If President Trump truly wants to win some Democratic votes on his tax plan, he should call Laura Tyson.
She's one of the most vocal Democrats supporting tax cuts for businesses, the core of Trump's economic plan. Her voice matters to Democrats, some of whom Trump is trying to woo at a White House meeting Wednesday. Tyson was an economic adviser to President Barack Obama and a member of the Clinton administration, serving as chairman of President Bill Clinton's Council of Economic Advisers and then head of his National Economic Council.
Like Trump, Tyson believes America can no longer be competitive with a 35 percent top corporate tax rate. She has been pushing tax reform for years. She wrote a Wall Street Journal op-ed last month headlined, “Why corporate tax reform is a bipartisan cause.”
But here's the catch: Tyson would vote “no” right now on the Trump plan. She likes the corporate tax rate reduction and the move to a territorial tax system (where businesses get taxed only on what they do in the United States alone), but she doesn't like the rest of the framework.
“I could not support this package,” she told The Washington Post on Tuesday. “It’s just another version of a supply-side tax cut.”
Her biggest gripes are that the plan adds even more to the nation's $20 trillion debt and that it gives too much away to the wealthy. Her advice to Trump and Republican congressional leaders is simple: If they want any Democratic votes, they should tax the rich more. (Trump has indicated that he might be willing to do that.)
Trump's Council of Economic Advisers put out a report Monday claiming that the president's tax plan would give middle-class families $4,000 each. Tyson says that's a"dishonest” and “disturbing” claim. She agrees that business investment will rise in the United States after corporate tax rates go down, but she thinks there's something important that the White House isn't acknowledging — that some businesses are likely to use that extra cash to invest in more robots and automation. That wouldn't create jobs or increase wages.
Below are excerpts of The Washington Post's Q & A with Tyson, a professor who works with the Alliance for Competition Taxation, a business group pushing for tax reform.
Q: Is the Trump administration's claim realistic that families will get $4,000 from cutting corporate taxes?
Tyson: I’ve been involved in tax reform discussions for a long time. I go out and defend tax reform because I believe lowering the corporate tax rate and moving to territoriality are important moves to make America competitive.
But the $4,000 claim is dishonest. It weakens the argument for why you want to cut corporate taxes. I am disappointed in Kevin Hassett [chairman of Trump's Council of Economic Advisers]. Some of Kevin's work I really like, but I find this study right now really problematic. That figure is really disturbing. I don't think there is evidence to support it.
Q: Will there be any wage growth after tax cuts?
Tyson: I have reviewed this evidence over many years. I would not expect a reduction in the corporate tax rate to have a significant effect on the wage level. I remember the literature. I never saw a number like $4,000.
The debate was: What share of the benefits of a corporate tax cut would go to capital and what share would go to labor? The number people seem to be using was 80 percent to capital, 20 percent to labor.
The Trump administration is arguing that if you cut corporate rates, you get more capital investment, and that drives productivity growth up, which should drive wage growth up. But we know from the last 30 years that wage growth has been delinked from productivity growth. So even if you believe in the investment-productivity effect, I don't see how you go from that to wages increasing.
There's no empirical evidence. When you look at all the studies, what you conclude is that the coefficient between the change in the tax rate and change in wages is zero. Hassett just cherry-picked the ones with a big coefficient. If you look at all of time, it's close to zero.
Q: But you do agree that cutting business taxes would boost investment in the United States?
Tyson: My general view is a corporate rate tax cut with move to territoriality would increase investment in the United States. A lot of economists believe that. I would be one of them; Marty Feldstein [Ronald Reagan's top economic adviser] and Doug Holtz-Eakin [Republican Sen. John McCain's economic adviser in his 2008 presidential bid] believe that.
The next question is: Would that increase employment and wages? Here, I think there’s something people haven’t raised at all in the debate so far. Capital investment is not linked anymore to the same extent with employment and wages. A lot of capital investment is in automation and labor saving [technology]. It helps workers at the top of the wage distribution because their skills are complimentary to the additional capital being created. I’m focused on automation. People are overlooking the importance of that.
Q: What do you like about Trump's plan?
Tyson: I do support a corporate tax cut. I do support a move toward territoriality. I started to work on this issue with President Obama when I was a member of his advisory councils.
The original proposal from several years ago was for a revenue-neutral corporate tax cut. So a tax cut for corporations paid for by going after all the special deductions and special credits to broaden the base enough to generate revenue. The general view of that was that would eliminate distortions in the corporate tax code. There are wild differences in tax rates for retail, energy companies, etc.
Cutting the corporate rate to 25 percent had a lot of support, including from the [business group] Alliance for Competitive Taxation. That seemed like a very sensible number. That is essentially what other developed countries were around.
Now the president is talking about 20 percent — I would say out of the blue. It's a race to the bottom between us and other countries. A 20 percent rate hadn't been talked about before because there is no way to pay for it.
Q: What do you dislike about Trump's plan?
Tyson: It has some good things in it, but it's got very serious distributional issues that need to be dealt with, and we're not paying for this. It's just another version of a supply-side tax cut.
Economists on the left and the right say that about a third of it would be paid for by faster growth at most. This is not a good time to do this. When Reagan did it, taxes as a share of GDP were higher. When President George W. Bush did it, taxes as a share of GDP were higher than we are now. We’re already at low federal tax take as share of GDP. We have a long-term debt problem, which no one can dispute.
If we want to reform the tax code and give relief on the corporate tax rate, fine, do that. But do it in a way that doesn’t explode the deficit and doesn’t exacerbate what is already a major distributional challenge. There are ways to do that.
Obama said he [would] consider a corporate rate cut if [the business community] came up with a revenue-neutral proposal. I don’t think we should have a deficit-enhancing tax cut at this point in time. I personally think the entire tax package should raise revenue as a share of GDP, not reduce it.
Q: How would you improve Trump's plan?
Tyson: I could not support this plan. I don’t support the package. There are all kinds of things one could do to get improvement in corporate income tax that would not just explode the deficit and not have these very adverse distributional consequences. But there's nothing in the [Trump] proposals to do that.
When you ask businesses how to pay for tax cuts, they suggest they could live with a carbon tax or a value-added tax [VAT]. You can make the VAT quite progressive. You can make it progressive by giving lower-income households a break or a rebate. That's what they do in other developed countries.
Q: What changes could be made to get Democratic votes?
Tyson: We used to say this at CEA [Council of Economic Advisers] when I was chair: You have to weigh the growth effects against distributional effects against revenue effects. There’s no perfect policy.
I think the problem with the overall plan is that it’s heavily biased to the wealthiest Americans. Even some of the corporate tax cuts favor them because the rich own shares in corporations, and the stocks are likely to go up.
What European countries have done is cut their corporate tax rates at the same time as they raise tax rates on the owners of capital. These countries offset the losses in revenue from business tax cuts by increasing taxes on the owners of capital (i.e. the rich). That has a better distributional outcome, and it generates revenue to pay for the corporate tax cut, so it's not deficit-enhancing.