If the objective was as you say, wouldn’t the big change have been a sharp reduction in the top rates, perhaps even a flat tax?
Limiting the mortgage interest deduction to a fixed large amount looks like a provision that only hurts the wealthy, since they are the ones whose mortgage interest may be more than that.
I think this is perhaps a little too optimistic in claiming that an overlap between “conceiviable tax policies better than the one we have now” and “politically possible tax policies” exists. And I say this despite arguing in favor of the bill in my mostly leftist bubble.
These two bills were passed remarkably quickly (compare with the ACA which took 6 months to reach a similar milestone) and it shows. (Someone please correct me, I don’t have great Internet where I’m at, so I haven’t been able to look closely at the individual claims made in the article.) Some these ‘glitches’ will be addressed in conference. Some almost certainly won’t. And just as Republicans were unwilling to help amend the ACA to work more effectively, I’d suspect Democrats won’t be supportive of reforms to tax reform. I think these two cases point to a major problem with large scale reform legislation: in order to ensure that it passes, it must be passed quickly before analysts, lawyers and congressmen can truly think through how it works. For things like tax policy and health care policy this seems disastrous, and points to the fact that the overlap mentioned is not vanishing, but vanished.
I’m generally fond of lowering taxes and shrinking government — I can think of huge bureaucracies I’d love to see completely deleted — but it seems that their plan is to lower taxes and not lower spending on anything, which is stupid. If we could dissolve the BATFE (with its responsibilities doled out to the FBI and FDA), stop our foreign wars and shrink the size of the military down to a reasonable size, remove marajuana from schedule C and reclassify it similar to alcohol, get rid of the TSA, etc. and THEN cut taxes that are commensurate with those actions, that would be fantastic. And yeah, reducing the tax burden on the middle class (I think anyone below the poverty line are largely exempt from federal taxes already) instead of the top 20%, that would be ideal.
It is literally impossible to lower spending without losing a ridiculous amount of political capital. By the time you’d successfully beaten a special interest and pryed the money out of their bloody necrotic hands you be too weak to fend off the other special interests would gathered around to grab the “free” money.
The only way to lower spending without losing every inch of power you and your movement have spent generations gathering, is to cut tax revenue to the bone by doling out tax cuts to your own special interests, basking in the glow of a captain providing plunder, dismiss any talk of deficits, and wait for the inevitable interest rate hike/funding crisis, then use all the political capital you’ve gained to ensure that its the tax revenue subsidized special interests instead of the tax cut subsidized special interests who lose the fight for declining government resources. BAM! Shriking government spending.
This essentially Grover Norquist’s strategy. He doesn’t support tax cuts because they put money back in peoples pockets, he supports tax cuts, loopholes, special credits, because they deny the government resources.
THis is also how Stephen Harper reduced the Canadian federal governments share of GDP from 20% to 15%, give a big popular tax break, say “oh we have to reduce this massive funding shortfall”, cut funding to enemy special interests, wash rinse repeat.
If you try to cut spending before you cut taxes or as you cut taxes your fucking idiot and have no future in politics.
Same goes if you try to increase taxes before you increase spending.
You buy the shit on your wishlist, and you leave the next guy to pay the Bill.
Reagan (2 terms) did it. Bush Sr. (1 term) lost because he didn’t do it. Bill Clinton (2 terms) was impeached because Gingrich stopped him from doing it in his second term. Goerge Jr. (2 Terms) learned daddy’s lesson. Barrack Obama (2 Terms) biggest deficits ever. Trump (calling it 2 Terms) “they’re gonna BIG”
Interesting and, I think, accurate summary of the incentives.
> THis is also how Stephen Harper reduced the Canadian federal governments share of GDP from 20% to 15%, give a big popular tax break, say “oh we have to reduce this massive funding shortfall”, cut funding to enemy special interests, wash rinse repeat.
Harper didn’t cut spending from 20% to 15% – it was already 15% when he took office, and it didn’t drop meaningfully. It was Chretien who did the cutting. Here’s a graph. Chretien was a left-leaning politiican, but he saw a bond crisis coming, and did what was necessary to prevent it(and didn’t hike taxes in the process either). That doesn’t fit your theory at all.
Sorry your 100% correct.
I got my graphs confused. I was thinking of total tax revenue as percent of gdp. And confused it with another graph I’ve seen on federal spending.
This is entirely my fault for not looking up the numbers before quoting them from memory. Your completely right to call me on that.
Please accept that this was simply neglegence instead of malice on my part. (Though that doesn’t help my pride)
Your absolutely right stephen harper did not cut government by 25% in relation to gdp.
However i think my theory still holds if we account for what i meant to say (or ough to have said).
My point about harper is what he did was incredibly cynical.
Harper cut federal tax revenue by 10-15% in proportion to gdp, by cutting the most efficient and economically sound (but unpoplular) taxes, the GST (sales/consumption tax) and doling incredibly popular but inefficient and economically horrifying tax credits.
Paul Wells has an entire section in his book “The Longer I’m Prime Minister” trying to figure why Harper (who has a masters in economics) would do this (cut the gst and dole out botique tax credits), when his every previous statement and apparently clear understanding of economics before becoming prime minister (once in power you must atleast make a show of not understanding economics or the implications of your actions ) would suggest he knew this was bad policy.
Wells comes to the conclusion that Harper, a norquist style government/tax hater since his early days and fierce partisan of Alberta against the federal government and its quebec/ontario stacked civil service, wasn’t motivated by a desire to give money and economic rewards back to Canadians, he was trying to get as much money out of Ottawa as possible without having the special interest trap close on him.
I had assumed he closed the deficit for the 2015 election by doling a million small cuts to the civil service (a task he would have relished) but it could be he just froze spending and and economic growth eliminated the deficit.
Ladies and gentlemen meet the most successful conservative politician in modern Canadian history.
I really think this supports my conclusion, Harper and Norquist cracked the code: cut taxes in the most abnoxious yet popular way, bask in popular support, fuck the deficit or make a show of shrinking it by attacking enemy special interests, wash rinse repeat. Be FDR in reverse.
And if there’s a rate hike and the deficit actually has to be reduced then make close it by hurting the otherside more.
As for Cretien I’m not an expert (before my time) although he did seem to whether the busget crisis by going after his political rivals (which was smart, he got 3 majorities).
But Mulroney was a complete idiot to introduce the GST and give Cretien that free revenue (or not I’ve heard alot to the effect that canadian conservatives weren’t trying to get small governments back then/ or elected). Introducing an economically efficient broad based tax increase garantees you can’t dole out favours to special interest, you can’t target the hurt at political rivals and it garantees that you’ll blow as much political captial as possible to only give the next guy a good pisition from which to hurt you.
Cretien could not have done any of what he did without the free money mulroney gave him.
It is no wonder Mulroney’s conservatives were knocked down from 211 seats to 2 (not a typo), their movement was split into two parties for a decade, and everyone who represented their wing of the movement was hunted down and weeded out or arrested.
Thats what happens when you try to enact rational tax policy in a democracy.
I should really read The Longer I’m PM at some point – I quite enjoyed Right Side Up. And yeah, that seems plausible as Harper’s strategy.
That said, my friends on the Hill have a different explanation – one staffer buddy said to me something to the effect of “It’s like everyone thinks we only have a microscopic amount of political capital, and we have to husband it at all costs – they think we can’t handle any controversy of any sort, so they’re not willing to do anything even a little bit bold, they just want to hold on and hope to sneak some change in while nobody’s looking”.
TBH, I think that fits better – Harper apparently wanted the 2006 election platform to feature income tax cuts, but he couldn’t find any that could be easily packaged into a sound bite, so he moved to the GST instead. And it fits how they acted on issues totally unrelated to taxes. It may wind up having Norquisty effects(I doubt it’ll work, but I wouldn’t complain *too* much if it did), but I don’t think that’s the real reason. Harper was just paranoid about the media and civil service having knives out for him.
Right. Starve the beast.
On July 14, 1978, economist Alan Greenspan testified to the U.S. Finance Committee: “Let us remember that the basic purpose of any tax cut program in today’s environment is to reduce the momentum of expenditure growth by restraining the amount of revenue available and trust that there is a political limit to deficit spending.”
Several, from the economic, there are advantages to simpler tax code and removing economically distortionary deductions that are more valuable than removing all taxes on specific individuals, to the political, spreading out the tax cuts gets them more votes than larger cuts to a smaller group, to ideological, why on earth should the ONLY metric of the goodness of a tax plan be how much more progressive it makes taxes?
And what do you think those shareholders will do with the money? They will either re-invest it in something else or spending it on consumption. The idea that corporations having more money won’t result in more investment or consumption isn’t just wrong, it’s mathematically impossible unless you think people store money in scrooge mcduck style vault.
No, there hasn’t been, people are just taking their pay in more tax advantaged forms of consumption instead of wages, because, well, those forms of consumption are tax advantaged, something this bill does, in a very small way admittedly, work to undo.
It doesn’t “free” anyone from any debt. It just transfers the debt from the student to the rest of society, and has the IRS do the collecting instead of the university bursar.
What opportunity are we passing up? Is there some better tax cut that is likely to be passed if this one goes down? Because I think you can make the opposite cases. this bill takes on a few real sacred cows, like the mortgage deduction. It doesn’t eliminate them, but it does chip away at them, and more than that, it shows that chiping away at them isn’t electoral poison, making it easier to get rid of them in the next go around. If this bill is defeated, things become more untouchable, not less.
I think the more likely outcome is that the market discount rate will stay roughly flat (although may go up a little if people suspect a future administrative will reverse these cuts), so the prices of equities will go up. This doesn’t lead to incremental consumption in the economy, just a one-time transfer of value to existing owners of businesses. Now you might argue, if the discount rate on existing equities hasn’t changed but returns on book value have increased by 30% due to lower taxes, doesn’t that make investment in new projects that much more attractive and so capital owners will shift their wealth allocations away from the stock market and towards new projects (or: companies will invest more of shareholders’ money in internal projects where they can invest at 1x book instead of buying back shares at higher multiples of book). That’s a fair point. It really depends on how many projects are waiting in the wings in corporate America that would switch from not making sense at today’s rates to making sense in a lower-tax world (i.e. the shape of the returns distribution for all the potential investment projects in the world).
My suspicion is that investment volume in new projects is not as sensitive to returns on the margin as you might think, e.g. the dramatic decline in interest rates post-crisis has probably raised equity returns on new projects far more than a corporate tax cut would, and we haven’t seen a giant investment boom as a result. I do suspect that at this stage barriers to new investment are more structural than returns based – regulatory barriers, power of incumbents, availability of talent, etc. But we will see!
A simple and fairly accurate way of thinking about the corporate rate is that the after-tax return required by investors won’t change (international capital mobility, the “small open economy” assumption n.b. this doesn’t actually require the country to be small, merely that the scope of the change in policy is small compared to the scale of international capital markets), and hence the break-even IRR for projects will go from r/0.65 to r/0.8 (for a tax change from 35% to 20%). It really hard to believe that the distribution of “possible project investment returns” just coincidentally has very little mass in this region.
Further, leaving aside questions of investment, estimates of the incidence of corporate taxes suggest that 1/2 to 3/4 of the burden of corporate taxes are born by labour Accordingly, cutting corporate taxes is a pretty good way of giving a widespread tax cut – indeed for many low income earners who pay very little income tax, the gains from cutting corporate taxes (which will turn up as higher wages, and thus not obviously ascribed to the tax cuts) are quite plausibly more substantial.
I agree intuitively but this framework makes it difficult to explain why the abundance of extremely cheap debt has not massively increased investment. My explanation is that investment volume is held back more so by structural barriers than project level IRRs.
What portion of the burden of income taxes (in a given tax bracket) are borne by labour (in that tax bracket)? What about consumption taxes? 1/2 to 3/4 sounds good relative to zero…
Irrespective of what the long-run elasticity of investment / capital to effective interest rates is, I don’t trying to estimate it from reduced form time series patterns using business cycle fluctuations in lending rates is going to be particularly enlightening. There is too much else going on – those lower interest rates are associated with lower economic fundamentals, which depresses investment. This is true even conditioning on output i.e. for a given level of output, economic fundamentals will typically be weaker, since that output level was achieved given that interest rate.
Fwiw, there is a literature on the elasticity of the capital stock to by real interest rates. I don’t know it particularly well / this isn’t my area (hence apologies if I mess any of this up), although apparently some stuff based on the elasticity of inter-temporal substitution suggests the capital stock to GDP ratio grows a little less than 1:1 with a reduction in real rates. (Sidenote: For Pikkety’s “r > g means the capital share of income will grow, ergo ever increasing inequality” I think he needs the reverse – that large increases in the capital stock are associated with only small changes in r).
Honestly, I don’t have much idea. For each, some should fall on direct labour, some should fall on capital (through reduced labour supply), and some should effectively fall on other labour through increased prices.
Berkshire Hathaway is holding 100 billion in cash because Buffet can’t find anywhere good to invest it. To me that indicates that there is more money chasing suitable investments than there are suitable investment opportunities.
>The idea that corporations having more money won’t result in more investment or consumption isn’t just wrong, it’s mathematically impossible unless you think people store money in scrooge mcduck style vault.
Or unless bank lending is more constrained by the supply of borrowers than by their reserves. There are good reasons to think that is the case.
berkshire hathaway’s cash isn’t actually cash. At worst, it’s parked in Tbills. Much is probably in highly liquid, relatively neutral assets like index funds.
It isn’t in index funds. At best it is treasuries. And Buffet says he is having a hard time finding ways to put the money to work because interest rates are so low he can’t compete with the borrowed money. That doesn’t sound like an economy where we need to encourage investment to me.
Buffet is known for patience and waiting for downturns to invest his cash. He got some great deals during the last crash. It will be interesting to see what he does in the next one.
” it’s mathematically impossible unless you think people store money in scrooge mcduck style vault.”
So you’re saying they could buy bitcoin…
When someone buys bitcoin for money, another person receives money in exchange for bitcoin. No money falls into a black hole, never to be seen again. This same error is made ad infinitum by people (in finance, journalists, who should all know much better) who say things like “today people sold out of shares as fears of…”. Unless the cyborgs are secretly buying up stocks, humans can’t in net sell out of shares.
What happens if the person that bought the bitcoins loses the private key?
Wouldn’t this slightly increase Bitcoin’s price, since supply decreases and demand is the same as it would have been otherwise? The value the person that bought the Bitcoin lost ends up in the hands of all other holders of Bitcoin.
This (at least to a first approximation, and I think exactly).
A clear example: Suppose there is a company worth $1m with 1000 shares (so each is worth $1000). Then a bunch of people collectively “lose” 500 shares. The company is still worth $1m, so the remaining shares are now each worth $2k. Or analogously (but in the reverse direction), the company has 1000 shares, and then the stock splits 2:1 (which you can think of as “randomly finding shares” except that the amount found is exactly proportional to previous holdings). Again, the company still has the same valuation, so the share price halves to $500.
Similar logic applies if people lose cash (or stuff it under their mattress for eternity). Other peoples’ dollars are now worth more. But one needs to think about this carefully – dollars being worth more means goods must become cheaper in dollar terms.
I think this comes down to a disagreement of fundamental principles.
Scott seems to come at it from a collectivistic perspective – the government owns the money, and decides how it will spend it. By this perspective, a tax cut is a cost in the same way as a company shutting down a market is a cost. Government may be good, it may be bad, but the right of government to own the money isn’t disputed
But people who are in favour of the tax cuts come at it from an individualistic perspective: the individuals who make and earn the money own it, and it is expropriated by the government. Under this perspective, tax cuts cannot cost anything, by definition. Government activities haven’t changed in their cost, not even slightly. All that is changed is that people are having less money being taken for those services.
Now you can argue – and I would – that this is still bad, since it means that people will end up having more money taken from them in the long run, by interest and inflation, and that this is worse because it is a more dishonest and hidden form of expropriation.
But from this premise, I could still argue a) that the cut is bad and b) argue against those arguing against the bill – because I am not arguing for the bill, but against the principle that the government is the owner of the wealth of the nation.
I think that Scott doesn’t understand this distinction, which is surprising, since he usually has a good grasp of the other side of the issue.
“But people who are in favour of the tax cuts come at it from an individualistic perspective: the individuals who make and earn the money own it, and it is expropriated by the government. Under this perspective, tax cuts cannot cost anything, by definition. Government activities haven’t changed in their cost, not even slightly. All that is changed is that people are having less money being taken for those services.”
Wouldn’t that apply equally well to the proposal to eliminate taxes on the middle class?
Absolutely. I’m a strict Objectivist – I don’t even think taxes should exist. Since we’re a long way away from that blessed state, however, I think it’s a matter of natural justice that the first benefits from slashing taxes and deregulation should go to those who have benefited from the system the least & who have done the least to engineer the system as it stands – while those who are best able to bear the costs and have benefitted most from the system, should be the last to receive the benefits from repealed taxes etc. So you start with lifting the various burdens on the poor, then work your way through the middle, and end with the top.
For example, my first port of call would be eliminating all corporate welfare etc. The details can be hammered out. But what I would not let go of at all is that the redistributionist racket has got to go.
That depends entirely on what you think is fair.
If you think that it’s fair that the tax burden be borne even more disproportionately by the rich because they have the means to pay it, then cutting or even removing taxes for the middle class is the way to go.
On the other hand, there are people who believe that the tax burden should be borne more proportionally by citizens, regardless of their income. That’s what the current bill is probably aiming for.
On another note, I don’t think it’s a problem even if a lot of corporations don’t reinvest their more of their income (though even if even they simply reinvest the same proportion of their income, reinvestment will still increase simply by the virtue of them having more after-tax income to reinvest).
Even if companies simply pay out more dividends to shareholders, the shareholders would have more more money to reinvest, because that’s what they do with their wealth, not keep it as cash. So that’s more capital for startups and for new and growing businesses, for investment opportunities in other companies. I see this increased capital mobility as a good thing in general.
Noteworthy how the convolution never seems to work the other direction, even though trickle up economics is at least as intuitive as trickle down. It’s not like you’re going to hurt this economy (in particular) by giving consumers more money.
Well, I’d sign onto that.
The core argument of “trickle-down” economics isn’t “Cut taxes on the rich to give money to the poor!” – that’s obviously stupid. Cutting taxes on the poor accomplishes that much more directly.
The basic argument is that demand is easy and supply is hard. You can only consume something that’s been produced, but if something valuable exists, somebody will want it. Thus, economic policy that focuses on production of more value will result in a richer society overall. (This is exactly opposite to Keynesian economics, which at root boils down to “Bad things happen in economies because of a lack of demand”)
Encouraging more productive work – on the part of labour and on the part of capital both – is how you make people richer. Redistributing wealth that exists is easier than creating new wealth, so work on the hard problem first.
Minor nitpick on causality of value
Something is valuable because someone wants it, because value is subjective. I’m sure you understand this, but someone less familiar with economic thinking may misunderstand.
Oh, I’m bulldozing whole fields of subtleties here, because I’m trying to summarize a century or two of economic thought in a cue-card-sized post. But yes, you are correct.
You’re also just plain wrong: Say’s Law is empirically incorrect. Demand does not always rise to reach supply.
Eli: Keynes is pretty notorious for how he presents Say’s Law. The TL,DR version is:
Say’s Law states: supply of X gives rise to demand for X, Y, Z, A, B, C, etc.
Basically, the baker is able to pay for a house because he makes things for sale — production is the ultimate cause for consumption, and supply precedes demand.
Keynes’s statement of Say’s Law: supply of X causes demand for X.
Which is so wildly inaccurate, and so easily disproven, that I’m very much inclined to consider it an intentional strawman.
EDIT: Here’s the original of Say’s Law:
And here’s Keynes’ formulation of it:
I understood that, but it reads like a tautology to me as a result. What’s the secret that makes the argument meaningful?
It’s the distinction between Keynesian aggregate demand and the Econ 101 “Means are limited, desires are unlimited” economic model(which, tbh, I think is the more accurate of the two). Keynesian economics focuses heavily on the possibility of valuable, desired goods being produced but nobody buying them because consumer finances don’t permit it. I think that’s usually a trivial effect.
I can see how two stage trickle down might work, but conservative administrations tend not to get onto the second stage, leaving “trickle down doens’t work” as a reasonable approximation.
No, but administrations that switch back and forth do. “Elect Republicans to generate growth and Democrats to redistribute it” actually isn’t a bad heuristic for the average voter.
yeah, but deliberate redistribution isn’t trickle down.
Except that GDP growth often seems to be higher under Democrats, so… yeah it’s a bad heuristic.
Eli: That really depends on the lag time between a tax cut and the economic growth, doesn’t it?
The evidence strongly suggests that demand is the problem right now. If supply were the problem, wouldn’t interest rates be high?
Exactly. Supply slide is plausible under some conditions, but we’re in the opposite of those conditions.
What logic would make this true or at least plausible?
That depends on many things. For one, if the Fed is exogenously setting interest rates low, then they won’t reflect market conditions and will mean very little in this debate. For two, if the primary barrier to additional supply isn’t financial(but is instead regulatory, for example), then rates will have limited ability to help.
No its not, because the (alleged) mechanism of trickle down economics isn’t money being spent, its money being invested.
There are two problems with this post, one of them shared with most public discussions of the effect of taxes or tax cuts. For the other:
As I pointed out to someone else on the previous thread, you don’t find the effect of a tax cut by tracing the path dollar bills follow. For a simple example, suppose (implausibly) that nothing else changes, corporate income is the same as before, so corporations now have all that extra money. Further suppose that they use it entirely to reduce debt–pay off bonds.
They have spent none of it on “cool economic-growth boosting stuff.” But the people whose bonds they paid off now have a whole lot of money, and as long as interest rates are positive they are better off investing it in something rather than sitting on a pile of cash.
You can run lots of other toy models. The basic point is that this is a complicated equilibrium system, and figuring out the effect of changing part of it isn’t as simple as “how do they spend the money they have because of the tax cut.” The question is rather “how does the change in the law change the incentives of the people affected, and how does the change in incentives change what the equilibrium result of their interactions is.”
Which brings me to the error in discussions of the effect of taxation made by almost everyone except competent economists writing for other economists. The effect of taxation, who ends up with less money as a result, doesn’t depend on who hands the money over, which is what the usual figures report.
Consider a simple case, using the reasonably accurate model where price of labor is at the level where quantity supplied equals quantity demanded.
The government imposes a $1000 tax on workers, paid by the workers. Alternatively, it imposes the same tax, paid by the employer. Alternatively, half is paid by each (the way Social Security actually works).
Once wages have had time to adjust, the effect on employer and worker is identical in all three cases.
If that isn’t obvious, consider that the quantity of labor supplied is a function of the price the worker is paid for his work–how much he gets for each extra hour worked. The quantity demanded is a function of the price the employer must pay for the work.
Suppose, with the first version, supply equals demand at a wage of $20,000/year. The employer is paying that much, the employee is receiving $19,000/year.
Switch to the second version. We know quantity supplied equals quantity demanded at $19,000 received by the worker, $20,000 paid by the employer. If the employer pays the tax we get that result with a wage of $19,000.
Switch to the third. We get the same result with a wage of $19,500.
Think of it as the employer handing over an envelope full of money to the employee. The government takes a thousand dollars out of the envelope. It doesn’t matter to either employer or employee if the money is taken out of the envelope just before the employer hands it over or just after. Or $500 before and $500 after.
But as most people report the effect of a tax, the first version is a tax on the worker, the second version on the employer, the third version split between both. Who actually bears how much of the burden of the tax depends on details of the market–the relative elasticity of supply and demand. But the result is the same in all three cases.
Generalize the example and you should realize that the standard figures on who pays how much of a tax don’t tell you what you actually want to know.
I note, by the way, that Adam Smith understood this point nearly two hundred and fifty years ago. He didn’t have an adequate theory so couldn’t do a good job of figuring out what the effect of various taxes was, but he made it entirely clear that it wasn’t simply a question of who handed over the money–that a tax changed the equilibrium set of prices and wages, and that change had to be taken account of.
DavidFriedman is quite right. There’s a vast empirical literature which shows that corporate tax cuts do increase investment.
This is pretty settled science at this point.
Real investment or “our inventories increased because we couldn’t sell anything” investment. Economists sometimes use the term in a way that has absolutely nothing to do with the standard use of the term.
The answer is in both Tyler Cowen’s article, and in the underlying paper he’s drawing from (available here http://faculty.tuck.dartmouth.edu/images/uploads/faculty/jonathan-lewellen/Investment_and_cashflow.pdf ).
Furthermore, the paper illustrates the effect is highly disproportionate:
What this means is that AAPL and GOOG will likely not increase investment a lot, but companies without such large cash hoards (e.g. manufacturers, service industry) will invest significantly.
While reading this post and the previous one, I was thinking of this post by Garett Jones on the Chamley-Judd theorem.
Also this one by Casey Mulligan:
Maybe the basic econ answer is wrong for some reason, but it’s worth establishing first what that answer is.
Serperating workers and capitalists is a false distinction, and the same one that Marx made. You can raise the material well being of workers by turning them into profitable capitalists (the qualifier is what makes it hard), which makes it no longer impossible to do what Garrett Jones says (though difficult, and perhaps impractical).
Excellent comment; thank you for writing it.
It just occurred to me that I actually used a book of yours in a college economic class — Law’s Order, I think it was, and I enjoyed that too. I should re-read it.
I don’t suppose you have any book recommendations for economic theory?
Read David’s price theory text, free online in the link. Or for a shorter and more accessible version his Hidden Order is also excellent. It’s basically a popularization of his textbook. I loved Law’s Order, too. It was my introduction to a lot of important ideas.
I learned price theory from Steven Landsburg’s Price Theory textbook, also excellent. I still go back to reference it frequently. Landsburg’s non-academic books are also great for learning some economic theory, particularly The Armchair Economist. If you want to take a deep dive, just pick up all the titles by both authors and start reading.
Indeed, the corporate tax rate is a tax on corporate investment in general — including endowments, pension funds, etc.
But it is also a tax on corporations vs. pass through sole proprietorships, partnerships, etc. As someone who is loath to see the Main Street economy completely swallowed up by corporations, I favor some penalty for adding the extra layer of indirection. And as the biggest corporations wield government like power, I want the corporate income tax to be progressive — which it currently isn’t.
But there is another reason to keep a corporate income tax: accounting. The income tax works (aka is “voluntary”) because people and organizations report on each other. GM’s tax deduction is Joe Sixpack’s taxable salary. Get rid of the corporate tax, and the incentive to pay employees — especially executives — under the table grows high.
I oppose the Fair Tax for similar reasons.
The big problem with high corporate tax rates is that multinationals can move profits overseas through accounting magic. My preferred solution is to make tariff rates the same as domestic tax rates. Then the multinationals can book their profits as they see fit with little tax impact.
If you abolish the corporate tax and require corporations to attribute their income to their stockholders, they still have an incentive to keep track of costs.
On your more general point, I have speculated that one reason for the roughly four fold increase in the ratio of government expenditure to GNP over the past century plus may be the shift from a largely self-employed population to a population where most workers are employers of firms. It makes it harder to hide income and so increases the revenue maximizing tax rate.
Consider the incentives of a corporate manager under your rule. Suppose management leaks money to its executives under the table without reporting it on the books, or falsely reporting the costs as some sort of expense other than employee pay. Shareholders and executives can keep more money.
On the other hand, with a corporate income tax, the corporation gets to reduce its corporate income tax burden by reporting what it pays executives, contractors, etc.
I absolutely agree with you about the difficulty of income taxing a population of sole proprietors.
(Another reason for the growth of government is that it ran out of tribal lands to give away/sell cheap. The Progressive Era coincided with the closing of the frontier. This country had a largess system in place from the beginning, in the form of land.)
Excellent comment, David. I would add that there is a third glaring error in the original post. The general income of the median American has increased when adjusted for inflation, benefits, taxes and transfers, household size (more single and smaller households now) and immigration (the 40 million immigrants are pulling down the average) by somewhere between 40 and 60%. Not 3%.
I will gladly supply links if anybody else hasn’t already (I haven’t finished reading the comments). However, Scott’s initial post is based upon an error.
That said, I see little or no value in the tax changes either. But let’s all get our foundations correct
Thanks for settings this straight. I love Scott’s wit and the general quality of the stuff here.
Whenever Scott writes stuff that seems off, the cognitive dissonance is killing me.
I could tattoo this on my forehead for the next debate on taxes:
When people, who produce goods and services, receive more money in return, there will be more goods and services.
I’m still confused by this – the proposal is to Remove taxes on wages (weighted to the lower end). In your toy example, in all three cases the employer pays $20,000 and the worker receives $19,000. But if the tax is removed, should we expect something like the employer pays $19,500 and the worker receives $19,500? The benefit for workers and companies is clear in this case. The alternate proposal is to lower the tax rate on corporate profits, but I would assume that lowering tax on the specific transaction where companies buy labour directly is more effective in increasing the welfare of workers than a commensurate lowering of tax on corporate profits? In order to believe that the latter was true I guess I would have to believe some kind of multiplier effect was in play..?
How the savings when the tax is removed divide between worker and employer (and, ultimately, employer’s customers) depend on relative elasticities. My point was merely that the three different tax plans I started with are all really the same. It follows that eliminating a tax nominally on the worker has exactly the same effect as eliminating one nominally on the employer.
Thank you, I appreciate your reply.
I am pretty sure I follow your argument there, any way you arrange it, the company is (let’s just assume the figure is) $500 better off when a tax is dropped. But what I meant was, if you drop taxes on wages rather than taxes on company profits, then would you not increase the incentive to hire workers over other uses of the money, such as replacement with technology?
Scott: is there a reason you’re wilfully ignoring that corporations only get temporarily richer, and that the money flowing into them eventually flows through to people? (Rule of thumb I use is two-thirds return to labour, one-third return to capital. Maybe the economists have those fractions to better precision than I do these days, references welcome.)
It’s not hard. Unless understanding it leads to conclusions other than “Sorry, I’m still right”, I guess.
2/3 to labour, 1/3 to capital sounds consistent with the literature I am aware of. For example, this paper suggests 45-75%. On a slightly different note, another paper suggests this burden is not disproportionately shouldered by high income earners.
I don’t think he’s ignoring that. He’s asking in what way is that better than giving the identical amount of money to people directly, for example by cutting the income tax instead of the corporate tax. Then the money would flow to people instantly instead of “eventually”. What is the value-add of routing it through a corporation first and is that value-add of a large enough magnitude to outweigh the time-value of money, the uncertainties involved in trying to grow the economy, and the lack of guarantees about how much of the money will eventually reach any particular demographic?
US corporate taxes are way, way higher than everyone else of relevance, and it’s been that way for a long time. The current corporate tax rate is simply dumb, and cutting it would be bipartisan in a sensible world. It actually is bipartisan in many other countries, most of which charge somewhere in the ballpark of half what the US does.
Also, last I looked at the numbers, both the House and Senate versions lowered taxes on poor people a fair bit, while doing essentially nothing for the rich. One of them actually *raised* taxes on one of the high-income brackets. So it seems like a big chunk of the money is doing exactly what a “Just give money to poor people” plan would do.
I’m not a US tax expert, and I haven’t dug into the details of this bill. I’m sure there’s nuances I’ll hate – there usually are. But the broad strokes seem pretty sensible to me, if you’re going to cut taxes at all.
Let’s be charitable to the Republicans for a second (I know, charitable to the outgroup), and consider the stated goals of this plan.
The goal of this policy, alongside the corresponding “free money to corporations” is to bring corporations back to the USA. Rather than incorporating in Ireland and keeping their money abroad, these policies are (supposedly, if taken charitably) designed to bring the money back into the USA: for Americans, domestic money is better than foreign money, even if much of it ends up in the hands of the wealthy.
I don’t know whether the tax bill will actually accomplish this, but this is a stated intent.
The other thing the tax bill does is double the standard deduction, from $6,350 to $12,700, and eliminate the personal exemption ($4,150 in 2018). This is a 20% increase in the amount you can deduct if you’re taking the standard deduction, which poor families disproportionately do. This could conceivably result in a decent chunk of money back in the pockets of poor families.
I don’t support the bill on other grounds (specifically the pass-through tax changes and failure to push through the income bracket changes), but these two changes don’t seem obviously or necessarily bad.
They aren’t. The nominal top marginal rate is, but that’s not the same thing.
They are. The middle marginal rate is 39%.
I pay it, it’s real.
That chart’s insane. Not the idea that it goes up to 39% in some parts. But that it bounces around considerably. If I was doing engineering analysis, I’d describe it as “ringing” subsequent to a single impulse input or something.
It looks like it’s a phase-out system. There’s four “real” brackets(15, 25, 34, and 35%), and the 39 and 38% brackets are designed to phase out the lower brackets and leave it with a flat 35% from the first dollar for big corps. It’s pretty typical in tax codes, actually, even if it’s crazy in other contexts.
In his second term, Obama proposed that “the corporate tax rate would be reduced to 28% from 35%, with a lower rate of 25% for manufacturing firms”, so corporate tax cuts ARE bipartisan.
The reason I didn’t comment on the main post is that I don’t disagree about the Republicans. They’re terrible; Trump was supposed to be different and here he is being just another gallon of swamp water.
I’m glad you’ve come around to tax cuts being different from huge government programs like “end world hunger”, though.
…it still puts more money in the hands of people who need it than just giving them the money would.
Should this be less money?
Why in the Φ hells would Moloch care about poverty? Poor people don’t create self-perpetuating power systems, or they wouldn’t be poor anymore.
Tax policy is not about what people want. It’s not about signalling. Tax policy is how government creates more of itself. (Government that creates less of itself has already died out and has trouble spontaneously generating again in an environment were all the free energy is consumed by existing life)
That politicians need to get reelected, and the party system, and all the other visible problems are simply a characteristic of the particular self-reinforcing process that evolved from the American Revolution. That a self-reinforcing system would dominate at some point is trivial, because any system that doesn’t reinforce itself will eventually lose to the one that does so most effectively in that particular niche.
I don’t know how to solve the problem, but the simple solutions work about as well as using foxes and disease to remove rabbits from Australia; they will add problems of their own and only result in the system making the smallest change to become resistant to that particular intervention. (See also: The aftermath The French Revolution, which used noble ideals and a democratic inspiration to overthrow the monarchy and install a brand new … dictatorship. Or the Russian Revolution of 1917, which overthrew the Czarist regime using populist values and created a series of somewhat different authoritarian regimes, all of which followed their own incentive gradient, and none of which had an incentive gradient that cared about what was good.
I think that maybe a handful of people (seasteaders, most likely) might be able to generate a system of governance that avoids evolving for a longer time and has incentive gradients that work. I don’t think that any such system can ever become large and popular, because it must necessarily be optimizing for other things.
So how did the Canadians shrink their government?
Bond market pressure. There was real fear from about 1993-1996 that we might not be able to finance our deficits any more, which could lead to going full Zimbabwe in the worst case. So, Chretien took an axe to everything to prove he was serious. (Naturally, the biggest axe was to transfers to lower levels of government, because he doesn’t get any flak for cutting provincial spending, and because they can’t do anything about it, but he did cut program spending substantially as well.)
He also pulled a trick where he had the Finance Minister systematically under-estimate the revenue for the coming year and then based spending based on those numbers. It’s a lot easier to cut spending if you claim to have less money than you actually do have.
Isn’t it pretty reasonable to say that ever-growing government is intimately tied to cost disease, that solving one problem is both necessary and sufficient to solving the other?
Like, if medicine becomes more and more expensive, and the costs are spiky in the first place, you have to pool resources, and then because the costs are so high and you want to avoid adverse-selection death spirals, you have to subsidize those pools, and then you’ve reinvented socialized medicine. It’s an effect, not a cause.
Although I don’t doubt you argued with some position you once heard from one kind of socialist, I don’t think the majority have a special attachment to expropriating things through social programs and complicated bureaucratic schemes like many libertarians would seem to believe. If you want to skip the state and just do Robin-Hood-style direct transfers (or anything in between) it’s not gonna be the left that’s standing in your way…
I want to push back on this. It’s true that the left no longer gets excited about nationalizing the automotive industry, but historically, most of the left didn’t want to nationalize/expropriate everything, just “the commanding heights” of the economy. In the 1950s, that meant the big classic manufacturing entities, like the steel, automotive, and chemical industries. Today, though, those industries aren’t the commanding heights. the commanding heights today are education, medicine, and finance, and guess what things the modern left is most concerned about controlling? I don’t think the left’s basic impulses have change nearly as much as you think, they’ve just shifted targets.
Alternative explanation: the left wants to nationalize things that they feel should be run as a universal service?
Corbynistas want to re-nationalize the railways, which are far from the commanding heights of the economy, but do feel like something that should be a universal service to many leftists.
When it comes to the commanding heights of the economy, the universal service they’re trying to grab is “good jobs for everyone” (or for the interest groups they care about, depending on your position). Given that we’ve seen where this ends (a Soviet model, where the raw materials are worth more than the finished goods), I think it’s a good idea to stop them from nationalizing the “commanding heights of the economy”. Or really any part of the economy that isn’t experiencing a serious market failure (e.g. insurance that is subject to adverse selection) or requires input of everyone to be legitimate, but that’s my centre-left talking.
In the case of health insurance in the U.S., the adverse selection is produced, mandated, by the government regulation, specifically the requirement that everyone pay the same price independent of state of health when the insurance is purchased. Also the limit on price difference with age, which makes insurance a bad deal for the young, a good deal for the old. Both seller and buyer have the information, but the seller is forbidden from using it.
The other examples I have of insurance with adverse selection are outliving your savings insurance (old age pensions), unemployment insurance, and screwing up your life/having your life screwed up insurance (welfare).
But reading your response, I think I was wrong to view them as market failures per se. It seems clear that in each case, more information transfer to the seller actually fixes the supposed market failure. Just at the cost of results that many people (including myself) would consider immoral. I’ll remember to asterisk those next time I talk about insurance and market failure.
It does seem if there isn’t market failure per se (in that I’m not sure improving these would leave no one worse off), there’s a great lot of market stupidity (in that people might plausibly hope that the market could give less ridiculous outcomes0 in the US health system.
1. Everything could be cheaper if people could make a credible promise not to sue (for three reasons: less malpractice insurance, less defensive medicine, and less defensive hiring of specialists to meet ridiculous and US-only “standards of care” requirements that help only in lawsuits, not patient outcomes).
2. Insurance companies don’t want to pay, so make doctors (who presumably have better things to do) jump through ridiculous paperwork hoops. I think Scott at one point mentioned that this can work and once him and his colleagues realized what they were doing wrong, their revenue doubled. Canadian doctors seem to have a much easier time dealing with the state insurance company.
3. Hospitals (video link; discussion of Singapore) respond to increased competition with increased signalling and bells and whistles, instead of lower prices.
It seems like most countries get around all of this with a strong coordination mechanism of some sort, while the US mostly leaves the pot to boil, while occasionally ineffectually (and contradictorily) stirring it.
I don’t disagree,but that’s because I think that’s a distinction without difference. they wanted universal provision of essential manufacturing goods 50 years ago too.
The left of the 1950s wanted to give people free cars, free steel, and free chemicals?
Guess which three things are hard for consumers to make informed choices about, but easy for suppliers to bamboozle people about? We live in interesting times because the commanding heights of the economy coincide with the kind of goods that are poor fit for simplistic free-market individual-choice models. The command economy is dead, the libertarian alternative is none too healtthy.
the commanding heights today are education, medicine, and finance, and guess what things the modern left is most concerned about controlling
Are you sure you didn’t work backward from your conclusion there? How does the “commanding heights” not include tech, for example?
Your point would be much more apt if there wasn’t a concerted effort on the progressive side to regulate tech.
Net neutrality, or any other proposed regulation that I’ve heard of, isn’t at all near the level of regulation faced by cassander’s other example industries.
I’d agree. I’d also say that more will definitely be coming. Insofar as “tech” can be referred to a single thing, it’s political importance is relatively new, and political ideas take time to form.
I’m no tax expert, and certainly no Republican, but corporate taxes don’t seem very sensible from a utilitarian perspective, and I’m confused as to why Scott is so vehemently against them being cut.
Let’s say I and a few buddies gather in a group and decide to make something which we will sell to put a little extra money in our pockets. One buddy, being very formal, writes up a contract for us to sign. We promise our labor to the group in order to make the thing in exchange for money.
Unfortunately, we live in a world with a state, so the king steps in and taxes this money. This would be called an “income tax”, and since it’s not in the category of perfectly efficient taxes (Omnisciently planned Pigouvian taxes or LVTs), it’s associated with a “dead weight loss” which is just fancy economic talk for the worst thing imaginable to a utilitarian: a non-utility-maximizing arrangement.
Now the king also says “and since you guys are in a group, you have to pay another tax on this money”, but since this tax is the second tax on the same money, not the first, we’ll call it a “corporate tax”. And Scott seems to think this second tax, with the same dead weight losses, is good, because we decided one of my friends in this group was extremely crucial to making the product (either because he took on the most risk, had an unsubstitutable skill, etc), and thus agreed to give him the most money, so he gets hit the hardest by this tax.
This makes sense in prehistoric caveman logic, where if someone in the tribe gained too many resources, he might use those resources against you, thus it’s in your incentive to make sure he doesn’t gain those resources even at great cost to the tribe. But to a utilitarian, I wouldn’t expect such arguments.
Furthermore, what I find even stranger, is the implicit equation of “not taxing people” with “society is loosing something”. It’s not clear that society is loosing anything, as taxation, even perfect taxation, is zero sum. The money not taken via taxes is simply money that goes back into people’s pockets, that they can spend as they wish. If you’re going to imply that society is at a loss for taxes not collected, then you need to show that those taxes would have gone to satisfy people’s preferences better than what those people would have voluntarily chosen to spend it on themselves. Simply assuming that taxes are going to be used in such a manner is erroneous.
The basic argument for corporate taxes is that they prevent tax deferral. And this is a bigger deal than it sounds like.
If corps flowed 100% of their profits through to shareholders then they’d be unnecessary, but they don’t, and retained earnings would be untaxed in a world without corp taxes. This means that any investor who has already maxed out their shelters would just incorporate, stash all their investments in the corp, and have them growing tax-free. Yes, they have to pay taxes at the time of withdrawal, but tax deferred is tax avoided, so it dramatically lowers their rates*.
Retained earnings invested within the company should probably be taxed at some point, and that’s even before you start exploiting it to make up tax dodges(and any financial planner or accountant with a week of experience could make up a dozen tax dodges before breakfast on a plan like this)
* – For a simple example, consider a $100 investment that doubles annually and is held for two years, in a world with a 50% income tax. If the money is taxed annually, it grows by a net of 50% each year, so your $100 becomes $150 and then $225. If you only pay tax at the end, your investment becomes $200 and then $400, and a 50% tax is levied on the $300 gain, or $150 total, leaving you with $250. In essence, the tax levied in the first year is money that’s unable to compound further in the investor’s hands, so the net rate on “second-generation” income is 100%.
The solution to that is to abolish the corporate income tax and require corporations to attribute their income (i.e. profit–revenue net of costs) to their stockholders, to be taxed as ordinary income.
When you sell the stock, your capital gain is the actual capital gain (hopefully inflation adjusted) minus the corporate income you have already been taxed on (net of dividends).
Which could lead to the case where a company makes a lot of money one year, but has a very poor outlook, so shareholders owe more income tax on the stock they hold than it can be sold for.
Isn’t the simplest solution just to make dividends distributions tax exempt?
Sure, individuals can sets up a company to avoid the highest marginal personal income tax brackets, but we can forbid that using anti-avoidance laws.
The concern is that we have two simultaneous goals which are difficult to disentangle unless you’re tremendously careful.
1) We want the retained earnings of a business to be subject to a low tax rate when they’re being re-invested in the business.
2) We want market investments held within the business to be subject to basically the same tax rate as if they were held personally.
In Canada, we solve this though a mechanism called “Refundable Dividend Tax On Hand”(RDTOH) – basically, the difference between personal and business tax rates is charged as a separate extra tax on passive corporate investments, and that tax is refunded when dividends are paid to shareholders. It’s an anti-deferral mechanism that doesn’t increase the ultimate tax rate, but does front-load it. (Unfortunately, the system is incredibly fiddly, and small mismatches between the corporate and personal rates happen all the time, but on the whole it works passably well)
I can’t speak to the US, but that’s how trust taxation works in Canada(including things like mutual funds, which are legally structured as trusts). Setting up all corps as flow-throughs is nice on paper, but I worry about how those taxes would be distributed in practice.
– How do you make foreign shareholders pay? You can’t do it by the traditional method of dividend withholding taxes, because there’s no actual distribution to withhold.
– What do you do with an investor who owns the shares for only part of the year? In a mutual fund you can easily figure out what the investments did because they’re always 100% liquid and the only cashflows are explicitly stated buys/sells/dividends, but in a corporation that’s not the case. A guy who buys the stock for a few months in Q1 is now on the hook for taxes liable due to a huge profit in Q4, without actually being an owner in Q4.
– Traditionally, what you expect to see in cases of predictable cashflows to owners is the underlying price of the stock + the expected cashflow from the one-time event(a dividend date, etc.) adding up. Since in this case the cashflow is negative, that means you would expect the price of the share to spike on the ex-tax date, which means low-income people could easily buy in on April 14, sell on April 16, take a trivial tax hit, and enjoy a big income bump. In other words, you’re encouraging short-term stock speculation as a get-rich-quick scheme among the poor. I see no possible way for that to backfire.
– A lot of companies have multiple classes of publicly-traded shares. How do you equitably divide up the gains between the share classes? On a go-forward basis you can put it in the prospectus, and in a case where management is genuinely not beholden to anyone then it’ll probably be divided fairly, but closely-held family firms that trade publicly often do a dual-class structure to ensure control is held by the family even if they only own a small part of the equity of the firm. Will firms like that distribute their gains fairly, or will it be used as another tool for the family to fleece the public?
Sorry, this seems like one of those ideas that’s really clever, and would work in a simpler economy. But modern tax-avoidance practice and financial theory has gotten too good to allow something like this to work properly.
The reason I personally don’t find this argument very compelling is that it’s premised on the idea that someone not paying as much taxes as they otherwise could is a bad thing. I don’t see how that follows.
The two points I made previously (corporate taxes are a compounded dead weight loss, and not taxing someone isn’t necessarily costing society anything) still seem to hold.
Silly question, but if you had a flat income tax rate for individuals, would tax deferral mean much of anything?
In the case you showed above, you’ve only demonstrated that taxing more often results in more revenue – it’s no different from interest compounding monthly vs. daily.
Yes, it still would. My example had a flat rate.
And you’re correct about how frequency of taxation works. But since tax systems are all annual, the only real choice is between annual and “once at the very end” tax systems, and the latter has a substantially lower effective rate due to deferral.
Lets look at taxes paid though. In your first example taxes paid are $50, then $75 for a total of $125. In your second example taxes paid are $150. So you have a situation where the individual is richer by $25 AND the government has $25 more in revenue AND YOU CONCLUDE THAT THIS IS A NEGATIVE OUTCOME.
You’re forgetting time value of money. A dollar in the first year is not equal to a dollar in the second year. If the government has access to the same 100%/year growth rate as the private sector(which it would if tax is at an economically efficient level), then the $50 in first-year taxes produces its own $50 in growth in year 2, which precisely offsets the gains. In other words, the real value of the taxes the government levies is $175 in the first example and $150 in the second, for a drop of $25. That precisely offsets the $25 that the person gains.
Also, to be clear, I’m not saying that deferral is bad. I’m saying that it’s a de facto tax cut, and should be treated as such. Whether that’s good or bad depends on a lot of other factors, which I’m not trying to go into here – I’m just demonstrating the math.
Corporations are not just a group of people working together; that’s a partnership. Corporations also have limited liability; they have special legal protections. While I don’t know if corporate income tax is the best approach to accomplish this, it does not seem obviously unreasonable for governments to raise revenue by charging something in exchange for those special legal protections.
Oh, and the criticism in this reply of one of your points should not be taken to imply endorsement of any of the points not explicitly criticized in this reply. You seem to make other mistakes as well, but that was the one I felt like commenting on before going to bed.
Limited liability only cuts in when a corporation goes bankrupt, so the cost to claimants is only the amount still owed at that point. If you add up all of the amount owed by bankrupt corporations each year, do you think it comes to a tenth the amount of corporate taxes paid? A hundredth? A thousandth?
And that’s an overstatement of the cost, because contracted for debts already include a risk premium reflecting the possibility of bankruptcy. It’s only uncollected tort damages that should count.
So the ancap tries to infer the value of limited liability from first principles instead of observing what people are willing to pay for it? Interesting.
Makes sense. You can’t easily measure it by itself – there’s no business that’s simultaneously incorporated and not incorporated, and there are both costs and benefits of incorporation that are totally unrelated to limited liability.
If the government sells something at a fixed price, the people who buy it will be the ones who are willing to pay that price for it. That tells us nothing at all about whether that is the right price.
To find the right price, the economist points out that the optimal Pigouvian tax is equal to the externality produced by what is being taxed.
Analogies are made to simplify relationships. Obviously corporations are more than just a group of people. They have names, can own things, etc.
The question is: is my analogy invalid because of limited liability? I don’t see why.
A zero percent corporate rate, like a zero percent capital taxation rate, might be ideal in economic theory, but in practice having such a low rate would create enormous opportunities for tax arbitrage that would almost certainly prove problematic.
Not if corporate income is attributed to the stockholders.
1. Wouldn’t it be very complicated to inform each stockholder of his tax liability?
2. So long as the corporation retains the income, aren’t they the one with the capability to pay the tax on it?
3. Does it matter much in the end, as long as the same income isn’t taxed twice?
(Sorry if I’m asking too many newbie questions.)
I attacked Friedman’s idea above, but I’ll steelman it a bit here.
1) Not at all. If you own stocks, you’re already getting an annual tax slip telling you how much you earned in dividends. This could just be added to that.
2) In principle, but encouraging distributions instead of retained earnings is a stated goal for many tax theorists, so I doubt they’d be too worried by pushing corps to declare dividends.
3) This really, really depends on the details.
On 1. This is already done for partnerships. The system exists and is used for “companies” like Ferrellgas.
Dealing with a K-1 is a bit more complicated than dealing with a 1099-DIV, but it’s not enough worse to reject the idea.
That option is actually already available to private companies: they can be structured as LLCs, which have limited liability (it’s in the name), are very flexible and can be organized to mimic a corporate form pretty well, and which can elect to be taxed as partnerships (pass-through entities).
Venture capitalists don’t like to invest in them, because they (and their investors, recursively) have to deal with the pass-through taxes, which are of course more complicated than one number because of the complexity of the tax code. It can take a long time for form K-1s to make their way up a complicated graph of ownership. This problem is solvable with modern technology, though, if there were strong economic pressure to do it.
I think only real estate and natural resources companies are allowed to have this sort of tax treatment and be publicly traded, however.
As I’m sure you know, the “standard” way of organizing taxes that is comparatively hard to game is to tax consumption rather than income. But people complain about tax deferral, as if Warren Buffett piling up a huge number of dollars while never consuming any actual resources is a big threat to their way of life.
Why would it prove problematic?
This seems like an argument for simplifying the tax code, not raising (or maintaining) corporate taxes.
Aside from the near-infinite marginal rate right at $100,000 or wherever? Perhaps not.
This is a pretty important point, and I wish people would understand it better. There are a couple of things going on here, so let’s unpack.
First, suppose there is a marginal tax rate schedule. If I pass a bill that reduces marginal tax rates (in general with very little restriction – at each dollar value the marginal tax rate can be reduced by any amount, or left as is if we don’t wish to cut at that precise point), then the total reduction in taxes is by necessity (weakly) increasing in income. Because if you cut the marginal tax rate on the k-th dollar, everyone earning at least $k gets that reduction, but those earning less do not get any benefit from that particular change. Mechanically, higher income earners get more $ benefit from tax cuts than lower income earners because they pay far more tax.
There is a way of getting around this – to make sure only those earning up to K benefit i.e. the higher income earners don’t benefit, claw the tax break back from them by increasing tax rates above K. But recall that by cutting marginal tax rates up to K, the people who benefit the most in $ are those earning just below K. (For example, in Scott’s suggestion, this is the person at the 80% percentile who earns $75k, currently pays about $12k in income taxes and $6k in FICA taxes. If we halve their income tax, they benefit to the tune of $6k).
If we want to make sure the people above K don’t benefit at all, we need to have a lump sum tax of the full benefit for those at K, immediately above i.e. a lump sum tax / an infinite marginal tax rate. Needless to say, this is hugely distortionary – anyone earning in the interval about K would be able to keep more dollars total by cutting back their hours. (For example, taking state taxes into account, combined marginal tax rates are already around 40% at this point currently, so anyone earning up to $85k would keep more by cutting back to under $75k). This is obviously horribly inefficient, results in a substantial reduction in earnings for a substantial number of people, and also loses the government a dramatic amount of additional revenue for the work that is now foregone.
If doing that gets ruled out as ridiculous, then the next closest thing to Scott’s proposition is just to increase marginal tax rates in the region above K. And to do so reasonably substantially, so the benefits taper off pretty quickly. But in practice, if you raise tax rates too much (e.g. above a current 40% effective marginal rate), the revenue gains become pretty small fairly quickly – at some point Laffer Curve style effects kick in, and even as one merely gets close the amount of deadweight loss per dollar of taxation raised gets very large.
(Personally, I reject the notion that the most relevant criterion to use to evaluate a tax change is its progressivity. It is not even particularly clear what this criterion is meant to mean when evaluating tax cuts by those who laud it. Dollars of relief given? (You may as well admit you oppose general tax cuts). The proportion of the total tax paid by any quantile of income earners? (In that case, I believe the GOP bill is progressive)).
To expand on that …
If you cut taxes in half for everyone making less than $100,000, you are also cutting in half the taxes on the first $100,000 of income for people making more than $100,000–that’s how a graduated tax system works.
Now consider someone making $110,000. The first $100,000 is now being taxed at (say) an average rate of 15% instead of 30%, reducing total tax on it by $15,000. To avoid cutting the total tax on that taxpayer you would have to tax the final $10,000 at a rate of 150%. But if you do that he won’t earn that final $10,000, since doing so makes him poorer not richer.
Generalize the argument to everyone above $100,000 and you will see that you can’t use $100 billion to cut in half the taxes of the bottom 80% unless you sharply increase the tax rates on income above $100,000.
There seems to have been an argument in the past over whether Scott’s claim to be bad at math is true or not. There is a good deal of evidence against, but this appears to be at least a little evidence in favor.
I was actually assuming that the suggestion was to halve the tax bill only of people under the cutoff and leave those above it completely unchanged. Either way, it has the look of a spur-of-the-moment idea that got written down without much in the way of further thought.
But wouldn’t that mean that someone making $99K a year makes $99K, but someone making $100K a year actually makes $70K a year? That would obviously be a huge disincentive to make more or to pay your employees more.
That was my point. To get that result you need a tax rate above a hundred percent in the range above the cutoff–in the limiting case just above the cutoff, an infinite tax rate, as Paul pointed out.
C’mon people, read him with a tiny bit of charity. He obviously meant something along the lines of halving the tax on each dollar of income below $100,000 or something along those lines.
If that is what he meant, then he’s taken the completely wrong approach to estimating how much it would cost to deliver such a tax cut. The conceptual error involved there is sufficiently substantial that assuming that is what he meant seems less charitable.
Also, suppose that this is plan – halve marginal tax rates under 100k – were proposed. Who gets the most $ benefit? Those earning $100k or more, of course, including those stinking 1% folk. Who would get very little? That substantial share who already pay almost no income tax. My guess is that Nancy Pelosi et al. would label this as “tax cuts for the rich” too.
No, by any measure this primarily benefits the less wealthy if you count payroll taxes, which you should.
Handwaving – top quintile pays 70% of total federal taxes, bottom 80% pays 30%. The 30% gets cut in half. So for a majority of money to go to the top quintile this tax cut needs to cut their taxes by a factor of 0.2 or so (70*0.2 ~ 30/2). The mean top quintile income was $265k according to the same link so that’s flatly impossible. (If taxes were flat, then their taxes would be cut by 0.5*100k/265k = 0.18; the progessivity of the income tax combined with the extreme skewness of the incomes of the top quintile will make the true cut much less.)
Interpretive charity is one thing; swapping in your own proposal wholesale is another. However you want to interpret the lowest-80% thing, Scott specifically said he was talking about income taxes.
You misunderstand. I’m not talking about which group of people collectively gets more money, I’m talking about which individuals get more money ($) in cuts (indexed by income group). This is a much more sensible way of talking about things since the group sizes are arbitrary – it is mighty rare to ever hearing anyone explicitly argue “it is unfair that group A, which is 1% of the population, collectively gets a smaller benefit from proposal X, than that received collectively by group B, which is 40% of the population.” People do tend to care about the per-person benefit, however.
With any sequence of marginal tax rate cuts, the amount of $ of relief is weakly increasing in income (and strictly increasing over any interval where the tax rate is cut). So here, the people who benefit most from the hypothetical reduction are those earning $100k (or in the interval above).
Oh, and none of this argument has anything to do with income taxes vis a vis payroll taxes.
The word “substantially” is doing too much work in that question. If there existed a set of policies that could plausibly get through congress which everybody agreed in advance they were sure would raise GDP substantially, we probably would have already passed those policies.
This bill would be worth passing if it were likely to raise GDP even just a little bit compared with not passing the bill. So…do you have a survey of economists on that question?
That doesn’t seem like a fair summary of what the CEOs were asked or what they answered. Specifically, the claim that they would expect only to “increase shareholder dividends” is NOT from a survey of CEOs, it’s a handwavy summary of what one specific CEO (who might have paid for the placement) wrote in an obscure linkedin blogpost. In other words, this “forbes contributor” author had a view he wanted to express, so he found a CEO willing to express that view.
As for the info that WAS based on a survey, it seems like CEOs quite predictably don’t know what this bill will do for them until it actually passes, including whatever additional compromises are needed to get it passed and whatever follow-up measures are taken going forward that mitigate/improve/destroy whatever policy updates this bill ends up producing. CEOs have a longer time horizon than a single year. The objectively correct answer to the sort of question they were asked is always to shrug and say “I dunno, we’ll have to wait and see”. Heck, even if they were pretty sure these policies would help their firm, they would still have little incentive to say so and some pretty powerful incentive not to say so. (You don’t get to stay CEO by alienating half your customer base for no reason.)
(There’s also the problem that what CEOs think their existing firm might do is irrelevant to whether the tax plan helps, but we can set that aside for now.)
Last but not least, regarding this bit:
The “Forbes contributor network” is a thousand-ish unpaid and unedited bloggers churning out content. What they write is not an official opinion of Forbes – it says that right at the top of the page.
If by “I’m right” you mean you have backed off from your original position that the tax bill was a waste of money great enough to solve US homelessness and provide free college to every US citizen, to the position that the tax bill is bad on net, then maybe you are right. Although even this isn’t clear, as you aren’t arguing that the tax bill is worse than status quo, just that it is worse than other potential bills that could exist. Obviously this is true. But you are seriously moving the goalpost if you claim that “the tax bill could be better” is the same argument you made on the last post.
Also, please justify your implied assumption that any good changes to the tax code involve cutting taxes on the poor. According to your own figures, the top 20% of people pay 85-95% of taxes. So what is your ideal level? Especially when you consider that ~45% of Americans pay no income taxes (Tax Policy Center). The tax code is already extremely progressive, and taking it as a given that it should be even more progressive is not up to your usual standards. That is the type of question economists debate endlessly because it is HARD. If you want to contribute to that debate, you are going to have to do better than this. All your surveys of CEOs and quoting of Forbes is just dodging the meat of the issue.
I repeat my claim that you are mind-killed on this topic. I love reading your blog and I don’t say this to cause trouble. But it takes time and multiple, consistent refutations to get someone to reconsider a received opinion. This is one. PLEASE try to start fresh on this issue and reconstruct your priors. “What do you think you know, and how do you think you know it?” You still have a lot of work to do if you want to answer this question.
I agree with David Friedman and some others. It seems you are going with a very simplistic understanding of how taxes work which doesn’t live up to your usual standards of thought.
I was surprised how lopsided the economist responses to that poll were. My usual experience is that economists never agree on anything.
Reading their comments, it does seem like they’re imagining the results in very different ways. Markus Brunnermeier was uncertain, but said “It is more likely that GDP will be somewhat higher.” I guess that’s not ‘significant’ to him though? But then there’s Robert Hall (also uncertain) who says “Though there is merit in cutting the corp tax and other capital taxes, with no other changes in policy, the fed gov will collapse.” I think he might be getting away from rigorous economic theory there.
I’m still a fan of this tax bill. My own taxes will go down, they’ll be simpler (won’t have to itemize anymore), and it’s a step towards eliminating the distortion of the home mortgage deduction. I have no idea what the effect of the corporate tax cut is, but i’m optimistic that it will cause *some* sort of economic stimulus. I’m sure this isn’t the *optimal* tax bill, but it’s better than the status quo.
Less charitably, I notice a lot of the people complaining that it’s going to “take from the poor and give to the rich” are extremely upper-middle class people who benefit massively by deducting the state taxes on their upper-six figure salaries. People like that will get a tax hike, not the working poor.
This is a partisan tax bill. Like all partisan tax bills it seeks to slay the opposition’s sacred cows while feeding the home team cows the best organic GM free grass available. The important point is that partisan tax policy proposals like this one have nothing to do with efficiently and fairly funding government operations.
Thats said, I think it’s pretty clear the corporate income tax should be eliminated completely. To make it revenue neutral, the special tax rate for capital gains would also be eliminated and the upper tax bracket should be adjusted to make up any difference.
The federal corporate tax system is a sham. Our rate is far above the OECD average but we have a lot of loopholes. Loopholes favor large corporations who can afford tax compliance divisions over small corporations who cannot, it incentivizes moving operations outside of the US instead of investment in the US, and it’s hugely inefficient. Focusing on personal income taxes is much better – whatever profits a corporation makes will eventually hit a person and be subject to taxation.
The GoP bill doesn’t do that, but just because it’s a bad bill doesn’t mean that reform isn’t necessary or wise.
But more than that there are a few principles in keep mind:
– There are only two ways to allocate resources – by fiat or through markets (or a combination of both).
– When you subsidize something you get more of it – even if that extra portion is wasted – along with price inflation. See education and healthcare in particular.
If you lower corporate tax below personal tax, you incentivise individuals to set themselves up as paper corporations.
Fixing this loophole with damaging genuine one person businesses is not trivial. (IR35 is a code used by Her Britannic Majesty’s Customs and Revenue, and the whole saga has been dragging on for nearly 20 years).
That’s easily avoided by setting dividend tax rates properly. More often, things like that are done these days to avoid regulation, not tax.
I’d like a very low corporate tax offset by making dividends and capital gains taxed like normal income (although still indexing capital gains to inflation).
I can’t speak to other countries’ tax codes, but in Canada every time the corporate rate drops, dividend rates go up to compensate. Cap gains are a whole other mess, though.
Yes. When not trying to score partisan points, economists are nearly universally in agreement that corporate taxes are inefficient and should be eliminated. Most importantly, corporations can’t pay taxes and we don’t really know the incidence of the tax. Who actually pays it? Nobody knows, but the possibilities are customers (higher prices), employees (lower wages), or shareholders (lower dividends). Well, if you want to tax customers, tax customers. If you want to tax employees, tax employees. If you want to tax shareholders, tax shareholders. But don’t tax corporations and pretend you’re not taxing anybody.
There are only a few problems with this. 1) If you eliminate the corporate tax, then it’s probably wise to eliminate the special tax treatment of dividends and capital gains. 2) You don’t want corporations investing for their shareholders with retained earnings because they can do so in a tax-advantaged way. The solution is to impute the annual change in retained earnings to the shareholders and tax them on it. 3) It has been pointed out that non-profits with huge endowments currently use their tax-free status to invest and earn money on their investments tax-free. Corporate taxes at least give the government some slice of that. But the solution is to remove tax-exemption of investment income from non-profits. (Charities and churches and universities and such would still be able to collect donations on a tax-free basis, but no longer allowed to invest that money and earn investment income on it tax-free.)
Exactly. This is my position on corporate taxes. Since we don’t know who really pays the taxes, maybe it is a better idea to actually tax directly the people we think should be paying tax? Corporate tax is only good for politicians who need something to hate, either in favor or against. And if we want to avoid tax deferral and tax avoidance by using the corporate shell, just make all taxes flow-through, as we already do for S Corps.
Although if we had a flat tax as I’d like to see, so everyone paid the same percentage on their income, with no deductions, then we could just charge this tax rate to corporations too, since it wouldn’t matter then who was paying the tax.
While I don’t know enough to defend or condemn the bill as a whole, I do take issue with Scott’s suggestion to lower taxes on the poor and middle class. Given that the about 50% of Americans currently pay 0% income tax, Scott’s suggestion of lowering their taxes at the federal level is impossible. Now, to be fair, one could still use the theoretical amount of money that would be spent on the tax cuts as a giant welfare program for those (such as myself) who pay no income taxes now, but this should be explicitly stated. It seems likely to me that whatever effect lowering taxes has, it would be different – maybe better, maybe worse, but certainly different – than increasing welfare for any particular group of people. Thus, his rather uncharacteristically disrespectful description of those who see this tax bill as helpful for the poor as morons seems to me to be disappointingly inaccurate and overconfident.
Highly misleading figure:
Well, there is a reason I said income tax. While you do have a fair point in regards to the federal payroll taxes as congress could theoretically do something about those as well, I would submit that when most people (including Scott here) talk about tax rates, this is the rate that they are generally referring to. Scott made his suggested change using this rate, but then said that it would help the “poor” and those who opposed it were morons. In fact, the article that Scott quotes from in his calculation states that:
From anyone else, this would be a negligible amount of imprecision and disrespect – I just expect better from Scott, because I am used to him being perfectly precise and showing the utmost respect for all involved.
That’s as bad a mistake as the simpler claim that the employee’s share is paid by the employee and the employer’s by the employer. The cost to both employer and employee is a function of the combined employer+employee tax. How it is divided between them depends on the relative elasticity of supply and demand for labor. There is no more basis for claiming it is all a tax on the employee than for claiming it is all a tax on the employer.
if the CEOs are lying and …the economists are wrong and… – then the good thing that happens is that poor and middle-class people have more money.
…which is the same thing that would have happened if you had just lowered the taxes on the poor and middle-class directly, you moron. It’s also what would happen if we spent it on welfare for the poor, on health care for the middle class.
Really, how can you give such an obviously stupid simplification, Scott? The poor getting employment is the same as them getting an extra $100 per year because both of them simply amount to “having more money”? (Note: I am not assuming that tax-cuts will necessarily improve employment; I am pointing out your mischaracterization of your hypothetical worst case scenario).
And for the record, here is Tyler Cowen, who is far more left/progressive leaning than you are:
I’m genuinely trying to figure out if the last few posts were an ideological turing test of some sort.
On one hand, what Scott wrote about how dehumanization is claiming someone’s arguments aren’t worth being refuted resonated with me.
On the other, it’s precisely because Scott’s arguments are usually so nuanced and careful to not misrepresent his sources that I am having so much difficulty taking the last few posts seriously.
In both the ‘against overgendering’ and the ‘against republican tax cut’ he seems to have unusually poor arguments (conclusions may be correct, but many other commentators have pointed out the major discrepancies between what his sources actually say, and what either his summary or the conclusions he makes from them imply they say).
It’s also curious that the first time he makes two arguments of what the average commentator believes is of significantly lower than usual quality, it happens to be on two political issues with conclusions appealing to opposite sides of the political spectrum.
Can someone advise me on how I should proceed?
On one hand I predict with 50% chance that Scott will admit he has been trolling us in some form, on the other hand I agree with Scott in earlier posts that accusing someone of trolling instead of addressing their arguments directly is discouraged for good reason in a forum such as SSC which places such a high premium on intellectual charity.
I don’t assume it’s trolling.
But I can imagine Scott, for some emotional reason, wanting to make passionate and not very thoroughly thought out arguments on several issues and deciding to minimize the fallout by doing so on both sides of the usual political divide.
I should add that I have no opinion on whether the tax bill is good, bad, or very bad–it’s a complicated issue and I don’t know enough. But Scott’s arguments here are very bad.
I also have no opinion on the substance of his previous post–I don’t think I have ever been sexually harassed, have no idea how often or badly other men are, and have not followed the various criticisms of his arguments carefully enough to judge whether they are any good.
I just look at this in terms of the track record. Republicans have been trying this “lower taxes to create balanced budgets” thing for a fair few administrations now, and yet they seem to increase the deficit and increase the total amount of debt. That’s what keeps happening. Tax and spend has had better results on that front, because Republicans talk about lowering taxes, cutting programs, and lowering regulations, but they do a lot of the first, a tiny bit of the second, and almost nothing of the third when push comes to shove, so the federal government is still doing tons of stuff but it can’t pay for what it’s doing with taxes anymore. Debt is inevitable. As an explicit strategy, “starve the beast” is an absolute and utter failure and should be completely shelved and removed from libertarian conservative ideology.
The Kennedy and Reagan tax cuts were done in an era when rates were wastefully high, and they did increase revenues substantially(though spending also spiked in those eras, so nothing was done about the deficit). By the time of the Bush tax cuts, rates were low enough that we were on the downslope of the Laffer curve, and a tax cut was a revenue cut.
Well, then maybe the tax cut philosophy was good at the start, but now they’ve succeeded, it’s time to be happy with tax levels as they are. Make savings for the private sector by actually following through on the cutting red tape side of things.
There’s just not enough red tape. It’s all social security, etc.
Presume the Republicans are right about supply side economics. The basic conceit is the more money that goes to the wealthy, the more is invested and spent, which stimulates the economy. If true, then lowering taxes on corporations will increase economic growth and provide gains for everyone, a net increase in wealth greater than your alternative (because the poor and individuals invest less), and with less government involvement. Of course, you might make an argument that supply side economics is wrong. But that’s begging the question, presuming supply side economics are wrong to prove they are wrong.
I’m not going to touch whether you’re right or not. That’s not really what gets me. Economics is complicated and a matter on which people may legitimately disagree and I’d love to see you do a deep dive on it. But you see, bad arguments are bad, tautologically. And unconvincing arguments are bad politically.
They’re particularly bad coming out of your mouth right now. You’ve built up a lot of credibility with conservatives for taking their ideas seriously, siding with them when you think they’re right, and attacking the wronger parts of your own tribe. Right now, the Reds control a supermajority of states and most elected Federal institutions. If they are wrong, convincing them their policies are wrong within their own tribal context is probably the best thing you can do to increase utils. And engaging in partisan Daily Show-ism damages your ability to do that.
PS: My alma mater recently sent a letter to its graduate students, informing them that in case of passing the bill they would no longer be required to teach in exchange for their waivers. Instead it would be based on a combination of factors, like need. Their very expensive lawyers and accountants had assured them this would prevent any tax burden from falling on graduate students. As I said in my last post, this effectively solves the problem. I think we can agree ‘universities having a somewhat less robust TA supply’ is a much less likely to destroy higher education than levying a large tax increase on graduate students.
I’d suggest concerned graduate students suggest this solution to their universities. If the administrators get shifty and mumble something about how they can’t afford it, or they need TAs, then… well, my conspiracy theory about their motivations has some more evidence. If they’re relieved and gladly implement it, then I was overly cynical and will… I don’t know, eat something sugary in the hopes of making myself less dour? Any ideas?
No. The basic argument is that the more of the money people produce they are able to keep, the more goods and services will be produced. The argument applies to poor people as well as rich people.
And “more is spent” is a red herring, spawned by pop-Keynesian intuitions–money that the government collects as taxes is spent too.
Before I disagree with you, are you arguing that this is what the average Republican politician believes or the average supply side economist? Because I’m talking about the politicians.
Any competent economist who thinks about the argument.
I don’t know what the average Republican politician believes, but I doubt that “to the wealthy” is part of it. Even if he believes that the effect depends on money going to capitalists, not all capitalists are wealthy and lots of wealthy people are not capitalists.
The conflation of the wealthy and capitalists is a Democratic meme I’d unconsciously absorbed. You are, of course, correct that wealthy != capitalist.
But yes, that’s what I meant to portray their argument as (see: how ‘the wealthy’ becomes ‘corporations’ in the second to third sentences). The Republicans explicitly argue that letting capitalists retain more of their capital encourages hiring and investment, which leads to stronger growth. They maintain this will benefit everyone even if decreasingly progressive taxation or redistribution means less immediate spending power for the working classes. See: Job creators. Beck’s pie metaphor. Etc.
Top incomes are all capital incomes, so “wealthy = capitalist” does become true for a certain (high) level of wealth (and corresponding capitalization). It’s hardly a “Democratic meme” as there’s nothing US-specific about the underlying fact.
Okay, could you spell that out for me? Let’s say my utility function is a combination of money earned and free time. Taxes are lowered, giving me an effective increase in money earned per hour of work. Wouldn’t basic economics predict that I modify my behavior to achieve some combination more money and less work? If that’s the logic for everyone, and everyone wants to work less, where does the extra production come from?
There’s two effects. One is the income effect – “I’m rich now, I can afford to be lazy!”. One is the wage effect – “My net hourly pay just went up, so maybe I should work that OT shift after all…”.
How those two balance out is an open question, but either one being dominant is at least plausible, and most people tend to assume that the wage effect will dominate.
Spell what out for you? The basic supply side or Republican argument? I’m not really interested in being the defender of that here. My point is not that they’re right. Whether they’re right or wrong is orthogonal to my comment. I’m saying that if they’re wrong, respectfully arguing their wrong from within the Red Tribe’s tribal context is the best way to affect things right now.
But to reply, what they would say is something like: Not everyone will prefer to work less. It depends on how much utility they get out of free time versus earning extra money.
Even presuming everyone did decide to cut back on hours, that doesn’t necessarily mean less hours will be worked. If it’s profitable, the firms will hire someone else to cover your hours. So production will not fall where you work. (They would argue it would likely rise as more have money to buy goods, making it profitable for the firm to produce more.)
And even though you’re making the exact same amount, there will be more goods and services produced because whoever they hired to pick up the slack will also be spending that money on those goods and services. Eg, now you and the person replacing a few hours will both consume a morning coffee, so Coffee Co will make sure there are two coffees made instead of one. Etc.
Again, there are good arguments against this. But it’s not patently absurd.
I know it’s not your main point, but I’m very curious about “PS: My alma mater recently sent a letter to its graduate students, informing them that in case of passing the bill they would no longer be required to teach in exchange for their waivers. Instead it would be based on a combination of factors, like need.”
What sort of school (private, public) was this, and does the proposed change apply to all departments? At my (public, research-active) university, this would be completely impossible — in STEM, at least, graduate tuition is, for students not working as teaching assistants, real money coming into the university from funding agencies (NSF, NIH especially), and it would be disastrous to waive it. For teaching assistants, it would be disastrous to say “you don’t have to teach” — it’s not like the need for teaching assistants will magically disappear. I can only imagine the policy you’re describing working at a fantastically rich school, but perhaps I’m missing something.
I am also very curious about this and would like to hear more.
A wealthy, selective, research-active private school.
I’m not sure how this solution is impossible for even a community college. They’re not lowering tuition across the board or trying to get less grants to pay student tuition. They wouldn’t need to. My understanding is that these are counted as scholarships, which are not and (afaik) would not be taxable. They’d be unaffected and the students wouldn’t be taxed. And it’s tautological that your university can afford to give up the money it already doesn’t collect in waivers.
Also, there’s nothing stopping teaching assistants from being volunteer, for credit, or doing it for a small (taxed) real-money stipend. The university could even require everyone going through the program to teach a number of TA hours just because. There are still ways to motivate people other than tuition waivers.
I really don’t understand this statement, and I think you’re very mistaken: “My understanding is that these are counted as scholarships, which are not and (afaik) would not be taxable.” If by “these” you mean grant-funded graduate student tuition, these are definitely not counted as tax-free scholarships, and the in the proposed tax bill they are counted as taxable income — that’s the whole point.
About internally funded tuition: “It’s tautological that your university can afford to give up the money it already doesn’t collect in waivers.” Obviously, but the issue is that (i) there can’t be a separate (larger) tuition for grant-funded and internally funded students — at least at present, I’m sure no funding agency would allow it, and (ii) since graduate students would, in the proposed bill, be taxed on this “income” of tuition, if the tuition were not set to zero then stipends would have to be increased to cover the cost, otherwise graduate students would be getting an effective pay cut. The increased stipend would cost the university real money.
About teaching assistants being volunteer: again, I think you aren’t understanding the issues involved, and I’m not sure how respond. I’ll point out for now: Removing tuition completely transforms the student into (completely) an employee; each hire, for example, would have to be conducted as a search, open to everyone, not just “graduate students.” One could argue that that’s a fine thing, but it would radically transform research universities and (at most places) be very bad in the short term.
Under the House but not Senate plan, tuition waivers are going to be counted as taxable income. I have yet to see anything about grants. If you can link me to somewhere saying that, we can discuss the specific policy. I simply haven’t heard of it, as of this point, nor is it mentioned in Scott’s original article.
There can’t be a separate tuition? Why not? Universities get along fine separating tuition in all sorts of other ways. In-state and out of state students, for example. But even presuming you were correct here, that’s not what anyone is proposing. What’s being proposed is the exact system we have now except it’s no longer a form of compensation or income. Your argument is: if universities keep almost all of their current financial structuring for students no one will possibly except it. This is trivially countered by the fact it currently exists.
Wait, what? The job would have to be offered to everyone? There’s no reason the job couldn’t have a requirement like ‘must be a current graduate student at X University in the appropriate subject’. None of this violates a protected category or anything. Even if it did, that seems like something that could pass strict need.
And that’s setting aside how they could bake it into a program or something.
Re: “Under the House but not Senate plan, tuition waivers are going to be counted as taxable income. I have yet to see anything about grants. If you can link me to somewhere saying that, we can discuss the specific policy.”
I’ve spent a bit of time staring at web pages, and I now think you’re likley right about this (i.e. the bill not applying to grant-funded tuition, even though, similarly, the student never directly sees this money.) I’m still confused by, technically, what counts as a “waiver” for graduate tuition, and I’ll try to read more. Thank you for spurring me to look into this more carefully!
If you actually look at the comments in the IGM poll, a lot of the “disagree” votes are really “tax minutiae don’t affect GDP” not “this tax bill is particularly bad,” because the question asked is whether the tax bill will cause a substantial improvement. When they actually asked about the corporate tax rate in particular, the economists seem to support a corporate income tax rate, at least in that narrow context. What CEOs say they’re going to do is kind of irrelevant; the incidence of a tax (and hence of a tax cut) depends on external factors they do not control. Regulatory capture is bad, but it isn’t that bad (yet). (Also, “dividends to shareholders” is also money in the hands of the middle class, because anyone can own stock, and many publicly owned companies pay quarterly dividends).
Cutting the income tax on the middle class is, well, a good thing, and it is probably more effective at getting money to the middle class than the corporate income tax by a similar amount of total revenue, but you don’t get any benefit if you don’t have a job. Of course, you could argue that middle class spending money causes jobs… but why would we believe these CEOs would build more stores just because people spent more money on their products, when they could just give themselves bonuses? It is most often wrong to think of wealth and income as static distributions. Wealth is constantly being created, consumed, and invested. Over a time scale of more than a few years, the details of how you try to fiddle with the distribution pretty much don’t matter at all compared to structural issues, incentives, and production.
You know all the things you need to know in order to figure out where most of the additional wealth that’s been created the last 50 years has gone. You’ve written about cost disease. Benefits have been going up to pay for increased medical costs. Money that would have been saved and inherited paid for overcosted colleges.
You’ve also written about why the poor seem to stay poor, in spite of how much actual wealth they have. Our standards for what constitutes poverty have changed; many of today’s poor have access to commodities the middle class did not 50 years ago. There’s some fraction of the population for which bringing them out of poverty really is more difficult than “give them some money” (though there are also structural issues with the way we fight poverty now, like welfare cliffs).
edit: to clarify, I think the tax bill is bad, partially because the graduate student thing seems incredibly poorly thought out, partially because it doesn’t do anything about profligate spending and the deficit, partially because the GOP seems to have gotten luck by accident on the corporate tax part, partially because the deduction eliminations seem like political maneuvering rather than good economics, partially because the rest of us could also use a tax cut (you are right that cuts could be flatter, although in absolute terms, the income tax code is so progressive already that any income tax cut will disproportionately benefit the rich), and probably some other reasons I’m missing.
The way that poverty is officially defined (i.e., in terms of income) it is literally never the case that anyone is still in poverty once you give them enough money.
The problems to which you allude (drug addiction, gambling addiction, mental health, etc.) do exist, but they are not understood to fall under the heading of “poverty” under its normal definition. Poverty itself is the lack of income.
To evaluate how good or bad it is to cut corporate rates compared to other rates, you need to discuss the economic incidence of the various taxes. The legal incidence of the taxes is basically irrelevant. This can be a hard question but some economists think the economic incidence of corporate taxes is in fact quite broad and not nearly as concentrated among the “rich” as most people on the internet seem to think. It is worth investigating at least, rather than glossing over.
So the UK has a few tax experiments that you could consider in the light of this discussion:
1. We have massively reduced the corporate tax rate from 30% in 2008 to 19% now – you can check how many of those gains are going to workers and how much additional growth they have generated.
2. We have a cliff edge marginal tax rate at £100,000 where every additional £1 you earn means you forfeit £1 of tax free personal allowance (so effectively 100% tax).
Both of those ideas have been mentioned above and they are both in action, so we have run the experiment for you! The effects might not be quite what some of you were expecting!
How? We don’t have a control, an alternate version of the U.K. in which the change wasn’t made and everything else was the same.
I seem to recall some unrelated things happening between 2008 and now that might have some effect on growth.
I’m seeing a lot of comments that Scott is making a category error by treating tax cuts as a cost, that is, by comparing it to other things that the government “could” do with that money given the will.
I think this is unfair. What Scott’s doing is essentially a moral Fermi estimate. The exact ways that lowering taxes for the government is or is not comparable to lowering income for an individual; the exact limits on the freedom of what the government plausibly “could” do; or the exact macroeconomic effects of all the various “options” Scott is considering… all of these are meaningful but complicated issues. They are each potentially worth discussing, but they should not get in the way of doing the back-of-the-envelope reasoning Scott is using.
Imagine I offered you a choice: I can give you a million bitcoin or make you dictator for life of Inner Mongolia. Probably the one of the first reasonable things you’d do is a naive conversion of both of those things into dollar value. A million bitcoin is worth about 1.5B$ right now; as DFLIM you could plausibly extract .1% GDP of rent (which you could take in the form of improved utility for your subjects if you wanted), so that’s around 300M$/year for a Fermi estimate of 100 years (assuming that your life expectancy rounds up); with a 3% discount rate that means about 100B$.
Both of those calculations are wildly wrong. If you actually tried to sell a million bitcoin, the price would crater; if you hold it, the price will surely not remain steady. If you actually were DFLIM, who the fuck knows what rent you could sustainably extract. And obviously you won’t live for exactly 100 more years, nor is 3% a precise measure of your ideal discount rate. But putting the two things onto a common scale of money, even crudely, at least lets you begin to address the problem. That’s what I think Scott is doing here; and at that stage, even relatively major objections like “tax cuts aren’t a cost” are mere details.
We could simplify the tax code while making it more progressive at the same time. First, merge the FICA taxes into the regular federal income tax. Turn the combination into a single bracket that goes up to 400K or so for an individual. You then have a flat tax for the 99%. Employers could stop keeping track of employee exemptions and just deduct the same rates for everyone. The truly rich can either add some quarterly payments of their own or pay a big bill in April of the next year.
As for the personal exemption, EIC, etc., replace it with a citizen dividend. Now you get a nice bridge from welfare to work and being a small time employer has become greatly simplified. This could change the dynamics of our permanent underclass quite nicely.
I’ve been pushing the idea for the past half decade. My first calculations on the idea are here. My most recent — which uses a higher fidelity model of the existing system — here.
Another simplification that would make the tax code more progressive would be to treat long term capital gains and dividends the same as ordinary income. When Warren Buffet defers his income for a decade, get gets a tax break. If a country doctor did the same with his earned income (beyond allowed retirement plans), he would pay credit card interest levels on the postponement.
Why ever make a tax flat and use brackets when you could do a continuous curve (or, put otherwise, each cent value is a bracket)?
Thought experiment: what would change if you crank the tax knob all the way down to 0% tax rate for the bottom 80% and all the way up to 80% for the upper 20%?
What would change if you make the tax rates 0% and 100% correspondingly?
Would anything change if you set the threshold for the tax cut to 90% instead of 80%? 95%? 99%?
In my humble opinion you’re trying to measure only the direct effects disregarding all the indirect effects of the policies.
The most credible attempts I’ve seen to estimate the peak of the Laffer curve put it at about an 80% tax rate. If that’s true, the difference between 80% and 90% and 95% is pretty significant; they aren’t all just “big numbers”.
I am happy to see that Scott has (once again) figured out that he can in fact know things, judge between experts, and draw conclusions using object level analysis.
Hopefully this update will carry over to other questions, beyond politics and economics. This is way more important than what we think of a tax bill.
Perhaps age did, in the end, bring wisdom.
Yeah, but everyone else below says I’m wrong.
Remember that on a society-wide level the balances of both popular opinion and professionally informed opinion are on your side, and it’s only the breakdown of SSC commentators that make your views look fringe, and keep up the good work!
The problem is most of the people here (quite rightly) have a much higher oppinion of the SSC comentariate than popular or pundit oppinion. And every other place you might go for detail economic analysis seems about as mixed as our comentariate.
The real divide isnt between left and right its between the economically literate (lossely defined) 3% and everybody else.
Would I be wrong in guessing that when you say “economically literate” you mean not “has devoted time and effort to the academic study of economics” but “holds views on economics which I, personally, consider to be sensible”?
Because if it’s the former, then I disagree – the distribution of opinions about economics among professional economists does differ from the distribution among lay-people, but not by nearly as much as the right-left divide. On average a right-wing economist will agree about more with a right-wing layperson than with a left-wing economist, I think (at least if you weight by significance of issue – there may well be more agreement on many small details among the professionals).
And if it’s the latter, I think your phrasing is misleadingly self-serving.
For what it’s worth, opinion on these tax cuts among professional economists seem much *more* mixed than among the SSC commentariat – who seem pretty overwhelmingly libertarian, and in many cases wrongly convinced that their views constitute economic orthodoxy – but a plurality of them seem to doubt the claims for the economic growth they’ll produce.
Not true in general. Free trade is the obvious big counterexample, but not the only one. Deductibility of home home mortgages would probably be another. Minimum wage would probably be a third. You will note that it was only when Krugman shifted from being a professional economist to being a professional Democratic pundit that he more or less abandoned the conventional economic view on the subject.
And it was a Democratic economist who was largely responsible for deregulating the airline industry.
I remember my father saying that when he used to testify to the Joint Economic Committee it would end up with him and Paul Douglas, a Democratic senator who had also been a prominent economist, against the rest of the committee.
The mortgage deduction is one where I grant you there does seem to be at least a strong majority view, from the little I’ve read on the subject, but I just googled “economists poll minimum wage”, and the results suggest anything but a consensus there – what are you claiming the consensus opinion is?
Actually I was refering more to the mode of argument than the actual content of their beliefs.
Scott, Eliazer, David Friedman, Bryan Caplan and numerous other figures in the rational sphere (also shout out to Joseph Heath, a hard left UToronto philosopher who never the less excellently presents an economically coherent take on global warming) are all prime examples that the economic mode of argument isnt left or right, its cost/benefit concious vs. “this policy is a moral good with no downside”.
And you just don’t get that quality of discussion outside the SSC discusion board. Individual pieces but not the back and forth.
Also i think Micheal Malice is running around here somewhere, but he won’t contribute damn him!
That increasing the minimum wage reduces the demand for minimum wage labor. That’s a special case of “demand curves for inputs slope down.”
That doesn’t say whether you are for or against increasing the minimum wage–you might believe that effect is small and other and desirable effects are large.
Take a look at what Krugman’s position was back when he was an academic–five years after the Card-Krugman study.
Right, and that effect itself (small or not) is not necessarily a bad thing.
In particular, since “demand for labor” is measured in labor-hours and not in dollars, demand for labor can go down while compensation for labor goes up or stays the same. (I.e., workers don’t get a raise but they do get paid the same for less work.)
It seems to me that the conventional right-wing line completely ignores that there even exists an upside for laborers to working less.
The people have (or think they have) a grasp on economy in your vicinity hail from a limited range of the opinions of economists in general, but present those opinions as the absolute, incontrovertible truth. Meanwhile, as said below, the track record of economists in predictions is still abysmal.
I am very entertained by the comments.
He said you could draw conclusions. He didn’t say the conclusions would be correct.
After two posts what’s striking to me is that Scott Alexander, a modern renaissance man who can talk intelligently across the spectrum of human knowledge from the AI singularity to evolutionary biology to creating his own multiple regression models, feels unconstrained by the laws of economics. Rather than address the specific holes in Scott’s Econ 101, let me think about why such a smart guy is making such poor arguments.
I have to credit David Friedman and Greg Mankiw for pointing this out years ago, but a large segment of the chattering classes often feel proudly ignorant of basic principles of micro-economics: price signals, the LAW of Supply and Demand, limited resources, opportunity costs, equilibrium, price controls, dead weight losses — Econ 101. Part of this stems from a disdain for pocket-protector wearing technicians but a larger part stems from the justified perception that the big macro questions of public policy, origins of growth and so on divide economists along ideological lines.
So the predominate left view creates a hierarchy where basic human decency and morality informs one’s favored public policy views and that in turn favors one’s macro economic views. Micro-economics? That’s just low level techno-babble that doesn’t belong at dinner party conversations or the educated classes. Leave it to the technicians to sort that out.
In this view, the right (by right, I meant the classical left) follows the same process, but due to a character flaw, basic human decency -> compassionate redistribution state -> Keynes economics instead becomes selfish interests -> market economics and limited government.
As evidence of this, I’ll offer two key pillars of the new Tax bill that match exactly with NPR’s cross-ideological panel from 2012 (it’s very short and worth listening to):
+ eliminating the corporate tax
+ eliminating the home mortgage interest deduction (the Tax bill marginalizes this from both ends by increasing the standard deduction and limiting the property tax deduction)
So where is the disconnect? Why is Scott Alexander so comfortable contracting his Econ 101 ideological peers and espousing populist schlock about corporations?
Well the problem is that Econ 101 imposes a lot more constraints than the formally educated mob appreciates and since the right considers individual liberty and individual rights as the foundation for public policy, it embraces these Econ 101 constrains rather than ignore them. The problem for Scott’s of the world is that doing macro economics without a solid micro foundation is like doing avionics without accepting gravity, fluid dynamics without the laws of motion or psychology without accepting evolution.
The problem isn’t so much that they’re eliminating (well, greatly reducing) the corporate income tax, but rather that instead of shifting the incidence of tax from corporate income to dividends and capital gains, they’re just… shifting the tax burden from property owners onto people who work for a living while blowing a giant hole in the budget.
The federal budget is ~$4 trillion. $100B is not a “giant hole”
I’ve just seen the guy behind this tax plan explain that $8B/year is an unacceptable expense, so you’ll pardon me if I had accidentally believed him for a little while.
Just a quibble with that last analogy. I am skeptical that accepting evolution is a requirement to be a competent psychologist. I wouldn’t be surprised if a significant number of psychologists couldn’t correctly summarize what the theory of evolution said.
But even if they all did accept the theory was true, suppose tomorrow irrefutable proof was presented that the theory was wrong. Do you think all these psychologists would suddenly stop practicing, or be rendered incompetent?
Let’s be frank, this is the only tax cut that could pass.
Lest we forget, the plutocratic party has voted to limit the mortgage interest deduction (generally decried by economists everywhere) to half a million dollars and oh you cannot use it on your second home. The most heavily hit congressional districts are the ones the Republicans hold in blue states. They are quite literally paying for part of the tax cut by taxing their own swing voters.
Democrats are appalled and denouncing this specific policy in hopes of political gain.
The Republicans voted to limit SALT deductions to $10,000. Ninety percent of people who claim that deduction make over $500,000. Again this is going to hit swing Republican voters.
Comstock, Stefanik, Issa, and a dozen other odd Republicans are highly likely to lose their seats over these particular tax policies on the margin. Yet Republicans actually did increase the taxes on “the wealthy”.
And not a single Democratic that I have heard has even acknowledged that except with glee to talk about how it will cost the Republicans the House.
Giant creaky messes of bills make it through Congress because you are threading a needle. You have to keep Amash, Paul, and company happy. You have to offer at least cover to Collins, Heller, and Comstock. You need to pass the parliamentarian. Do you honestly think there is a single Republican who prefers this bill to all others?
I mean think back to Obamacare. Passing that required hundreds of millions in pork. It required roping in Lieberman and Baucus. It required exempting unions from Cadillac taxes. It required billions in gimmees for hospitals and pharmaceuticals. Not to mention the myriad of payouts to the insurance industry that was already getting a giant subsidy for people to buy their product as was now required by law.
Sure, just about every other possible tax cut is better than this one to the majority of people. The problem is that this is a collective action problem. Any three defectors can induce concessions. Congressmen have plenty of competing interests and I amazed that this got through at all. It is far too easy to hijack the process to get some benefit for particular donors.
The basic point I always look at is this: we have unified governmental control by Republicans. Some sort of tax cut is going to pass. Some sort of diminishment of Obamacare is going to happen. The only way these things are going to pass without defectors hijacking the legislation is if the margin is so large that the leadership can tell many potential defectors to take a flying leap. Unless Democrats cared more about passing a less-bad tax cut than reaping political benefits, we were always going to end with some terribly designed plan.
I mean seriously, the Republicans voted a bajillion times to repeal Obamacare. They won on the promise of repeal. They had every incentive to tank Obamacare quick and early and they couldn’t do it.
Coordination problems are hard. Just like Obamacare this bill is an opening position. It will be changed by subsequent actions. Is this bill better than no change in the status quo? Most likely. Would some clean tax bill be better? Sure. Would that ever pass? Not a hope in hell. Show me the last piece of legislation that spent a half trillion bucks that was under 50 pages long. It simply cannot be done with the current incentive structure in congress.
I understand that Democrat politicians need to oppose this plan without qualification but the fact that the NYT, WaPo and entire left media/academic mob won’t even concede that the plan includes major items that have cross-ideological consensus confirms that like Paul Krugman they’ve devolved into rank partisan hackery.
I suppose my view is similar to supporters of Obamacare who complained about it getting no credit for being based on Romneycare.
It is my impression that Republicans don’t have higher income than Democrats. Maybe that was true 20 years ago, but I think no longer. And I am pretty sure if you look at the number of those with high income in the Blue states where the SALT deduction is the most important, it would be heavily Democratic.
In the Virginia elections this year, Republicans carried 45% of those earning over $100K. They carried only 43% of those under $50K and 41% of those in the middle according to the exit polls. Last year, Trump did best with 50K – 100K, worst with 100K. It looks like Republicans maintain a slightly positive Partisan Voting Index among the wealthy currently; less than it ever has been, but still a vital clutch of votes.
Regardless places like NJ-7, VA-10, NJ-4, IL-6, and CA-45 have some pretty solid income figures.
Worse, limiting the mortgage interest deduction does nothing to affect the stratospheric wealthy who do not have mortgages or who already “rent” their properties to be able to deduct upkeep costs more effectively. Also making this less impactful on the bastions of Democratic affluence is the fact that the high cost Democratic districts are the most urban in the country and typically have much higher rates of renting than the wealthy burbs that still vote Republican.
SALT certainly does hit blue states harder. But over half of the Republican House margin comes from California alone. Adding in New York and New Jersey and it is more than the entire Republican margin in the House. Sure some of those are not wealthy districts, but places like VA, IL, and even WI will also add to the balance. This is the Republican’s hope for keeping the House. There just are not that many poorer districts they can flip that are not majority minority or otherwise unattainable with the current setup.
I do not dispute that only way this stuff got passed was that it sticks it to Blue State budgets long term. I just have looked at the numbers and there is an awful lot of blue state turf that currently determines who holds the House and Republican proposals to “tax the rich” are going to hurt them in these swing districts.
The fact that this is the compromise that made it through the House and Senate aught to tell us something about how impossible better alternatives are to get coordinated. Revenue was raised, almost exclusively on those America finds to be “wealthy”, and it had to go after the out-tribe in some fashion … and with just those simple constraints the Republicans had to whack some of their core voters in clutch swing districts.
Scott A. can talk all he wants about a theoretical better tax cut, but it is farcical to imagine that something simple and better could get through or it already would. If the votes were there for a more telegenic cut, it would have happened. But Democrats (for a host of reasons) are mostly saying “drop dead” and putting conditions on their votes that will at least peel off a few GOP hardliners. Now you are operating with very slim margins and of course some holdout is going to have outsized influence. This will encourage someone else to hold out and the end compromise becomes yet another massive schizoid bill.
Judging this against a clean bill is like judging Obamacare against a Beaveridge healthcare system. A theoretically useful exercise, but nothing that informs us about the real tradeoffs under consideration. The votes simply were not there.
“The Republicans voted to limit SALT deductions to $10,000. Ninety percent of people who claim that deduction make over $500,000. Again this is going to hit swing Republican voters.”
This doesn’t sound right to me. This is the group of people who live in states with either an income tax or property tax, and itemize. I find it hard to believe that 90% of those people make 500k+.
My long-winded response didn’t address Scott’s points specifically. That’s much easier than trying to understand why he’s making weak arguments:
1) Tax cuts for the poor!
The greatest distortions come from high marginal rates. This happens at the low end with subsidies (thus the basic income support) and at the high end.
2) Even Forbes doesn’t accept the Econ 101 accepted by G2 through G20.
Years ago Forbes switched to a blog model online where hundreds “contributors” push 1000 different views including a bunch of ill-informed nonsense and partisan hackery.
3) but the inequality
According to the JCT, this makes the tax system MORE PROGRESSIVE. You’d think the Republicans would be crowing.
I’m pretty sure that now that people have pointed this out, Scott will insist that his reference to Forbes was unimportant and the fact that it was shown to be false should have no bearing on the rest of the argument.
If so, remember that that’s how Gish gallops work.
I’m not sure if I’d accuse him doing Gish gallops, but it does make me wonder if he’s maybe the posts that I love suffer from similar problems namely seemingly novel stylistic elements that are actually a superficial glossing over a handful of fundamental misunderstandings of the topic at hand.
It’s a bit like when you read an article in a publication that you really admire that just happens to cover a topic that you understand in intimate detail from first hand knowledge and the writer just gets it completely fundamentally wrong. So what about all of the other articles?
That’s Gell-Mann Amnesia. (Incidentally, the reverse is why I have high regard for Wait But Why and Saturday Morning Breakfast Cereal, for example.)
So the obvious conclusion to draw from the fact that rich people currently pay more taxes than poor people, is that rich people should be taxed even more and poor people even less? Well, I guess that does make sense from a utilitarian perspective, but the argument then really just boils down to “all income should be 100% taxed, and redistributed equally”. And (almost) nobody supports this, so I don’t find the above argument convincing.
And this problem holds for the post in general. Sure, lowering taxes on the rich might not be the optimal policy right now; but that’s not obvious just from the fact that poor people exist. Do you think it’s obvious that taxes should be increased on the rich? How much? When should we stop? I can reverse your “it might not turbo-charge the economy” argument for lower taxes, with “it might completely trash the economy” for higher taxes. When will that happen? Who knows? The whole point is to find an optimal rate; do you think that that optimal rate was exactly where we are now?
Or, if you are consistently in favor of massively increasing taxes on the rich to reduce inequality, that’s fine; criticize the tax plan all you want. But then you should also criticize the Democrats almost equally for not increasing taxes while they were in office. Taking a step backwards is only a little worse than not walking onwards, if the goal is far enough away in the distance.
Now, I do think the whole bill is bad, but that’s because they cut taxes without cutting expenses. That doesn’t make any sense. If they did cut expenses (and paid down most of the deficit), I’m open to the possibility that a tax plan like this might not be such a bad thing.
Higher taxes on the rich have two impacts. 1. They reduce the overall investment pool since the rich save more. 2. Where taxes are steeply progressive, risk gets punished. That is, if one makes an investment with a 10% chance of a 10 to 1 gain and a 90% chance of a complete loss, the expectation value is break even with a flat tax. For progressive taxes, the big gain gets taxed at a higher rate that the loss receives as a tax deduction.
To mitigate the first problem: use the extra tax money to reduce the budget deficit. Budget deficits also drain the capital pool. (The combination of low taxes for the rich and high deficits constitutes a subsidy for those with money to lend/invest. Today’s wide spread between workers and owners reflects this 20 trillion and counting subsidy.)
To mitigate the second: keep the current tax rates for the rich, but treat capital gains and dividends as ordinary income. The progression effect is small and the effective tax on old money becomes higher than in the 50s.
There are much more fundamental problems with taxing “the rich” than loss of investment capital. High marginal rates create stronger distortions aka deadweight loss aka burning money.
From Mankiw, the rule of thumb is that the destroyed value is the square of the rate. So tax income at 50% and you’re burning 25%, but bump that up to 75% and now you’re burning 56%. And remember that this applies to the actual statutory sticker-price rate, not the effective rate because the actions taken to achieve that effective rate are part of that value destruction.
This is one of the hard Econ 101 constraints on public policy that Scott’s crowd is happy to wave their hands at and chalk up to some inscrutable and unknowable mystery of economics that would require a really complex regression model to solve.
To extend my physics analogy, imagine a 2nd order physics discussion on a topic like “do feathers dropped from planes return to earth” or “should the US Postal Service charge air freight for feathers” with people who viewed the concept of gravity skeptically as inherently tied up in advanced avionics or fluid dynamics.
Physics 101 gets complicated really quickly when trying to model actions in the real world, BUT that doesn’t make it any less real or mean that you can just ignore it.
So when Scott talks as though tax rat cuts are equivalent to increased spending or as though narrowing the tax base to exclude more people is equivalent to lowering marginal rates with no consideration of deadweight losses, it’s like listening to someone design a plane without understanding gravity, laws of motion or thermodynamics.
But what is the dead weight loss of perpetual deficit spending?
Also factor in the higher marginal utility of money for the poor vs. the rich. Hand a $20 bill to a bum, and you get a happy bum. Hand a $20 to Bill Gates and you have wasted his time.
I suspect that utility is a roughly logarithmic function of income. (Follows from marginal utility being roughly proportional to relative income changes.) A flat utility burden would require a progressive tax. (But the brackets would be different from what we have today.)
I never understood why, especially on the left, marginal $ utility is seemingly only contemplated at the level of the individual.
You’d think that progressives, who place a high premium on outcomes at the collective level, would take a more collectivist approach to utility. And it seems fair to acknowledge that growth and progress tend to occur at the margins.
Hand a bum $20, and it will be applied toward basic consumption (a hot dog, or more realistically, a 12-pack of beer).
Hand Bill Gates $20, and it’s likely spent on the attempt to bring clean water to Africa. Give it to Musk, and it’s being used to colonize Mars.
But what is the dead weight loss of perpetual deficit spending?
Yes, that’s the right question and the obvious reasonable criticism of the fact that it’s not revenue neutral.
The answer for those who want a smaller federal government more in line with Canada or even our U.S. history is that spending cuts are politically impossible so you have to play deficit chicken just like Obama did in 2009 to increase the unproductive sector of the economy.
That’s not a good criticism of this bill. Again, according to the JCT the bill makes the taxes more progressive and the US already has one of the most progressive tax systems in the world. Scott’s attacks on corporate tax cuts are just ill-informed populism and partisan hackery.
Generally speaking the big problem with the utility argument is how complicated it is to calculate the marginal utility of money for everyone paying versus everyone receiving and how to prevent those with the most political power (generally the rich) ending up on the receiving end.
Rich to poor transfer is certainly NOT the primary or even a major characteristic of the current $4 trillion in federal spending.
Deficit Chicken was an interesting strategy 35 years ago. Today, it is a proven utter failure.
I’d like to see a citizen dividend that is tied to a surplus. Then the politicians can debate cutting spending vs. maxing out the Laffer Curve.
I don’t think deficit spending is really “dead weight” loss.
There’s a certain sense in which the interest payments may be regarded as a loss, but I don’t think that’s dead weight. And whether that’s even true is probably questionable, as the defenders of deficit spending would likely argue that so long as you invest in projects whose return is greater than the interest charge, there is no loss at all.
To use a private example, if I purchase a home that appreciates in price by 10% per year with a mortgage that charges 5% interest, there is no “dead weight” loss here. There’s a gain.
You are misreading Mankiw. The rule of thumb is that the deadweight loss is proportional to the square of the rate (“The deadweight loss of taxation rises roughly with the square of the tax rate.”). The constant of proportionality depends on the elasticities.
The distinctions between rich, poor and middle class seem entirely distorted in these discussions. Based on the WSJ numbers and income statistics from 2015, a family of household earning more than $112,262 is in the top 20% of all earners. This could easily be two nurses in Iowa City each earning $60k.
A household earning more than $72,001 is in the top 40% of earners. This could be a family where the dad is a cop, and the mom stays at home. Yet they are considered “upper middle class” based on income statistics.
From the tax code standpoint, however, a household earning $75k would be at the top end of the second lowest rate (15% rate) and a household earning $120k would be square in the middle of the seven tax brackets at 28%. While so much of our discussion depends on income quartiles and the “affluent” top 20%, the reality is that the vast majority of tax filers are barely even participating in the competitive economy. In other words, if there are two spouses each earning $35k (basic entry level full time wage), the household earns more than 60+% of American households. But is that household really “upper middle class”?
The tax system reflects this. The “average” household income of $55k is actually taxed at 15%, the second lowest rate, and is accurately reflected as lower income (what household in American can live on $55k?). Where Americans fall in the seven tax rates is a more accurate representation of their class, and this also explains why the bottom 60% of American household pay 2% of all income taxes. Tax rates reflect where all the “action” happens in the American economy.
The gov’t is basically saying, “If you ever figure out how to get into the top 40% of earners, we’ll tax you. Until then, don’t worry about it. Good luck.” Of course there are still FICA taxes….
But in making wealth redistribution policy decisions, let alone NPR/NYT emotional profiles on “death of the middle class” and “the affluent wealth hoarders”, the tax brackets are a more helpful grouping.
The middle class of households, based on the tax code, is somewhere between $150 – $230k/year. These are the dual earning families commuting to work each day, probably working in a white collar setting, saving for college, planning for retirement, etc.
The Forbes example is a very bad one. Anyone can post as a Forbes contributor, you just send them an article and if it’s not scrawled in crayon on a sheet of tinfoil it gets accepted.
It also doesn’t follow that “Let’s say the government is definitely bad and taxes are definitely too high. The current tax bill is still not the right way to do tax cuts.” Less evil is less evil, any way you spin it. Could we have less evil more effectively? Sure, but all things being equal, we want less evil.
“the amount taken off the top by executives and shareholders…” will still be taxed, just as income/capital gains. It doesn’t vanish into the ether.
What about foreign executives and shareholders?
Under the current system companies incorporated in the United States (theoretically) pay taxes on worldwide income and foreign companies doing business in the United States pay taxes on profit earned here. The breakdown of where those taxes are incident isn’t entirely clear, but it seems that at least some of them fall on foreign executives (employees) and shareholders. So it isn’t possible to just substitute 1:1 individual income and capital gains taxes for taxation at the corporate level.
Whether those people *should* be subject to the incidence of US taxation is a separate question.
Right, we’ll lose a chunk due to that. Just wanted to push back a bit on the idea that reducing corporate taxes necessarily means that that money totally escapes taxation, which seems a common fallacy.
My impression is that “US-based company artificially putting their profits into foreign countries to dodge high US corporate taxes” is quite a bit more common than foreign companies with mostly foreign executives/shareholders getting taxed in the US (maybe foreign carmakers in US factories would be a big case of the latter?). If that were true, than this might actually have the impact of “onshoring” some of that money (e.g. Apple profit going to Tim Cook and US shareholders, who would be taxed, instead of getting squirreled away in Ireland or whatever).
But I have no idea how close that actually is to reality.
The problem with making a super steep increase in the marginal rates from the lower middle class (starting at the 53% who pay income tax up to the top 20% that pay most of it) is the huge disincentive effects: Being a PA rather the a doctor is looking more attractive. Being an RN instead of a PA is looking more attractive. Being a nurses’s aide rather than a nurse is looking more attractive. There’s a lot of dynamics with a the trailing spouse’s income being more trouble than its worth too.
I still don’t think we’ll have a hard time “filling” the upper positions. But like public teachers jobs, the problem isn’t that someone isn’t willing to do it, it’s that the optimal kind of person is no longer willing to do it.
I love the macro story of the lower middle class build wealth under super low taxes, and the upper middle class, established in financial safety and ease pay for society to keep running. But I just don’t think you can expect the same quality of output or ambition under that environment long term.
You’re making the assumption that the higher ranking jobs are trading off job satisfaction for income, but the reality is that higher ranking jobs are more satisfying in addition to better paying.
I was under the impression that that famous graph showing stagnated wages for decades on end had an addendum showing total compensation rather than just wages, and the result ended up looking like total compensation wasn’t stagnating at all, it was all just being eaten by exploding health care costs.
I was under that impression for a while too, but I remember looking into it more and deciding that probably wasn’t true. If you find better evidence, let me know.
Someone earlier in the comment thread pointed out that including immigrants in the calculation was an error of composition.
Suppose that in 1970 the average American makes $40,000 and in 2017 the income of the same people (for simplicity nobody dies or is born) has risen to $60,000 (all inflation adjusted).
Further suppose that by 2017 half of the population consists of people who immigrated during that period, and their average income is $20,000. Including the immigrants in the calculation means that the average income is still $40,000, even though all the people you started with have increased their income by 50% and all the immigrants by (probably) much more relative to what they made before they came.
So to do the calculation correctly–obviously my numbers were rigged to make the arithmetic easy–you should separate out all the people who came to the country between your starting and ending dates. I haven’t done that, but my guess is that the average income of those people is a good deal lower than that of the previous residents, so the correction would make the increase in wages bigger than the uncorrected figure.
My comment addressing this and supplying evidence to the contrary is directly below (currently just three or four boxes down) posted at 8:47 am yeasterday. As David notes, the stagnating wages argument depends upon ignoring 40 million immigrants pulling down the median and it requires excluding benefits, transfers, net income after taxes, changes in composition as more people retired, reductions in household size and workers per household due to lower marriage rates. There is also the issue of using the correct inflation adjustment (PCE v CPI).
Median wages in the US have increased between 40 and 60% over the past 30 to 40 years. But even this grossly underestimates real experienced per capita lifetime gains, as just about everyone moves from lower income in their youth to higher income in their late middle age.
We have a situation where the median real US born citizen has seen their wages Increase substantially, and yet The NY Times writes that household wages haven’t increased in decades. The media repeats this narrative hundreds of times and most people start to believe it.
I thought, for sure, that this was going to lead to an argument that “tax cuts have to go to the rich because the rich are who pays the most taxes.” But, no, it went the other way.
First, for the record, I tend to think that taxes on the wealthy should go up, if the funds can be used for useful things that really actually honestly promote a healthy society for other people (instead of things that we have a hunch ought to help because it works in The Sims and anyway the rich are paying so let’s just try it out).
But there’s nothing inherently wrong about just lowering taxes in a simple way where you tax reduction is proportional to your tax bill.
After all, society will decide from time to time to raise taxes, and it’s going to raise the vast bulk of new money from the rich, for reasons (imaginary) Willie Sutton would explain. Unless Scott is proposing a ratchet system where things always and only move in one direction, for symmetry reasons some tax decreases will need to decrease taxes on the rich.
And to argue against that, I’d use Scott’s old essay (which I can’t find, my search skills suck lately) where he talks about how some arguments prove too much and specifically cites some where society can just demand you give up whatever you wanted to do with your life and become something like a moisture farmer.
It is absolutely incorrect that median incomes are not rising in the US over the past few decades. Most estimates, when adjusted for transfers and taxes, proper inflation, household size, and non monetary benefits reveal that median incomes have increased somewhere in the neighborhood of 40 to 60%. This however still grossly understates welfare gains to real families as it excludes movement up to higher classes as people age and it ignores that the average is being statistically weighted down by the influx of 40 million immigrants over the last 30 years or so.
Here are references:
The first is from the Minneapolis FED. I encourage everyone to follow the link for details.
“The main finding is that—after adjusting the Census Bureau data for three key factors—inflation-adjusted median household income for most household types increased by roughly 44 percent to 62 percent from 1976 to 2006.
Here is a preview of the key data issues that lead to the higher estimates of median household income growth.
1. The price index used by the Census Bureau overstates inflation, and thus understates income gains, relative to a preferred price index.
2. A changing mix of household types leads the overall median increase to understate the median increase of most household types.
3. The Census Bureau measure of household income understates income growth by excluding some rapidly growing sources of income.”
For additional elaboration here are three other good links which explain the income gains…
And remember, most of these don’t counter for the effects of immigration, which totally distorts real gains for real families (specifically including those immigrating).
I am not a fan of the tax bill either, but US standards of living continue to be among the highest in the history of humanity and are continuing to rise even as billions of people in less developed countries have begun to join in the prosperity.
Most of my objections have already been commented upon by other people, but I have two that continue to stand out/need reinforced:
-Several people are making the argument that because we have companies sitting on cash, there are no attractive investment opportunities left. This is then used as a conclusion that lowering taxes on capital will be useless. This reverses the causality. Lowering the taxes on capital returns raises the value of all investments, which means marginal investment opportunities are now more attractive than holding cash.
People seem to think of “investment” as a fixed amount, and government capital tax policy affects how much “savings” exists. “Investments” aren’t fixed.
Just think, if capital gains were taxed at 90%, what would you do with your cash? You would sit on it. If the capital gains rate falls to 40%, you might invest some of it, because the return is multiple times higher.
-“Trickle-down economics” is a pejorative term. Supply-side economics operates under the theory that reducing taxes on something will get your more of that something, so we should reduce taxes on things that make us richer, so we can all get richer.
It does not mean “give money to the rich and then it will trickle down to everyone else through their spending.” More on the spending piece later. Suffice to say, if the supply-siders think YOU will work harder because your taxes go down, then they will want to give YOU a tax cut. However, the relevant data suggests that labor is a lot less sensitive to taxes than capital is. YOU will work 40 hours no matter. Therefore YOU should not get a tax cut. It doesn’t distort the economy much at all to tax you, because YOU will always work 40 hours a week. This is especially true if YOU are a standard white heterodox CIS-thing (or whatever the term is). This is less true for women, who are more sensitive to tax rates, as they are not traditional bread-winners in many families.
This makes “cutting taxes on the middle class” less attractive to a supply-sider viewpoint. Sure, reduce their taxes on their capital holdings, but if anything, they should pay more in direct taxes, because we should be taxing their labor, AND we should be taxing their consumption (which we currently do not, at a federal level).
The best tax rate on Warren Buffet-types may very well be zero. I have a very strong prior that Warren Buffet should definitely be paying less tax than his secretary, and it doesn’t matter if Forbes quotes Warren Buffet saying that it’s wrong.
-“Spending” does not create growth and boosting consumer spending in the hopes of generating growth is Zimbabwe-esque wishful thinking. There are theoretical exceptions in recessionary gaps, but you can’t just spend your way into pushing out the production frontier. This, again, makes middle class tax cuts in the way people think of them less attractive.
-The economy doesn’t need to turbo-charge for economic growth to be more attractive than current redistribution. It depends on your discount rate. Economic growth continues through the magic of compounding interest just as much as a regular investment, meaning your economy 100 years from now can be substantially larger. A compounded growth of .02% per year means 2.02% in 100 years. Maybe you don’t think that’s important, but if our ancestors in 1917 made a social choice that deferred some of THEIR well-being to benefit us, that’d be almost $400 billion today, vastly larger than this tax cut. A policy that can boost growth by half a percent leads to a 65% larger economy in 100 years.
So what discount rate should you use? We can go back in time and rob Thomas Edison to give some money to some aging civil war widows. They won’t be alive to benefit from any of Edison’s inventions, and we can help them immediately, so…..?
-You cannot make a corporate tax cut revenue neutral and there is no convincing reason for it do so. The “tax loopholes” for corporations are complicated beasts that involve things like foreign earnings and accelerated depreciation that are quite sticky to address, and they are smaller than the tax loopholes for things like untaxed health benefits and mortgage interest deductions. Taxes have to be made up on the individual side.
-The purpose of a tax system is not to be progressive. That’s what your spending is for. Taxes should raise revenue in the least distortionary manner possible. Again, if that means Warren Buffet pays no tax, it means Warren Buffet pays no tax.
For middle-class people I can buy for the moment that tax rates don’t matter, but at the bottom end of the scale I think it matters a lot. There’s a lot of people who are only mildly attached to employment and payroll and income taxes further discourage it, or encourage working illegally under the table. In theory EITC should stop this but it’s not as important if you don’t have kids.
Do you think all of those top economists saying this won’t help the economy much are wrong, or are you saying something different from what they’re saying?
The economists said GDP would not be “substantially higher.” Substantially is not defined, leaving each person to decide for themselves what that means. US GDP is ~19 trillion and is typically measured in a percentage basis. This tax plan, as you say, is ~100B or so. Let’s say that 100B gives us a 2x return via stimulating the economy. That’d be pretty good, right?
But that would also only increase GDP by $200B, which would increase GDP by about 1%. Is that “substantial”? Maybe not. But that doesn’t mean we should shrug off something that gives us a 2x return to GDP as “not improving the economy”
Furthermore that 1% of GDP increase might come over 10 years.
To provide a different example, let’s say I see a $20 bill lying on the ground. Should I expend the effort to bend over and pick it up?
Well, if my yearly income is $50,000 a year, this $20 will increase my yearly income by 0.04%. It would be fair to say that picking up the bill will not significantly improve my financial position.
Does it therefore immediately follow that I shouldn’t bother to pick it up?
You should stand on the $20 and wait until after this bill is passed to pick it up, since then you will only have to pay a 20% on your gain.
I think one of the problems here is that Republicans (I’ll include Trump in this group for the purposes of this specific argument) hold some generally unpopular views on the issue of taxation, such that to get what they want, they have to spin and signal it a certain way that obfuscates from the real motivations behind their plans.
Allow me to serve as the steelman for the hardcore libertarian position based on my own personal views:
1. Taxation is theft. Period. It is always unjust to take someone’s property without their consent, even if you plan on doing “really good things” with it.
2. Most things the government spends money on aren’t actually “really good.” A whole lot of them are downright evil. Think drone bombings, most of our foreign affairs, the drug war, a whole lot of economic regulation, even retirement plans that incentivize poor planning and frivolous spending during one’s productive years. Most non-evil things the government does (schools, roads, whatever) are primarily funded at the state and local level anyways.
3. Progressive taxation is immoral AND provides perverse incentives. We should not punish our most productive. If we have to have taxation, it should be a shared burden. The income tax is always immoral, but having 90% of it fall on 10% of the population is especially immoral, and punishes achievement in general.
Now, theses are unpopular ideas. You won’t get elected to much of anything on that platform. But what you CAN do is get elected on a platform of “I care a lot about decreasing taxes on the poor and middle class!” and talk about how your tax plan totally is designed to do that through a series of five steps when the reality is that it really helps address points 1-3 above.
So to Scott’s point of “This bill doesn’t actually help the poor and middle class,” my honest answer would be “Who cares?” But Republicans can’t say that because it’s unpopular. But if we’re debating whether this bill is overall a good thing or not, we have to address points 1-3. Just because it won’t do what they say it’s going to do doesn’t make it “bad.”
3, I would suggest, is held by almost no one. I can think of very people, even hard libertarians, who would have a problem with a night watchman state funded by very progressive taxes.
Really? I would have thought that would be the least controversial point. Plenty of fairly mainstream Republicans have expressed nominal support for a “flat fax” or a “fair tax” or whatever you want to call it.
Like, even if you take the “who would build the roads” objection to libetarianism at face value, demanding that taxes be progressive seems like straight up class warfare with no real basis in economic theory.
I’ll vouch for this. About the only thing that unites the conservative movement (across nations even) is a vague hatred for the progressive income tax and an intese desire to create a flat (or atleast flatter) income tax. Alberta actually did it for a while and i think a habdful of US states have aswell.
Go to any conservative event and the speaker who denouces the progressive income tax is cheered and his donations shoot up 50%.
I honestly though it was common knowledge that around half the english speaking world felt this way
Change that from progressive taxes to lower taxes and I’d agree. But no, conservatives everywhere are not unified by a collective desire to stick it to poor people just for fun. They want lower taxes and since the rich pay a disproportionate share of taxes, that means they’ll benefit the most from cuts.
I’ve generally understood the argument for a flat marginal rate to be the product of two basic concepts:
1. Deadweight losses are proportional to the square of the marginal tax rate.
2. For a given amount of revenue raised, any deviation from a constant marginal rate will increase the maximum marginal rate
Ergo, a flat tax minimizes total deadweight loss for a given amount of revenue raised.
A regressive tax produces even less deadweight loss.
@DavidFriedman, wouldn’t the higher-than-flat marginal rates at lower income levels increase deadweight loss (relative to the flat case) more than the lower-than-flat marginal rates at higher levels decrease it?
ETA: Or does the difference in elasticity of income across levels offset it?
You are correct that looking at people with different incomes complicates it. The simple case I was thinking of is a society where everyone has the same income. The disincentive is from the marginal rate, and the marginal rate is the rate on your last dollar.
Suppose everyone makes $50,000 and government wants to collect $10,000. A flat rate means that of the last dollar you keep $.80. A regressive tax of 30% on the first $25,000 and 10% on the rest lets you keep $.90.
With varying incomes, it’s still the case that, for each individual, his disincentive is less with a regressive tax than with a flat tax that collects the same amount of money from him. But with varying incomes and alternative systems that collect the same amount of money in total the two systems don’t collect the same from every individual. If we assume that for some reason elasticity is much higher for lower income taxpayers, you can probably get a situation where the deadweight loss is less under the flat tax. But there is no reason to expect that to be true in general.
Well I don’t think I am particularly radical, and I am in favor of a flat tax. I think we should have a welfare system that gives money to the poor, but I think that using the tax system to do this is inefficient and ineffective. The welfare system should pay the poor the amount society believes should be so re-distributed. A progressive tax system only makes it more difficult to calibrate this result.
A flat tax limits the total amount you can collect from billionaires to the total amount that you can morally or economically justify taking from the poor. (E.g., if you want to take 5% of a $20M income, you have to justify taking 5% of an $8k poverty income.)
To solve this, flat tax advocates will introduce an exemption (e.g., no taxes on the first $50k) but then your tax isn’t actually flat, it has two brackets.
There is no legitimate justification for just two brackets that doesn’t equally apply to adding another bracket, and another, and another (for exactly the same mathematical reasons within each bracket that applied to the flat system) until it’s continuous.
In terms of marginal utility, we are not.
In terms of marginal utility, it is.
How does one measure marginal utility, exactly?
No no no no no! Taking your premise, the resultant economic growth would create compound gains that would provide benefits well into the future. Meanwhile giving the money to folks that consume it immediately produces a linear type gain.
Now, I don’t take your premise at all, so I don’t actually believe that.
Edit; Beta Guy beat me to the punch.
Something which gets handwaved away a lot, which should at least be mentioned, is that these ideas–cut taxes incident on the very wealthy and raise taxes on the middle class–are also horribly, horribly unpopular. The President ran on a platform of cutting taxes for the middle class, even explicitly promising that he, and other wealthy people, wouldn’t do any better. (Also, he’d balance the budget, maintain Social Security and Medicare, and grow the military while cutting those taxes, which is literally, numerically, impossible.)
The current bill is so cartoonishly at odds with those campaign promises that describing it accurately seems like a ridiculous partisan attack. I certainly have no idea how to fix that, but we should, I think, take a moment and really reflect on how Trumpism’s one great populist achievement so far is a giveaway to hedge fund managers and heirs at the expense of the working class.
This is why policy matters. Everyone who voted for feels over reals last year is getting exactly what they voted for, good and hard. I’m just sad that the rest of us have to get it along with them.
It seems like some very obvious, very basic assumptions are being taken for granted.
The real question at play in tax cuts is this: “Should we trust individuals, corporations, or governments to best handle the resources in question.” The implicit assumption that giving money directly to the poor and middle class will be better only makes sense if you assume that the poor and middle class is going to be able to effectively use the resource windfall to the net benefit of the economy.
The reality is that they generally can’t. As much as I like keeping as much of my money as possible, and as much as I recognize the individual right to be a dumbass and fail, the number of people I’ve known that have never nor will ever rise above their station from a sheer lack of potential is too many to count.
If you give poor people a lot of money, the vast majority of them are going to stay poor by applying their behaviors to a slightly larger pool of resources and that isn’t necessarily to the net benefit of long-term economic growth and innovation. Poor communities form non-income-based resource-and-labour coops that can’t easily be quantified. Basic subsistence spending doesn’t grow economies and money isn’t an end-state solution; it doesn’t feel like this conversation is touching on any of that at all.
Assuming a corporation can handle money better than an individual is – I feel – NOT an unreasonable bet because if corporations are bad at handling money they cease to be entities. And those same corporations are the places that the people who underwrite our debt – which we operate entirely dependent upon – are necessary to continue to attract the kind of investment and trust that makes our entire country and way of life possible.
Individuals who are bad at handling money are still entities in a situation that needs to be addressed, but at the end of the day, those individuals’ problems will be infinitely worse if the government doesn’t have a world-dominating economy to rely upon.
Individual citizens are the blood cells, corporations are the beating heart, and the government-brain can’t function unless the heart keeps beating. If you wonder why the government seems to care more about corporations than people, look no further.
I think we may be operating with different goals here.
My argument doesn’t hinge on poor people being better investors or better able to increase the economy than corporations.
It hinges on helping poor people have more money being more utilitarian-efficient than helping the economy grow, unless some big fraction of the gains from a growing economy go to the poor, which I’m not seeing.
(all those economists saying it won’t really grow the economy that much seem pretty important too, but even if they were wrong I would still be skeptical)
I think I’m probably just phrasing it badly; I appreciate your reply and patience!
My counterargument is that helping poor people have more money via tax cuts being more utilitarian-efficient implies that taxes were a significant interference to them not having that much money/having good lives, which isn’t the case. And because taxes aren’t a significant interference, any utilitarian “gains” would be negligible when the same final value of cuts is diluted across the much larger number of individuals. And if both of those statements are correct and accurate, then it’s irrelevant if the taxes don’t directly benefit individuals as long as general quality of life improves elsewhere.
So, while I agree its a not-good tax plan because I agree with the assessment that it probably won’t help grow the economy that much, I disagree that putting those tax cuts elsewhere would automatically have greater benefit and should be the primary reason we disagree with it.
To be consistent you have to consider BOTH. If you take 100 billion dollars and give it to the poor for their utility, you still have to consider what happens economically because once that $100 billion is spent you are going to want to give another $100 billion. If they just spend it on utility maximizing things and not economic growth inducing things their utility function is mostly going to revert to what it was at your starting point. Now you are looking around for another $100 billion to give them, but the economy is X billion poorer than it would have been had that first load of money not been distributed in the way that it was.
If you do this to many times then growth goes negative and you start increasing the number of the poor, to which you will respond by looking for more than $100 billion to spread among them, and eventually your entire economy is bread and circuses and some Germans wander in and burn the place down.
How much would a few hundred urbmon’s outfitted with a hundred million big screen TVs, PC gaming rigs, and daily rations of Soylent, Xanax, and pot brownies cost, anyway?
There seems to be a quiet assumption here, that $100 billion suddenly showing up on dividend payments or balance sheets will go into the economy to induce new investment, but $100 billion suddenly showing up in poor peoples’ pockets will be stashed under their mattresses, rather than going into the economy by being, for example, spent on goods and services from firms which will then have more money, and you’re in the same situation as the first one, except poor people have more goods and services now.
If money poured into one end of the system finds its level, why wouldn’t money poured into the other end of the system?
Spending doesn’t cause real economic growth, only investment does or even can. Even Keynesians who claim AD shortages acknowledge that spending to drive economic growth only works during a recession (at least they did before 2008, there seems to be some confusion as to when the spending should stop nowadays). As so many have pointed out money is not invested, when you buy stock your money goes to a person selling stock. If that person is raising money to fund their business they do not build their machines out of dollar bills and quarters, but they take that money and buy machines. Those that sold the machines will take that money and buy more metal to build more machines and on and on. Growth only comes when that metal, and labor and knowledge comes together to produce something new that wasn’t being produced before, that consumers value.
Thank you for trying to explain, but I don’t quite see how that answers my question–if businesses will invest money that they receive, then how is it so infinitely better to pour that money directly into those businesses than into the people buying things from those businesses?
I would submit that the real goal is not giving the poor more money, but increasing the quality of life or their consumption.
I am not terribly convinced that giving the poor cash will increase their consumption more. After all, there would initially just be an increase in prices that would siphon off the cash and in the long haul I pretty sure that most poor people are not going to pool their money to make better phones even if they would all prefer the R&D of smart phones or better video games over an equivalent amount of goods.
Certainly the revealed preferences of the poor suggest some particularly difficult problems with coordination, time preference, and the like.
With things like medicine, AI, and mass 3D printing I suspect that investment in the general economy may generate a sustained flow of extremely useful innovations for the poor that come with gargantuan upfront costs and trivial continuing costs.
Of course looking internationally, growing the economy and fostering innovation actually helps the real poor. The poor in America, after all, are pretty rich on global standards. The federal poverty level is about the average wage in Egypt. Medicaid eligibility gets you to around the average wage in Thailand or Montenegro. I suspect that more benefit will accrue to the bottom billion if we let companies develop more cell phone technology or pharmaceuticals that can be pirated than if we gift to Americans still pretty high up the global income ladder.
I have heard it said that if we truly taxed the rich to pay the poor, world wide, even Americans living at the federal poverty level would be assessed taxes and not receive benefits. Economic growth crosses borders much more easily than welfare.
First of all, the IGM Forum asked the nation’s top economists whether the current tax bill would substantially raise GDP. 51% said it wouldn’t, 36% said they weren’t sure, and only 2% (= 1 economist) thought it probably would.
So how many economists thought it would reduce GDP?
It sounds like most of them thought it would increase GDP, but perhaps not by an unknown amount called “substantial”.
I’m sure it will increase GDP; the question is whether it will do so enough to make up for the opportunity cost of $100 billion. I feel like $100 billion should be able to buy a lot of “substantial” things.
I’m inclined to agree that this tax bill is a bad idea, though I don’t know many details. But I disagree strongly with the arguments in this post. And in particular I think it’s relatively clear that abolishing the corporate income tax (and replacing it with an equally progressive income tax) would make everyone better off.
– You say “The only argument I can think of [for eliminating the corporate income tax] is that corporations are good because they make investments are hire employees and stimulate the economy.” Have you considered the *normal argument* for cutting corporate taxes, namely that they introduce significant distortions and have almost no advantages relative to an income tax (other than sounding better because people don’t like corporations)? It has all of the distortions of the income tax, + a significant distortion on corporate activities, + corporations are 100% mobile and so in the long run will just leave the high tax jurisdictions, + it can’t be very progressive since it’s tied to the corporation rather than the investor. I think the only argument in its favor is “If we want to redistribute from the rich to the poor, we need to seize every opportunity to do so, because this is a war of all against all where the other side will seize every opportunity to do the opposite. Efficiency is unimportant relative to improving the distributional outcome.” That may be a good argument against this particular bill, but I think it’s a bad argument against reducing the corporate tax rate, and in general it’s the kind of argument that predictably leads to bad policy.
– Restating: Do you grant that there is any room to evaluate policies based on their efficiency? That a proposal which costs rich people $1.50 and raises $1 is better than one which costs rich people $2 and raises $1? Can you at least see how this comparison might even lead someone to call the second policy “bad,” and to think that it should be avoided? You seem to say that you can’t even sympathize with someone who takes that perspective, which seems out of character.
– If the corporate tax were really terrible, it might be several times more costly than an income tax that raises the same revenue. Perhaps it has a deadweight loss of $1 per dollar raised, instead of $0.50 via an income tax. But even in that world, a $100B drop in corporate taxes should raise GDP by at most 0.5 * $100B, or 0.3%. So a corporate tax cut isn’t necessarily going to “substantially” raise GDP even if it’s a great idea. Even if the tax cut (implausibly) raised GDP enough to pay for itself, say by increasing GDP growth from 3% to 3.2% over the next ten years, it still probably wouldn’t qualify as a “substantial” change. This is really not the right bar to use when evaluating this kind of proposal.
– You seem to be substantially overestimating the redistributive effects of this tax. A substantial part of the cut flows almost directly to employees and consumers. It’s definitely still regressive, but it’s several times smaller than a $100B transfer from poor to rich.
– You say “I guess expanding the economy can give us cool technology, but would like rather less cool technology for a while, actually.” I agree that faster progress (of any kind) isn’t particularly good for a long-run focused utilitarian. That said, technological progress seems responsible for the current high standard of living that humans enjoy, this is not some incidental side effect that only deserves a parenthetical. Your dismissal seems to involve a weird double standard. You are evaluating the distributional impacts of the tax by how much they effect welfare without concern for the long-run utilitarian evaluation (on a long-run utilitarian perspective the distributional effect is probably positive). I think that’s totally reasonable, we are debating whether normal people should like the tax or not, and you want to participate in political discourse despite your weird views that cause you to care about totally different stuff. But if you instead want to argue from the impacts of superintelligence, it cuts both ways: if you think superintelligence is likely to be developed soon and dominates other considerations, then the direct welfare impact from the redistribution is small compared to the impact on AI risk. You are jumping back and forth between your real beliefs and some kind of “consensus view of what is important,” in an apparently arbitrary way that justifies your conclusion.
– You say “Forbes notes that A Corporate Tax Cut Won’t Boost Economic Growth, because they went around and asked a lot of CEOs whether they were going to invest the tax cut in cool economic-growth boosting stuff, and the CEOs mostly said no, they would probably just increase shareholder dividends.” If you give money back to shareholders, that money will then typically get reinvested in stock, which in turn makes it easier to raise money for new investments. Buybacks followed by higher stock prices followed by increased investment is what you expect to see in the world where this policy is a good idea, the markets work relatively efficiently, and corporate governance is good. The observation that money will flow to investors isn’t really relevant as an argument against the policy. (In most cases the dividends/buybacks will be automatically reinvested, it’s not even a possibly-controversial argument about how investors will respond to incentives.) Forbes may not be Marxist, but that doesn’t mean their authors have a good grasp of even the uncontroversial parts of economics.
“Restating: Do you grant that there is any room to evaluate policies based on their efficiency? That a proposal which costs rich people $1.50 and raises $1 is better than one which costs rich people $2 and raises $1? Can you at least see how this comparison might even lead someone to call the second policy “bad,” and to think that it should be avoided? You seem to say that you can’t even sympathize with someone who takes that perspective, which seems out of character.”
Yes, I agree raising $1 efficiently from rich people is better than raising $1 inefficiently from rich people. I would have no problem at all with this bill if it replaced the tax with some equally progressive but more efficient tax that made the same amount of money.
Maybe a metaphor for where I’m coming from: suppose we decided that since having to drive to your accountant’s office to do taxes is deadweight loss, no rich person ever has to pay taxes again. Would you agree that even though deadweight loss is bad, this would be a really bad policy unless it was replaced by some other tax which had less deadweight loss?
Or maybe another way I’m looking at this is: the government has a choice of what problems to solve / inefficiencies to eliminate / positive interventions to make, given the resources available. Right now they’re choosing to use $100 billion to solve this deadweight loss problem. I’m not only unsure that’s the best use of $100 billion, I’m not even sure it’s better than the (probably crappy) thing that the government would actually do with the $100 billion if this wasn’t an option. Granted this would pay for itself if it were linked to a more efficient tax, but it’s not, so it doesn’t.
“You are jumping back and forth between your real beliefs and some kind of ‘consensus view of what is important,’ in an apparently arbitrary way that justifies your conclusion.”
I haven’t actually heard the “growing the economy is good from a purely technophilic perspective” argument, but it seems consistent and like something someone might say to rebut worries about whether the economy helps people, so I wanted to rebut by mentioning I am not a pure technophile.
“If you give money back to shareholders, that money will then typically get reinvested in stock”
I think my main argument is: eliminating inefficient taxation and encouraging reinvestment and so on can only bottom out as good if they grow the economy (or possibly grow tax revenue). We have all of the top economists saying probably that won’t happen very much. Should I not trust them?
If you think that redistribution should definitely be higher and is by far the dominant considerations, then it’s not super surprising you don’t like a tax cut. I think that’s the whole story, and I mostly object to adding other frills.
There is not agreement that there should be more redistribution; about ~1/2 of the political influence is pushing for more redistribution and about ~1/2 is pushing for less. As a utilitarian, it is *always* going to be obvious to you that there should be more redistribution (unless you consider the long term consequences, in which case everything is really complicated). You are always going to be in the position of being frustrated by the 1/2 of the proposals whose redistributive effect goes in the wrong direction. As it turns out, I think the current republican legislature is doing a bad job, but I don’t think your annoyance here is particularly related to that.
> We have all of the top economists saying probably that won’t happen very much. Should I not trust them?
The size of the tax cut is about $100B. You should expect the impact to be on that scale, and it would be a really fantastic deal if it increased GDP by 1%. I expect the economists are correctly objecting to the absurdly optimistic narratives that sometimes circulate and that I expect many laypeople believe. (Is making GDP 1% bigger substantial, when growth per year is 3%?)
Also note: of the $100B tax cut, I’d expect that >$50B goes to consumers or employees (and I’d expect that most economists would agree with that). So the other government spending is only going to be better if it’s at least 50% as good as giving random people cash. I think that’s probably the case, but I don’t think it’s obvious.
And finally: one obvious way for the budget to balance is for the government to raise taxes later. If they did this by raising income taxes across the board (or even better raising taxes on high earners, as seems likely under the next democratic administration), then I expect the net effect would be progressive, since the corporate tax is probably more regressive than the income tax system more generally—you report an 85% estimate for rich people, and it seems unlikely that the incidence of the corporate income tax is more skewed than that.
I’m completely comfortable with the idea that it’s dumb to tax corporate income twice, once as corporate income tax and once as an individual income tax on dividends and capital gains. But the current bill takes the system from half-assed, where corporate taxes are high and dividend/cap gain taxes are kinda low, to one that’s no-assed, where corporate taxes are kinda low and and dividend/cap gain taxes are kinda low.
I’d be perfectly happy with corporate taxes being zero, dividends taxed as ordinary income, and capital gains taxes being not quite as low as they are now.
Note that taxing dividends as ordinary income while keeping capital gains as a less-lucrative preference item should encourage stockholders to want corporate growth (aka investment) over immediate cash. It’s not perfect, because corporations can still buy back stock, but at least it’s forcing investors to value equity over cash flow.
I’m a bit more torn about how to tax pass-through entities. In general, I’d favor a big whopping deduction on the first $250ish thousand (maybe up to $500K) to encourage small business formation, after which it’s all just ordinary income. In this kind of a system, you really could flatten marginal rates a bit, without driving the deficit into the stratosphere.
It doesn’t bother me that the bulk of an across-the-board tax cut goes to wealthy households, simply because wealthy households pay most of the taxes. But it bothers me when the looting of public revenues is so nakedly gleeful and transparent. That applies to both parties, but the GOP now seems to be far out in front of the Dems in weaponizing this.
Nope, you’re still atrociously wrong. I mean you might be right that the tax bill is awful, but your arguments don’t support that conclusion.
You completely ignore tax incidence, to the point where you claim it’s *obvious*, that you’d have to be a *moron* not to know who the winners and losers are of a tax bill, without even thinking about the details of that bill. Sorry, but no. It’s not at all clear to me that I’m better off having my income tax cut or invisible taxes levied on my 401k and everything I buy and everywhere I work cut. It’s. Not. Obvious. You have to look at the details, which you haven’t done.
It’s not obvious what how big the deadweight losses to taxation are, but it is obvious they exist. And it’s obvious higher marginal rates make them worse.
Your arguments make almost no reference to what the status quo actually is, and how it’s being modified. They’re *generic*. You could say the same thing about lowering corporate taxes from 40% to 30% that you’re saying about lowering them from 30% to 20%. It proves too much.
Your arguments are generic pro-tax, pro-redistribution cliches. The same arguments could be used for raising taxes in Venezuela as against lowering them in America. They ignore any attempt at cost benefit analysis and claim that the benefits are obvious and the costs are nonexistent and only a moron wouldn’t see it that way.
“Spending the tax money on social welfare programs would help give poor and middle-class people more money. Expanding the EITC would give poor and middle-class people more money. Cutting personal income taxes in lower brackets would give poor and middle-class people more money. This tax bill doesn’t do any of those things, and it costs the money that would make doing any of those things easier.”
“Both plans double the standard deduction for everyone. A single filer’s deduction increases from $6,350 to $12,000.
The deduction for Married and Joint Filers increases from $12,700 to $24,000. As a result, 94 percent of taxpayers will take the standard deduction. The National Association of Home Builders and the National Association of Realtors oppose this. As more taxpayers take a standard deduction, fewer would take advantage of the mortgage interest deduction. That could lower housing prices. But this could be a good time to do that. Many people are concerned that the real estate market is in a bubble that could lead to another collapse.
I’m not sure what economic class you’re in or what you consider the middle class to be, Scott. But people who are not rich enough to own a home or have a whole lot of calculated charitable contributions, in general, take the standard deduction. Doubling the standard deduction is a MASSIVE subsidy to anyone who was already taking it.
Your last post mentioned something about a “price of ending homelessness” too. Reducing housing prices is one of those things that’s really really good for people who don’t own homes.
Caveat: This only helps lower income people if they have 1 or fewer children. It hurts the Quiverfull variety of lower income people, because of the loss of child tax credit.
Economists are notoriously poor at predicting future economic performance (in general, in response to any specific policy, better than random chance – choose your qualifier, it doesn’t really matter). This is true, both of those who support the GOP tax plan, and of those who don’t support it. Therefore, the merits of the tax plan should not be debated based on whether we think we can predict how it will impact economic growth as a whole (we can’t) but on whether it promotes the kinds of things we want at costs we’re willing to accept.
Although I don’t hold to these ideals, I think it’s important to at least consider the GOP plan based on their vision of how they think it will work, which I don’t think has been adequately addressed in Scott’s post. The argument goes something like this: “Corporations aren’t people. People are people, so if you’re concerned about tax cuts for the wealthy, you should be concerned about how much the wealthy pay in taxes, or about how corporations provide cash/benefits to wealthy people, not about how much money any corporation holds or pays in taxes. Therefore, we should ideally lower taxes on corporations to zero, since they are at best indirect taxes and promote more harm than good. This isn’t a ‘tax cut for the rich’, since even rich corporations aren’t really people – despite what the law may try to claim.”
I really don’t have a problem with political groups engaging in projects that I don’t agree with or think will ultimately fail to deliver on their stated claims. The problem I have is that they tend to be entirely unaccountable for those claims – and by design. If the GOP wants to pass a tax bill on the theory that cutting the corporate tax rate will boost the US economy, I don’t care so long as they have prior stated objectives, claims, a definition of failure, and ideally a controlled comparator and/or a sunset condition if performance conditions aren’t met. In other words, let’s not blow a $100 billion dollars and not take the time to measure whether we got what we paid for, or at least whether the theory that spawned it is correct.
If you’re going to implement what is essentially an experiment on a nation of 300+ million people, you should at least have SOME way to determine whether that experiment was a success. But politicians never do. Examples are legion. Take TARP, the stimulus, etc. Did they help or hurt? Your answer to this question could be almost entirely predicted after the fact by what you thought about the measures before they were implemented. I’m not an economist, but I’ve listened to actively-publishing, well-known economists debate the data with essentially no agreement about the direction (let-alone magnitude) of the effects of these programs. As far as future decision-making is concerned, I call that a major failure.
Or take the ACA. If you asked me asked while the bill was being sold what the law was supposed to produce, I’d probably have responded with something like, ‘bend the cost curve down’. But then later it was to ‘reduce the number of uninsured’. Now, both objectives were stated during the run-up to passing the ACA, but so were a number of other objectives. And this is the pattern: promise 100 things people will never remember, then claim credit for the ‘successes’ (that will randomly happen if you include that many outputs) and claim special circumstances/obstruction for your failures. Or, since there are no controls in place, cherry-pick a counterfactual and claim success regardless of the outcome.
I expect the same to come from the GOP tax plan. People who hate it now will continue to hate it. People who stand by it (for party/ideological reasons or whatever) will continue to stand by it in 5 years. Nobody will be convinced by the data, because everyone will be able to cherry-pick what they want to apply as ‘the important part’. If the only thing the GOP tax bill produced were a certain knowledge that the principles applied are wrong, we would at least have something to show for it. Our children would have new knowledge to apply during future political decision-making. As it stands, whether the bill succeeds or fails, we will still debate whether it was a net benefit to the American people 100 years from now. And that is itself a failure.
“Economists are notoriously poor at predicting future economic performance (in general, in response to any specific policy, better than random chance – choose your qualifier, it doesn’t really matter).”
Great — this is a productive avenue of discussion. Presumably, then, no one is very good at predicting intervention outcomes here. Can we agree on this? If not, can you point me to some folks with a good record?
If we agree on this, then it seems we either:
(a) Get better at forecasting what our interventions do, or
(b) Do not argue about tax policy based on their effects on metrics.
Presumably, the folks in Congress who passed their bill had no particular special insight into what they were doing either, it was just that incentives pushed them and they obeyed.
Similarly, presumably Scott just wants folks to be happy, and a good way to make folks happier is to get them more money.
If you say that giving folks more money is going to result in bad outcomes, then we should have a mutually beneficial conversation about how you are able to see this in advance, in a way that professionals (who I assure you are pretty smart..) missed.
This is a kind of “empiricist despair,” but maybe this is a reasonable way to argue policy… or at least the best we have if above is true.
Let’s agree that economists do no better than random chance at predicting outcomes. If we’re being honest with ourselves, we should agree that saying something like, “all these economists’ projections are saying this is a bad thing” is not an argument against doing that thing, since we just acknowledged economists can’t tell the future in any but the most specific cases (such as on the topic of price controls).
As I said above, of course this also holds true with someone who has an economic hypothesis that includes a future prediction. “If I do [X], it will produce [Y].” This includes the GOP tax plan itself, not just opposition to it. This uncertainty should not make us unwilling to act based on any specific economic hypothesis. But it should make us wary. Not of what other economists-who-can’t-predict-the-future might say – we already established they don’t know what will happen. We should be wary that in the scientific process the easiest part is generating a hypothesis, while the hard part is testing the hypothesis – especially since most hypotheses tend to be wrong. All I’m saying is that if we’re planning to spend $100 billion testing a hypothesis we should do more than the shoddy, disorganized, mostly non-existent efforts at measurement previous laws have done.
If we don’t learn anything useful from passing the law, then win or lose it is a failure in my book. There’s no “empiricist despair”, unless the despair is in the refusal of elected officials to take an approach that is amenable to empirical analysis. That’s the problem with this bill – and most others like it pushed by both parties over the years. Anyone who says, “this hypothesis is clearly wrong based on other people’s opinions that are not founded on actual data” is just blowing hot air, regardless of their expertise. Anyone who says, “we’re spending a fortune based on this hypothesis, and we don’t even know if it will work – nor will we know if it worked after the fact! – so it’s clearly a waste” is on solid ground. You might also argue, “I don’t find the hypothesis sufficiently compelling to spend $100 billion on”, which is essentially what the opposition party is saying.
The GOP seems to think it is sufficiently compelling to spend that much on – and what’s more – they seem to think it’s sufficiently obvious to not need to be tested. That’s false.
I don’t know what your intended goals of this post are. Regardless, I’d like to thank you for being willing to hash all of this out in front of the rest of us. It’s a wonderful contribution to the world and leads me to think differently about the world.
If you buy the Solow-Swan model, then the optimal savings rate is about 40%. The current non-residential investment rate is 21%. This implies to me that savings is literally half what it should be. Given that about 40% of corporate taxes are reinvested (compared to 5% for personal income), that seems relevant – no?
On top of that, the top 1% receive most of the dividends and they save about half their income, so losing $1 in revenue from corporate profits probably boosts investment by 70 cents.
Some of that even gets invested overseas where utility returns are higher.
If you blindly buy Solow-Swan, our saving is at the point where $1 saved generates more than $1 extra in long-term consumption, and about 60% of that should go to laborers – not capitalists.
I’m not saying cutting corporate taxes is obvious just that not cutting them isn’t obvious either.
Also, in response to the economists – this entire tax plan is 0.5% of GDP – of course its second-order effects won’t “substantially raise GDP”.
Yep, I made this point above.
I’d also suggest that Scott is making an unfair comparison… When comparing the “cost” of the tax cuts, he compares it mostly to other social programs that cost less, or a roughly similar amount, to show how large the cost is. But when evaluating the benefits, he demands a “substantial increase in GDP” which is a significantly higher amount than the tax cuts, to show how small the benefits are.
It would be more fair to compare the costs and benefits in a similar manner.
Even if it’s true that lower-middle class salaries in developed countries have grown little in recent decades, part of the reason seems to be outsourcing. The global upper-middle class (the developed countries’ lower-middle class) has stagnated, while the income of the globlal middle class has been growing, reducing global inequality. Part of the consumption increase of the developed countries (resulting from GDP increase) is going to developing countries. So if you care more about the global poor than the American “poor”, then American GDP growth matters, regardless of how the benefits are distributed between Americans.
Furthermore, if unskilled workers’ salaries in developed countries stagnate, that doesn’t mean that GDP growth is irrelevant to them. Wage stagnation may be a sum of outsourcing/automation (which reduce wages) and GDP growth (which increases wages). Perhaps without GDP growth, those wages would’ve fallen significantly, rather than stagnating. If tax cuts increase GDP growth without increasing outsourcing/automation, they are likely to increase wages.