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A White House Fairy Tale
About the Trump Tax Plan
Last week, the White House
Council of Economic Advisers put out a paper claiming that Donald
Trump’s tax plan would raise average household income by at least
four thousand dollars a year. Kevin Hassett, the chairman of the
Council, and Larry Summers, the former Treasury Secretary, are now
having a heated public argument about that claim. After Summers went
on television and called the figure “absurd,” Hassett accused him
of failing to understand the analysis and engaging in an ad-hominem
attack. In a piece for the Washington Post, on Tuesday, Summers shot
back, “I am proudly guilty of asserting that it is some combination
of dishonest, incompetent and absurd.“
In its paper, the White
House claimed that the figure of four thousand dollars was based on
“conservative estimates” derived from academic studies of the
link between corporate taxes and wages...So the White House is claiming that its tax
cuts could boost wages and incomes by more than ten per cent—a huge
and unprecedented increase.
In assessing this claim,
it is worth recalling what the Trump plan would actually do.
Among
other things,
it would cut the corporate tax rate from thirty-five
per cent to twenty per cent;
allow corporations to expense their
capital investments immediately;
set a new rate of twenty-five per
cent for so-called pass-through businesses, such as partnerships and
sole proprietorships;
allow multinational corporations to repatriate
trillions of dollars they are holding abroad at a low tax rate;
abolish the estate tax; abolish the Alternative Minimum Tax; and
reduce the number of personal-income tax brackets from seven to
three.
The provisions of the plan
are heavily slanted toward corporations and other types of
businesses. You might suspect, therefore, that the primary
beneficiaries will be members of the corporate class—the people who
occupy senior positions in corporations, invest in limited
partnerships and other tax-friendly vehicles, risk getting ensnared
by the Alternative Minimum Tax, and own most of the corporate wealth
in the country.
Such a suspicion would be well founded.
According to
figures compiled
by Ed Wolff, an economist at N.Y.U., the richest ten per cent
of U.S. households own more than eighty per cent of all stock-market
wealth. And, as the market has risen in anticipation of the Trump tax
plan passing, these wealthy households have already enjoyed a
substantial windfall.
... Faced with the widespread
(and correct) perception that this is a highly regressive tax
proposal, Hassett and his colleagues on the Council are clearly
trying to shift the terms of the debate.
... “Put simply, capital deepening, which brings
additional returns to the owners of capital, brings substantial
returns to workers as well,” the White House paper concluded.
... The real problem appears to be that
many firms can’t see enough profitable investment projects, or
sufficient demand for their products, to justify expanding capacity
and upgrading their equipment. Rather than taking this risk,
corporations are using their profits to buy back their own stock, a
tactic that also just happens to benefit senior executives who own a
lot of that stock. The Trump tax plan wouldn't do much to address
this problem.
What about the White
House’s claim that its figures are based on solid academic
research? As Summers said, it doesn’t stack up.
Indeed, Martin A.
Sullivan, an economist at the Tax Analysts blog, who used to work at
the Treasury Department and the congressional Joint Committee on
Taxation, points out that the White House has followed the formula
for “deceptive economics,” which he defined as follows:
“[1]
First state facts that casual observation and simple logic easily
support...
[2] Cite in your discussion studies, preferably
peer-reviewed work of respected academic economists, which support
your results...
[3] Do not mention that many of these studies are
subject to academic criticism...
[4] Do not mention that there are
many other studies that find contrary results...
[5] Do not
mention that there is any case enormous uncertainty about the results
(that almost all the underlying studies freely admit).”
At least one of the
authors of the academic papers mentioned in the White House study,
Mihir Desai, of Harvard Business School, has already complained about
his research being misinterpreted.
... Other
economists, including Jason Furman, who headed the Council of
Economic Advisers under President Obama, have pointed out that the
White House’s projections are way out of line with most of the
findings in the economic literature.
About the only way to
justify the Trump White House’s numbers is to assume that the
proposed tax cuts will produce a growth “miracle” that reverses
almost two decades of sluggish investment and stagnant wages.
In a speech to the Tax
Policy Center a couple of weeks ago, Hassett mentioned the United
Kingdom, which, in the course of the past decade, has cut the
corporate tax rate from thirty per cent to nineteen per cent...Last December,
Mark Carney, the governor of the Bank of England, said that the U.K.
was going through “the first lost decade since the 1860s.”
... If a
student presented him with a plan like this in one his classes at
Harvard, Summers wrote, he would be "hard pressed to give it a
passing grade." That actually seems quite charitable. ... "
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