October 05, 2017
The New York Times took a big leap into a post-modern future with James Stewart’s column on tax reform. The piece proposes several changes to the tax code that would fill the gap in revenue created by the tax cuts the Republicans have put on the table.
Before laying out the proposals Stewart tells readers:
“The Republican budget resolution accepts a 10-year revenue shortfall of $1.5 trillion, on the theory that faster economic growth will make up the difference. That’s a debatable proposition, but for purposes of this discussion, let’s accept it.”
No, that really is not a debatable proposition, it is just something Republicans say to justify their tax break. They have no evidence that their tax cut can produce anything like this amount of additional revenue from faster growth.
This actually is a well studied topic. For example, see this analysis by Douglas Holtz-Eakin, a Republican economist who headed the Council of Economic Advisers under George W. Bush. It found that, at best, growth could temporarily make up 30 percent of the revenue lost from a tax cut. And this was under a set of assumptions that made the tax cut a net negative for growth over the long-term.
It is irresponsible (fake news?) to imply that something that is obviously not true becomes a “debatable proposition” just because someone in a position of power asserts it to be true.
Unfortunately, this is not the only item the piece gets badly wrong. It tells readers:
“Almost everyone agrees that corporate tax rates need to be cut because of global competition.”
Nope, a very large percent of policy types don’t see a need to reduce corporate tax rates because of global competition primarily because there is little evidence that companies shift production in response to tax rates. Furthermore, the effective tax rate in the United States is right around the OECD average due to the fact that loopholes bring the effective rate down far below the official rate. (There would be widespread agreement around the idea of lowering the tax rate and eliminating loopholes. The current structure allows people to get very rich in the tax avoidance industry.)
Stewart then throws in:
“Companies should not be able to stash earnings overseas tax-free.”
Actually, this plan explicitly allows companies to stash earnings overseas tax-free by eliminating the U.S. tax on the foreign earnings of U.S. companies. That is in contrast to current law which only allows them to defer the tax as long as the earnings are held (on paper) overseas. The Republican system will give companies huge incentives to have their earnings appear to come from tax havens.
He then adds:
“A lower rate for small businesses and pass-through entities, while more controversial, should promote economic growth.”
Actually, the plan doesn’t call for a lower tax rate for the vast majority of small businesses. It reduces the top rate on income from pass-through businesses to 25 percent. More than 90 percent of owners of pass-through businesses would not benefit from this lower rate since they are already paying tax at a 25 percent rate or less.
Only high-income individuals who can make their income appear to be coming from pass-through corporations will benefit from this proposal. This will be a huge boon to the tax avoidance industry as high-income earners set up shell companies to take advantage of the lower tax rate, but this waste is more likely to slow than speed growth.
The piece also gets the distribution of charitable giving badly wrong. It tells readers:
“The wealthy already account for a disproportionate share of charitable giving: the top 1 percent accounted for 37 percent of deductions for charitable contributions in 2014.”
The percentage of charitable deductions is not the same thing as the percentage of charitable giving. Most low- and middle-income people don’t itemize their deductions so they would not be taking the charitable deduction. For this reason, we can’t infer the percent of charitable giving coming from the top 1 percent (who get more than 20 percent of all income) based on the percent of the deductions for charitable giving.
Anyhow, apart from these mistakes, it’s an interesting piece.
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