The Trump administration’s tax plan is not a plan. It is a melange of ideas put forth without precision or arithmetic. It is not clear enough to permit the kind of careful quantitative analysis of its expected budget costs, economic effects and distributional implications that precedes such legislation in a serious country.
It is clear enough, however, to demonstrate that the claims of Treasury Secretary Steven Mnuchin, National Economic Council Director Gary Cohn and Council of Economic Advisers Chair Kevin Hassett are some combination of ignorant, disingenuous and dishonest. Hassett, whose job is to stand up for rigorous apolitical economic analysis, had the temerity last week to accuse the Tax Policy Center — staffed by many of the most distinguished tax analysts in the country — of issuing “scientifically indefensible” “fictions.” He and his colleagues should look in the mirror.
I have strong disagreements on tax policy with Republican economists such as Greg Mankiw, Glenn Hubbard and Martin Feldstein and with Treasury alumni such as Nick Brady, John Snow and Hank Paulson. Nothing I have ever heard or read from them seems absurd or dishonest in the way that almost everything coming out of this administration does.
We know enough to say that a tax-reform plan along the lines of the administration’s sketch would not substantially increase economic growth, would blow out the budget deficit and would make the United States an even more unequal place.
The administration pushes the idea that somehow cutting the corporate tax rate will be a huge spur to investment. It is certainly possible that with a lower tax rate accountants will locate more corporate income in the United States, but a big spur to investment seems unlikely. With after-tax long-term interest rates well below 2 percent, the stock market sky-high and businesses able to write off investments immediately, capital costs have never been lower. True, there is much cash parked overseas. But almost all the companies that have done so also have cash hoards in the United States that they have chosen not to invest. The first-order effect of a Trump administration “territorial system” that renounced a U.S. tax claim to overseas corporate income would be to encourage relocation of productive activity to tax-haven jurisdictions, slowing U.S. growth.
It should not be forgotten that the most rapid gross-domestic-product growth achieved in the United States took place in the 1950s, 1960s and 1970s, when top tax rates were nearly twice as high as now. These rates were surely too high, and punitive rates would be a huge mistake in the current context, but it is absurd to suggest that reductions from current levels will call forth some renaissance of hard work. Just as likely, people who feel richer will reduce their effort.
What about the budget deficit? For tax cuts to pay for themselves, as Mnuchin sometimes asserts would happen, they would have to massively increase growth. Because this is unlikely, they would bloat the budget deficit at a time when we should be preparing for the next downturn, for rising entitlement costs and potentially for the need for increased national security spending.
But it’s worse than this. Many in the administration’s orbit have expressed the belief that the Federal Reserve’s quantitative-easing program has inflated asset prices by absorbing long-term bonds. If this logic is correct, increasing the supply of bonds to fund the large increase in deficits that tax cuts would entail should have a significant depressing effect on asset prices and the economy. Any possible supply-side benefits of the tax program have to be weighed against this damping impact.
Finally, there is the question of fairness. Those secure in their beliefs do not seek to depublish studies by apolitical civil servants. There is little doubt among serious economists that — as explained in a 2012 paper that has mysteriously vanished from the Treasury website — the immediate impact of corporate tax cuts is to help corporations and that the vast majority of corporate shareholding is concentrated among those at the top of the income and wealth distribution. There is the further point that in defending fairness the administration ignores its proposed estate-tax repeal, which affects only the top two-tenths of a percent of the population.
Furthermore, Cohn’s argument that corporate tax cuts would benefit firefighter pensions is, as he must know, disingenuous; such pension benefits are promised and not dependent on the performance of the stock market. And Mnuchin and Hassett’s arguments about investment depend on the false premise that domestic investment will be spurred by corporate tax cuts. Anyone in doubt about such fairness questions should just note that the administration is not willing to do what all previous Treasuries have been willing to do: present a revenue and distributional analysis of its plan.
This week, the world’s finance ministers and central bank governors will gather in Washington for the annual International Monetary Fund-World Bank meetings. These meetings used to be a time when the United States urged other countries to respect the laws of economics and arithmetic in formulating their economic policies. This time the lecturing should go in the opposite direction.