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Tyler Cowen tells us in this Bloomberg piece that the Republicans are right to say that their plans for a big cut in the corporate tax will boost investment. (He is still opposed to the overall package.) I’ve had several people ask me about this one. I’ll give the usual economists’ answer: it depends.
If the argument is that other things equal, more cash in corporate coffers means more investment, I’m with Tyler. If we throw a huge pile of money at corporate America, at least some of it has to end up being invested, so Tyler is right on this point.
On the other hand should we expect the investment boom projected by the White House and Tax Foundation, where the capital stock will be 30 percent higher in ten years as a result of the tax cut? That one seems pretty nutty. (Tyler doesn’t endorse this view.) There are and have been large disparities in after-tax rates of return between countries. The argument for an investment boom depends on an equalization in after-tax rates of return across countries. (I know, we can wave our hands and explain that by risk premia, but that is just hand waving.) There is little reason to believe that a change in the corporate income tax rate will have a huge effect on investment, even if we can say the direction is to raise it.
It is also worth asking about the other things equal assumption. Suppose that the Fed sees higher projected deficits and decides it has to raise interest rates faster and further. It is entirely possible that these interest rate hikes more than offset any positive effect that the tax cuts have on investment, resulting in a net negative.
Another possibility is that the larger deficits embolden the deficit hawks who then take the hatchet to transfer programs like Social Security, Medicare, and food stamps. The vast majority of this money is spent quickly by the people who get it. The reduction in demand from cuts to these programs could lead to a fall in demand in the economy, thereby reducing the incentive for firms to invest.
We can also envision a story in which state governments are forced to reduce taxes, since their residents can no longer deduct state and local taxes from their federal income taxes. This could lead to a reduction in spending on infrastructure and education, which could also have a negative effect on private investment.
In addition, taxing tuition waivers for grad schools could drastically reduce the supply of new graduates in computer sciences, biotech, and other areas requiring highly skilled workers. This could also lead to less investment.
In all of these cases, the net effect of the Republican tax package could be to reduce investment, but Tyler is right that the immediate effect of a cut in corporate taxes should be to raise investment.
Tyler Cowen tells us in this Bloomberg piece that the Republicans are right to say that their plans for a big cut in the corporate tax will boost investment. (He is still opposed to the overall package.) I’ve had several people ask me about this one. I’ll give the usual economists’ answer: it depends.
If the argument is that other things equal, more cash in corporate coffers means more investment, I’m with Tyler. If we throw a huge pile of money at corporate America, at least some of it has to end up being invested, so Tyler is right on this point.
On the other hand should we expect the investment boom projected by the White House and Tax Foundation, where the capital stock will be 30 percent higher in ten years as a result of the tax cut? That one seems pretty nutty. (Tyler doesn’t endorse this view.) There are and have been large disparities in after-tax rates of return between countries. The argument for an investment boom depends on an equalization in after-tax rates of return across countries. (I know, we can wave our hands and explain that by risk premia, but that is just hand waving.) There is little reason to believe that a change in the corporate income tax rate will have a huge effect on investment, even if we can say the direction is to raise it.
It is also worth asking about the other things equal assumption. Suppose that the Fed sees higher projected deficits and decides it has to raise interest rates faster and further. It is entirely possible that these interest rate hikes more than offset any positive effect that the tax cuts have on investment, resulting in a net negative.
Another possibility is that the larger deficits embolden the deficit hawks who then take the hatchet to transfer programs like Social Security, Medicare, and food stamps. The vast majority of this money is spent quickly by the people who get it. The reduction in demand from cuts to these programs could lead to a fall in demand in the economy, thereby reducing the incentive for firms to invest.
We can also envision a story in which state governments are forced to reduce taxes, since their residents can no longer deduct state and local taxes from their federal income taxes. This could lead to a reduction in spending on infrastructure and education, which could also have a negative effect on private investment.
In addition, taxing tuition waivers for grad schools could drastically reduce the supply of new graduates in computer sciences, biotech, and other areas requiring highly skilled workers. This could also lead to less investment.
In all of these cases, the net effect of the Republican tax package could be to reduce investment, but Tyler is right that the immediate effect of a cut in corporate taxes should be to raise investment.
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I had a post that took issue with a WaPo Fact Checker saying that the Republican tax plan will not actually kick 13 million people off insurance. Rather, they will opt not to buy it if they are not required to. I had misunderstood the Congressional Budget Office’s analysis and thought it projected premiums would rise 10 percent a year as a result of this change. In fact, they project a cumulative increase of 10 percent.
I had a post that took issue with a WaPo Fact Checker saying that the Republican tax plan will not actually kick 13 million people off insurance. Rather, they will opt not to buy it if they are not required to. I had misunderstood the Congressional Budget Office’s analysis and thought it projected premiums would rise 10 percent a year as a result of this change. In fact, they project a cumulative increase of 10 percent.
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Everyone knows that Amazon founder Jeff Bezos is a genius. After all, he made himself one of the richest people in the world by avoiding the requirement that retailers collect state sales taxes. Yes, Amazon now collects these taxes, but the savings on tax collections in the years it didn’t collect taxes almost certainly exceed Amazon’s cumulative profits since it’s been in business.
While Amazon’s tax avoidance may have been legal, it was 100 percent brain-dead as public policy. In effect, state and local governments were directly subsidizing an Internet giant at the expense of their homegrown mom and pop retail stores. It is very difficult to imagine a world in which this policy makes sense.
Anyhow, the NYT apparently feels some need to carry water for Amazon, implying there is some ambiguity about state efforts to require Amazon to collect taxes for sales of its affiliates. It tells us that states are “thirsty” for unpaid sales taxes, as opposed to trying to correct an abuse of the law that benefits a huge company and one of the richest people in the world at the expense of their own retailers.
It is also very generous in presenting Amazon’s case, explaining that the company is concerned that it could be held liable for taxes that its affiliates fail to properly assess. This is called “too damn bad.” Amazon is making money off its affiliates sales. This means that it carries certain responsibilities for those sales, including that taxes are properly collected. In a market economy, if a company like Amazon can’t conduct its business competently, then it should go under and be replaced by businesses run by people who know what they are doing.
Everyone knows that Amazon founder Jeff Bezos is a genius. After all, he made himself one of the richest people in the world by avoiding the requirement that retailers collect state sales taxes. Yes, Amazon now collects these taxes, but the savings on tax collections in the years it didn’t collect taxes almost certainly exceed Amazon’s cumulative profits since it’s been in business.
While Amazon’s tax avoidance may have been legal, it was 100 percent brain-dead as public policy. In effect, state and local governments were directly subsidizing an Internet giant at the expense of their homegrown mom and pop retail stores. It is very difficult to imagine a world in which this policy makes sense.
Anyhow, the NYT apparently feels some need to carry water for Amazon, implying there is some ambiguity about state efforts to require Amazon to collect taxes for sales of its affiliates. It tells us that states are “thirsty” for unpaid sales taxes, as opposed to trying to correct an abuse of the law that benefits a huge company and one of the richest people in the world at the expense of their own retailers.
It is also very generous in presenting Amazon’s case, explaining that the company is concerned that it could be held liable for taxes that its affiliates fail to properly assess. This is called “too damn bad.” Amazon is making money off its affiliates sales. This means that it carries certain responsibilities for those sales, including that taxes are properly collected. In a market economy, if a company like Amazon can’t conduct its business competently, then it should go under and be replaced by businesses run by people who know what they are doing.
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Okay, that’s not quite what the article said. Instead it told readers:
“Republicans have long championed free trade, believing that by allowing markets to operate unhindered, nations can boost domestic industries, lift their wages and improve living standards.”
Wow, so Republicans are motivated by a concern over workers’ living standards. It’s good we have the NYT to tell us this because we certainly wouldn’t know about Republicans’ concern for workers based on their behavior. (Yes, Democrats are politicians too and it is reasonable to assume that politicians of both parties are first and foremost concerned about their re-election, which means appeasing powerful interest groups.)
The piece misrepresents many other issues, especially with its repeated use of the term “free trade.” What exactly about longer and stronger patent and copyright protection is “free trade?” It’s fine that the NYT likes these forms of protectionism and apparently approves of the massive upward redistribution that results from these market interventions, but it is a lie of Trumpian proportions to call them “free trade.”
Also our “free trade” deals have done almost nothing to free up trade in highly paid professional services, like those offered by doctors and dentists. As a result our doctors and dentists are paid roughly twice as much as their counterparts in other wealthy countries.
The piece also notes the rise of populism on the left and right and then incredibly tells readers:
“The fissures over trade are a product of a surge in populism on both the political right and left. …
“Growing anxieties about the unforeseen costs of globalization, the overhang of the financial crisis and the stagnation of the middle class have deeply damaged voters’ faith in the ability of free markets to deliver prosperity — and fractured the Republican Party in the process.”
The costs of globalization were hardly “unforeseen.” Many of us tried as hard as we could to warn of the costs of exposing large segments of the U.S. workforce to competition with much lower paid workers in the developing world. The more appropriate word here would be “ignored,” as in the people in positions of authority deliberately chose to ignore both evidence and the predictions of standard trade theory in pushing trade deals that had the predicted effect of redistributing income upward.
It is also misleading to refer to “free markets” in this context. Trade deals that protect the most highly paid workers, longer and stronger patent and copyright protection, and bailouts of the financial industry when it faces bankruptcy are not characteristics of a free market.
(Yes, all this is covered in my (free) book Rigged: How Globalization and the Rule of the Modern Economy Were Structured to Make the Rich Richer.)
Okay, that’s not quite what the article said. Instead it told readers:
“Republicans have long championed free trade, believing that by allowing markets to operate unhindered, nations can boost domestic industries, lift their wages and improve living standards.”
Wow, so Republicans are motivated by a concern over workers’ living standards. It’s good we have the NYT to tell us this because we certainly wouldn’t know about Republicans’ concern for workers based on their behavior. (Yes, Democrats are politicians too and it is reasonable to assume that politicians of both parties are first and foremost concerned about their re-election, which means appeasing powerful interest groups.)
The piece misrepresents many other issues, especially with its repeated use of the term “free trade.” What exactly about longer and stronger patent and copyright protection is “free trade?” It’s fine that the NYT likes these forms of protectionism and apparently approves of the massive upward redistribution that results from these market interventions, but it is a lie of Trumpian proportions to call them “free trade.”
Also our “free trade” deals have done almost nothing to free up trade in highly paid professional services, like those offered by doctors and dentists. As a result our doctors and dentists are paid roughly twice as much as their counterparts in other wealthy countries.
The piece also notes the rise of populism on the left and right and then incredibly tells readers:
“The fissures over trade are a product of a surge in populism on both the political right and left. …
“Growing anxieties about the unforeseen costs of globalization, the overhang of the financial crisis and the stagnation of the middle class have deeply damaged voters’ faith in the ability of free markets to deliver prosperity — and fractured the Republican Party in the process.”
The costs of globalization were hardly “unforeseen.” Many of us tried as hard as we could to warn of the costs of exposing large segments of the U.S. workforce to competition with much lower paid workers in the developing world. The more appropriate word here would be “ignored,” as in the people in positions of authority deliberately chose to ignore both evidence and the predictions of standard trade theory in pushing trade deals that had the predicted effect of redistributing income upward.
It is also misleading to refer to “free markets” in this context. Trade deals that protect the most highly paid workers, longer and stronger patent and copyright protection, and bailouts of the financial industry when it faces bankruptcy are not characteristics of a free market.
(Yes, all this is covered in my (free) book Rigged: How Globalization and the Rule of the Modern Economy Were Structured to Make the Rich Richer.)
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The Washington Post may have misled readers on the Trump administration’s claims about the impact of its proposed cut in the corporate income tax. It noted the claim that “that more than 70 percent of the corporate tax burden is passed on to U.S. workers.” In fact, it is assuming an amount of growth that would vastly exceed the size of the tax cut. If workers get their share of this growth, well over 100 percent of the tax cut would be passed on in higher wages.
That is how it gets the figure of a $4,000 average gain per household. That would come to approximately $560 billion a year, as compared to a tax cut that will average around $150 billion a year.
The Washington Post may have misled readers on the Trump administration’s claims about the impact of its proposed cut in the corporate income tax. It noted the claim that “that more than 70 percent of the corporate tax burden is passed on to U.S. workers.” In fact, it is assuming an amount of growth that would vastly exceed the size of the tax cut. If workers get their share of this growth, well over 100 percent of the tax cut would be passed on in higher wages.
That is how it gets the figure of a $4,000 average gain per household. That would come to approximately $560 billion a year, as compared to a tax cut that will average around $150 billion a year.
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University of Maryland economics professor Peter Morici misrepresented the Republican’s proposed change in the mortgage interest deduction in a debate with my friend Jared Bernstein on Morning Edition. Morici said that the proposed cap would only hit people paying more than $500,000 in interest on their mortgage. In fact, it would cap the amount of principal on which interest could be deducted at $500,000.
Morici is correct that this would hit very few people, since it means having an outstanding balance on a mortgage of more than $500,000. Furthermore, the cap only applies to the margin over $500,000. This means that someone with outstanding principal of $540,000 would still be able to deduct the interest on $500,000 or more than 90 percent of their interest payment.
It is only the interest on the last $40,000 that would no longer be deductible. If they are paying 4.0% interest on their mortgage this would mean they are missing a deduction of $1,600, which translates into a tax increase of $400 for someone in the 25 percent tax bracket.
Addendum
Budget Geek reminds me in a comment below that current mortgages are grandfathered so they would still be able to deduct interest on principal in excess of $500,000. (There is already a cap at $1 million.) It is only newly issued mortgages that would be subject to the $500k cap.
University of Maryland economics professor Peter Morici misrepresented the Republican’s proposed change in the mortgage interest deduction in a debate with my friend Jared Bernstein on Morning Edition. Morici said that the proposed cap would only hit people paying more than $500,000 in interest on their mortgage. In fact, it would cap the amount of principal on which interest could be deducted at $500,000.
Morici is correct that this would hit very few people, since it means having an outstanding balance on a mortgage of more than $500,000. Furthermore, the cap only applies to the margin over $500,000. This means that someone with outstanding principal of $540,000 would still be able to deduct the interest on $500,000 or more than 90 percent of their interest payment.
It is only the interest on the last $40,000 that would no longer be deductible. If they are paying 4.0% interest on their mortgage this would mean they are missing a deduction of $1,600, which translates into a tax increase of $400 for someone in the 25 percent tax bracket.
Addendum
Budget Geek reminds me in a comment below that current mortgages are grandfathered so they would still be able to deduct interest on principal in excess of $500,000. (There is already a cap at $1 million.) It is only newly issued mortgages that would be subject to the $500k cap.
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Yep, that seems to be the point of a major NYT article highlighting increased sales of Canadian lobsters in Europe. The point is that a trade deal between the European Union and Canada eliminated a 7 percent tariff on Canadian lobsters, which remains in place on U.S. lobsters.
To put in some of the perspective that is altogether lacking in this piece, the lobster industry in the United States is a bit under $500 million annually. Or, to put this in some context that might make sense to most NYT readers, it amounts to less than 0.003 percent of US GDP. In other words, the tariff is an issue that might make a difference to a small number of lobster trappers in Maine, but it matters pretty much not at all to the economy. (Actually, the rest of us will pay more for lobster if the tariff on U.S. lobster was eliminated, but the NYT forget to mention this fact.)
Anyhow, the proposed EU–U.S. trade deal, the Trans-Atlantic Trade and Investment Pact (TTIP), actually had very little to do with trade, since trade barriers in almost all areas are already relatively low. The deal was about putting in place a pro-business structure of regulation. Among other things, it would set up special tribunals for investors that would override domestic laws in both the EU and US. It was also protectionist in that it would lock in longer and stronger patent and copyright protections.
Major media outlets, like the NYT, have been strong proponents of this deal using both their news and editorial pages to push it. This piece is an example of a pro-TTIP article that wrongly implies the U.S. is suffering major economic damage as a result of not pursuing TTIP. That is not true.
Yep, that seems to be the point of a major NYT article highlighting increased sales of Canadian lobsters in Europe. The point is that a trade deal between the European Union and Canada eliminated a 7 percent tariff on Canadian lobsters, which remains in place on U.S. lobsters.
To put in some of the perspective that is altogether lacking in this piece, the lobster industry in the United States is a bit under $500 million annually. Or, to put this in some context that might make sense to most NYT readers, it amounts to less than 0.003 percent of US GDP. In other words, the tariff is an issue that might make a difference to a small number of lobster trappers in Maine, but it matters pretty much not at all to the economy. (Actually, the rest of us will pay more for lobster if the tariff on U.S. lobster was eliminated, but the NYT forget to mention this fact.)
Anyhow, the proposed EU–U.S. trade deal, the Trans-Atlantic Trade and Investment Pact (TTIP), actually had very little to do with trade, since trade barriers in almost all areas are already relatively low. The deal was about putting in place a pro-business structure of regulation. Among other things, it would set up special tribunals for investors that would override domestic laws in both the EU and US. It was also protectionist in that it would lock in longer and stronger patent and copyright protections.
Major media outlets, like the NYT, have been strong proponents of this deal using both their news and editorial pages to push it. This piece is an example of a pro-TTIP article that wrongly implies the U.S. is suffering major economic damage as a result of not pursuing TTIP. That is not true.
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