This is what I feared

The proposed GOP tax bill is not what it seems.  First of all, pay no attention to the media discussion of who gains and who loses—as they use naive models where stockholders are assumed to bear the burden of a corporate income tax, and the person who writes the check to the IRS is assumed to bear the burden of the personal income tax.  In the long run, markets adjust to tax changes and largely offset any distributional impacts.

Also pay no attention to the fact that taxes are supposedly being “cut”.  The GOP has no intention of cutting spending, and one way or another society must pay for all of that spending.  Money doesn’t simply grow on trees.  Yes, the “starve the beast” theory might have some validity, but most likely the Dems will largely offset any tax cuts with higher future taxes.  And meanwhile the larger budget deficits will be a drag on investment.

There is only one issue worth paying attention to—efficiency.  Do these changes make the tax system more efficient?  The initial proposal seemed positive on that score, but I’m seeing worrisome signs of backtracking:

Late Thursday, the chatter in the Capitol was that Republicans may adjust the repeal of the alternative minimum tax, which ensures that certain individuals pay a baseline tax if they have high deductions, to pay for Corker’s demands. That would cause problems in the House, where Republicans have touted the repeal of the AMT as a significant feature of their tax plan.

It’s not just a significant feature, I’d say the repeal of the AMT and the dramatic reduction in itemized deductions are pretty much all that is worth fighting for, at least on the personal income tax side.  Backtracking on this would be a huge defeat, leaving our horrendously complex tax system largely unreformed.  This is a real test for the GOP.  Our health system is called “Obamacare”; after this bill passes our income tax system should be called the “Republitax”.

Congress has no idea how much damage it does by adding tax complexity.  That’s why I still believe the best solution would be the complete abolition of the personal income tax.

PS.  Yes, I’m aware that most people are not affected by the AMT, although any statistics you see in the media will be complete lies.  The number is far higher than the media reports.  (Just as the 39.6% top rate is a complete lie.)  But the income tax system imposes complexity in a wide variety of ways, such as its interaction with the health care system.  We are all much worse off because of this monstrosity.

PPS.  There is also talk of sunsetting the tax cuts after 6 years.  That’s like “reverse Keynesianism”.  Implementing lower taxes during boom years and higher taxes during recessions.


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67 Responses to “This is what I feared”

  1. Gravatar of harryh harryh
    1. December 2017 at 09:10

    I also read that Collins cost for her vote might be keeping the SALT deduction intact. Oh well.

  2. Gravatar of Randomize Randomize
    1. December 2017 at 09:33

    The “Starve the Beast” theory is both logically and morally bankrupt. By racking up extra debt but keeping taxes the same, all we’re really doing holding the price tag stable while trading government services for more and more debt service. If the government is going to take X dollars from, I sure as hell want to get something for it other than interest payments.

    I’ve never had to pay the AMT but am under the impression that the incremental effort to calculate it once regular income taxes are done is very minor. The formula, at least on the surface, looks really simple. I’m not advocating for or against it, just saying that the regular tax system seems more burdensome.

  3. Gravatar of Massimo Heitor Massimo Heitor
    1. December 2017 at 09:33

    “The GOP has no intention of cutting spending”? WaPo recently said, “President Trump on Tuesday will propose cutting federal spending by $3.6 trillion over 10 years, a historic budget contraction that would severely ratchet back spending across dozens of programs and could completely reshape government assistance to the poor.” Cato cites $4.6 trillion over ten years.

    Isn’t the whole gist of this bill to reduce tax complexity?

    “I still believe the best solution would be the complete abolition of the personal income tax.” Why? Explain the gist of this. This sounds too crazy to gain any political traction at all.

  4. Gravatar of ssumner ssumner
    1. December 2017 at 09:37

    harryh, She’s hopeless.

    Randomize, You said:

    “I’ve never had to pay the AMT but am under the impression that the incremental effort to calculate it once regular income taxes are done is very minor.”

    Not so, it’s such a nightmare to calculate that it caused me to give up trying to do my own taxes.

    Massimo. Trump says that he plans to cut spending? Yes, and he also claims that he’ll play off the entire national debt in 8 years. And you believe that buffoon? Seriously?

  5. Gravatar of Brian Donohue Brian Donohue
    1. December 2017 at 09:47

    I do my own taxes. The AMT is simpler than the regular tax calculation.

  6. Gravatar of Alec Fahrin Alec Fahrin
    1. December 2017 at 09:58

    We have no clue what the final bill will look like yet. Corker’s deficit hawk plan seems to have been dropped a few minutes ago though. Flake and Lankford, supposed fiscal conservatives, backed down and now say they will support the bill.
    State property tax deductions will be put back into the senate tax bill. That might give the Republicans 50 votes, but will lose Corker and Collins.
    Other than that, details are mostly lacking. As far as I can see, the reforms to improve the efficiency of the tax system (AMT, SALT, Standard deduction) appear to still be in it. Yet, there are new taxes and new complexities. Many of these tax cuts expire at 5-10 year intervals and the Byrd rule might still stop the bill.

    I have no clue why the Republicans did not take more time to make this tax bill work. One thing is for certain, this is not tax reform. It is a politically-motivated attack on the Democratic half of America to the sole benefit of GOP donors.

    When the Democrats take back power, you can expect retribution.

  7. Gravatar of ssumner ssumner
    1. December 2017 at 10:06

    Brian, The problem is that you have to do your taxes twice. And the AMT is anything but “simple”.

    Alec, There is some tax reform here, but nowhere near enough. It’s a missed chance to do something more dramatic. But then I suppose they don’t have the votes for anything else, so this is what we’ll be left with.

    I’m not sure it hits the blue states quite as much as people suggest. The Dems claim this bill favors the rich—well the rich live in blue states. The Dems are going to face a dilemma–do the represent the poor (who tend to live in GOP states) or do they represent the states that vote blue, which have lots of rich people.

    You said:

    “When the Democrats take back power, you can expect retribution.”

    I agree. And the GOP will deserve everything the Dems do to them.

  8. Gravatar of A Rash Anion A Rash Anion
    1. December 2017 at 10:09

    If 39.6% top rate is a complete lie, what’s the actual top rate?

  9. Gravatar of FacePalm FacePalm
    1. December 2017 at 10:30

    All,

    The issue with tax complexity is not that it’s ‘hard’ to do your taxes. It’s that it’s nearly impossible to know ahead of time the implications of your actions. If you don’t believe me, try to find an investment adviser that will try to estimate you an after-tax rate of return — they don’t exist.

  10. Gravatar of mpowell mpowell
    1. December 2017 at 11:14

    The AMT is simple as long as you ignore the ridiculously complicated weird cases that most likely don’t apply to you. Just click ‘no’ on all those questions in turbo tax and AMT is pretty easy to address. It’s just stupid I have to figure my taxes with a bunch of itemized deductions and then pay AMT anyhow. If you think I shouldn’t have those deductions, just take them away, or cap them. That would be much fairer.

  11. Gravatar of Justin D Justin D
    1. December 2017 at 12:31

    Scott,

    You’ve said in the past that a consumption tax is effectively a wealth tax, and also that you support progressive consumption taxes.

    Would you support replacing income taxes with wealth taxes?

    For example, US household net worth as of 2017Q2 was $96.2B and surely higher today. Individual income taxes and estate/gift taxes were projected to raise $1.683 trillion in FY2017 in the White House’s budget’s historical tables. Without evasion, that means a flat 1.75% tax on net worth would cover that revenue (in practice, probably more like 1.85% or 1.9% to offset evasion).

    I’ve done some rough calculations, and a ~2.5% net worth tax on all net worth (including business net worth, etc) could provide for all of the revenue.

    I can see a few potential issues: those with low income and high value but otherwise unproductive wealth might have a hard time paying taxes, valuing hard to value assets, evasion, and a very pro-cyclical revenue source.

    On the other hand, you get a very low flat rate applied to everyone while still being progressive with respect to income, and it eliminates the need for separate estate/gift taxes.

  12. Gravatar of Massimo Heitor Massimo Heitor
    1. December 2017 at 12:46

    Trump’s own senior staff, Budget Director Mulvaney, was quick to admit that the comment about paying off the entire federal debt was just hyperbole. You know that already.

    My parse of this is Sumner supports the GOP tax bill, he’s critical of the tax cuts that fuel the deficit, he fears they are rolling back important reforms specifically the AMT elimination and elimination of deductions, and he’s trolling Trump supporters as always.

  13. Gravatar of Alec Fahrin Alec Fahrin
    1. December 2017 at 12:54

    Scott,

    If I am reading this correctly
    https://www.bloomberg.com/news/articles/2017-12-01/senate-republicans-work-to-salvage-tax-bill-tax-debate-update
    you’re AMT is about to become more complex. Also, more deductions to secure Collin’s vote.

    Justin D,
    I am not trained in this issue as Scott might be, but my impression is that measuring wealth is difficult. What is the value of Taylor Swift’s brand? Who determines that value? The market? The government? It runs into the “fair value” problem quite quickly.

    Measuring consumption is much easier because the market automatically puts a value on the service/good. We know what services/goods the rich and wealthy like. Why not tax those goods with a 50% consumption tax and update the list yearly as a “Wealthy CPI”?

    The efficiency gains from a consumption tax can pay for any isolated losses and still have a net benefit left over. Yet, it is difficult to pass because of a few years or higher measured inflation.

  14. Gravatar of ssumner ssumner
    1. December 2017 at 16:15

    Anion, 43.4%

    Facepalm, There are lots of problems with the tax system, that’s just one of them.

    mpowell, I can’t use Turbotax, it doesn’t work for me.

    Justin, Wealth taxes are not wealth taxes, they tax investment income.

    Massimo, Hyperbole? Trump is always scrupulously honest.

  15. Gravatar of dtoh dtoh
    1. December 2017 at 17:08

    Scott,

    Which of the following do you NOT believe?

    1. Cutting corporate tax rates will increase investment.

    2. Increasing investment will increase the economic growth rate?

    3. Increasing the growth rate is a good thing?

  16. Gravatar of B Cole B Cole
    1. December 2017 at 17:16

    Good post.

    The GOP is not engaging in tax reform, it is engaging in tax fiddling.

    Tax reform would involve moving away from income taxes, towards property taxes, sales taxes, fossil fuels taxes, pollution taxes and import tariffs. Maybe some Pigou.

    After a century of implementation, elites know how to evade income taxes. See offshore banking.

    As Leona Helmsley said, only the little people pay taxes. I feel small quoting her.

  17. Gravatar of Larry Larry
    1. December 2017 at 17:33

    “…and the person who writes the check to the IRS is assumed to bear the burden of the personal income tax.”

    Well, I write a substantial check every year and it feels like I feel the burden. How am I wrong? And my tax adviser tells me there is no way I can pay as small a percentage as Mitt Romney pays.

    “The proposed GOP tax bill is not what it seems.”

    Well, it seems like a big fat tax cut for the rich and powerful, particularly those changes to pass through income. Am I wrong about this, too?

    Anyway, how do you know? The tax bill isn’t even written yet.

    “Also pay no attention to the fact that taxes are supposedly being “cut”.”

    They are not being cut? Who are you kidding besides yourself. If AMT had gone away your taxes, apparently, would have been cut, too.

    “…naive models…”

    Maybe so. But lots of economists reach the same conclusions. And my friends are busy telling me with a glint of gold in their eye that their stocks are skyrocketing in anticipation of the cuts. But what do they know?

    I do not know whether this tax cut for the rich is good or not so good for the rest of us, though I have my suspicions. And as far as I can tell no loopholes for the rich have been closed. How about that carried interest loophole that Trump said he would close.

    But what I am sure of is that the process of getting to this tax bull is thoroughly corrupt.

  18. Gravatar of ssumner ssumner
    1. December 2017 at 18:47

    dtoh, I believe all three, and I think the House bill is a step forward. However I’m very worried about what the Senate may produce.

    We need tax reform far more than tax cuts—which the Dems are going to reverse in any case.

  19. Gravatar of ssumner ssumner
    1. December 2017 at 18:50

    Larry, Gas stations write big checks to the IRS every year, as do cigarette companies. Does that mean sellers (not buyers) bear the burden of excise taxes? And who bears the burden of payroll taxes, which are legally split 50-50 between employers and employees?

  20. Gravatar of foosion foosion
    1. December 2017 at 19:03

    “2. Increasing investment will increase the economic growth rate?”

    Not if there are other confounding factors. For example, the Fed might keep growth on a slower path. Dudley has been making noises in that direction in response to the tax bill. Powell doesn’t seem particularly dovish.

  21. Gravatar of Benjamin Cole Benjamin Cole
    1. December 2017 at 20:46

    Add on:

    1. Bitcoin exploding in use and value.

    2. Cash in circulation exploding in size and probably use. Now near $5k per US resident. The Fed says that figure will reach $10k in seven years. Per resident!

    3. Offshore banking exploding. Offshore LLCs. LLPs, JVs you name it. Cochrane saw a chart entities with ownership of Trump’s helicopter and said he (Cochrane) does not know who owns Trump’s helicopter. I saw the same chart, and it deploys some sort of reverse Mobius strip Houdini act.

    4. The US tax code is exploding, 75,000 pages long now.

    Sure, “reform” the federal income tax code. Haha.

    And my car can’t shift into 3rd gear, so I am going to get a new set of tires.

  22. Gravatar of Benjamin Cole Benjamin Cole
    1. December 2017 at 20:56

    “All hail Goushi Kataoka!”

    The above is an excellent post by Scott Sumner, over at Econblog. I was going to blog on the same topic, but Sumner stole my thunder.

    I am permanently banned from Econlog, so I post here.

    BTW—does anyone really believe the BoJ will ever sell its balance sheet? I do not. Adair Turner says they never will.

    Does this make the BoJ monetary expansion permanent?

    This is an interesting topic. What if a central bank expands its balance sheet, but it is unclear what they plan to do?

    This is a real-world grey zone confronting theory, no?

  23. Gravatar of JMCSF JMCSF
    1. December 2017 at 21:29

    I feel like if we are going to get rid of some deductions, why not all and then lower rates accordingly. There was bipartisan support to do this, I don’t know why Republicans went down this route. What was wrong with Mitt Romney’s plan?

    And while the optimal tax rate on businesses and income is zero, I think for arbitrage purposes and taxing foreign investors we should have corporate tax rates above zero and tax revenue from diversified areas.

    I’ve heard it said that ultimately this is a political gift for Democrats as Republicans are doing their dirty work for them. Our long-term debt problems are real and tax increases are more likely than cuts in spending. Republicans are raising taxes on the middle class; Democrats will reverse the cuts for the wealthy in the future with popular support.

  24. Gravatar of KevinA KevinA
    1. December 2017 at 22:30

    @ForuminGeneral: Its silly to make the theoretically best tax reform proposal the basis upon which the republican tax plan is judged. Such a plan would never pass through our highly divided congress.

    I agree with Scott that the good stuff was: elimination of deductions and losing the AMT. AMT is complex, but likely not as distortionary as SALT overall, so I can wrap my head around its sacrifice, although the overall benefit of the bill is becoming increasingly marginal as a result of such sacrifices.

    Now seems like an odd time to cut taxes, with the large debt overhang and brisk economic growth. In addition, if lucas is right, people will at least somewhat expect an increased tax burden as the result of an expanding deficit, nullifying some of the benefit of the cut.

    In my readings and from personal experience, I have come to believe that regulations and excessive legal liability are larger detriments to business growth than taxes.

    (Regulations are essentially taxes, the value of the tax is equal to the present value of compliance costs. There might be middle ground: government could increase taxes on a business by, say, $1 million but reduce regulations by $2 million, and everyone would be better off. This is under the belief that a substantial part of our vast regulatory apparatus does not provide benefits which exceed their costs).

    Politically, I’m in it for the sweet schadenfreude of eliminating the SALT deduction and the result it would have for liberal states (I live in CA) which have highly concentrated their tax base to the upper, upper class over the years out of sheer political expediency.

    I can justify eliminating it, logically, so the guilt is somewhat alleviated, but it is strange to me that I would get an emotional benefit out of it as well.

    Perhaps I’m spending too much time staring into the abyss.

  25. Gravatar of Justin D Justin D
    1. December 2017 at 22:47

    –“I am not trained in this issue as Scott might be, but my impression is that measuring wealth is difficult. What is the value of Taylor Swift’s brand? Who determines that value? The market? The government? It runs into the “fair value” problem quite quickly.”–

    Some things are rather difficult to measure precisely, but most things aren’t quite as intangible as the above.

    Market traded financial assets, for example, are very easy to value. Certain real property isn’t difficult either – you can quickly find the estimate of a home price on Zillow, a car’s value on KBB, etc. You can quickly tie both values to insurance to ensure reasonableness from the perspective of the taxpayer – that is, the insurance company would not owe more in the event of loss than you claimed that particular asset was worth. If you said your car was worth $15,000 and you totaled it, the insurance company would not be obligated to cut you a check for more than $15,000. Same would hold true for personal effects. You have a renter’s insurance policy for $20,000? Then you’d owe the tax on $20,000 of personal effects. The equity of a business or other organization is just the net of its book assets and liabilities. So the vast majority of assets could be valued in this way. In any case, I’m just spitballing here. It just seemed like an interesting idea, but Scott made a good point, a wealth tax can be thought of as a (potentially high) marginal tax on investment income (e.g. at 2.5% it’s a 50% tax the income of an investment which earns 5%/yr).

    –“Justin, Wealth taxes are not wealth taxes, they tax investment income.”–

    Interesting point – but don’t consumption taxes also tax investment income, given that ultimately wealth is the present value of future consumption, which investment income helps to finance? And isn’t taxing investment income politically unavoidable? Nevertheless, I can see how a wealth tax of significant size would effectively translate to a very large marginal income tax rate on many investments.

  26. Gravatar of KevinA KevinA
    1. December 2017 at 23:24

    @JustinD, taxes on consumption are neutral in regards to consumers and savers, taxes on savings value consumption over savings.

  27. Gravatar of J.M.Keynes J.M.Keynes
    2. December 2017 at 00:08

    – Each source of income (interest from both municipal, federal and corporate bonds) should be taxed at the same rate.

  28. Gravatar of dtoh dtoh
    2. December 2017 at 01:20

    Scott,
    You said, “dtoh, I believe all three, and I think the House bill is a step forward. However I’m very worried about what the Senate may produce.”

    “We will have to see the final bill that comes out of conference.”

    “We need tax reform far more than tax cuts—”

    “…..which the Dems are going to reverse in any case.”

    I’m a little curious why you say that. Is it a maximizing utility argument? I suspect it’s based in part because you don’t believe the cuts will have that big an impact on investment and/or growth. If the cuts produced an extra 2 points a year in real growth would you have a different view?

    “…..which the Dems are going to reverse in any case.”

    They need to control both houses and the Presidency. Doesn’t happen that often. And there’s a pretty strong global trend toward lower corporate tax rates, which makes it somewhat harder to raise rates in the U..

  29. Gravatar of Larry Larry
    2. December 2017 at 05:34

    Scott says, “Larry, Gas stations write big checks to the IRS every year, as do cigarette companies. Does that mean sellers (not buyers) bear the burden of excise taxes?”

    Excise taxes are basically pass through taxes paid by the purchaser and forwarded to the government by the seller. They are not income taxes. We are talking income taxes here.

  30. Gravatar of ssumner ssumner
    2. December 2017 at 08:56

    foosion, You are confusing the supply side with the demand side.

    JMCSF, The optimal tax rate on investment is zero, the optimal tax rate on business is not zero. Lots of business income is labor income.

    You said:

    “I’ve heard it said that ultimately this is a political gift for Democrats as Republicans are doing their dirty work for them.”

    Yes, this will make it much easier for the Dems to raise taxes in the future.

    Justin, It all boils down to one question—is future consumption taxed at a higher rate than current consumption?

    Keynes, No, interest should not be taxed at all. See my reply to Justin.

    dtoh, You asked:

    “If the cuts produced an extra 2 points a year in real growth would you have a different view?”

    Yes, indeed if they produced an extra 0.2% growth I’d have a different view. But they won’t (except in the short run.)

    You said:

    “Doesn’t happen that often.”

    We also don’t get mindbogglingly incompetent presidents like Trump very often. And BTW, can you name a single Democratic president that took office without complete control of Congress? A single one?

    Larry, So if you tax high paid professions at 90%, that doesn’t get passed on in the form of higher prices, or lower output?

  31. Gravatar of -B- -B-
    2. December 2017 at 09:07

    “I still believe the best solution would be the complete abolition of the personal income tax”

    Should we not at this time examine how we ended up with a tax on domestically earned wages in the first place?

    The problems* that exist today including the income tax exist because people do not go back to root cause and examine how we got from there to here. They examine the here and propose new layers of complexity or reforms while accepting many things as facts of life when they are nothing but previously created constructs that resulted in these problems.

    For instance we don’t discuss how medical prices became high, we discuss how to make insurance to pay those prices affordable. We don’t discuss what is income, we discuss who should pay income taxes and who should not. The frames are set such that ordinary people will always lose and the players in and around government win regardless.

    If we started to examine the root causes we will find many of the constructs that are given to us to argue between are simply false.

    *Most are not problems, but the desired features and outcomes of a few.

  32. Gravatar of ssumner ssumner
    2. December 2017 at 09:11

    B, I agree.

  33. Gravatar of Starve it Starve it
    2. December 2017 at 09:16

    Starve the beast is the ONLY way.

    Lower taxes >>>>>>>> efficiency

    Fiscal conservatives are the handmaidens of socialism.

  34. Gravatar of robb robb
    2. December 2017 at 09:43

    Scott,
    Why do you assume that consumption taxes are neutral and do not lead to inefficiencies? I can think of lots of ways to change my behavior so as to reduce my tax bill if my taxes are all based on consumption.

    We already have the complex (and you don’t like complexity) rules around things like using a company car. How would this help?

    It seems to me that this just means that rich people go to places without consumption taxes to do their consumption.

    And of course it would mean that all sorts of semi private consumption (plumber, nanny, yard work) would be incentivised to go underground.

  35. Gravatar of Larry Larry
    2. December 2017 at 12:13

    Scott said, “Larry, So if you tax high paid professions at 90%, that doesn’t get passed on in the form of higher prices, or lower output?”

    90% of earnings after the first million? 90% of earnings after the first $10,000?

    Sure, all things being equal 90% tax on marginal earnings can lower output or increase prices. But all things aren’t equal as you well know. It could very well be that 90% marginal tax rate on high earners will induce more competition and eventually lower prices for everyone. You do not know and neither do I.

    And there is no guarantee that reducing taxes on corporations and pass throughs will either increase output or increase wages.

    Besides I never said it would. I said the tax reform bill is a tax cut for the rich and powerful. And I am amazed how hard you try to fight that conclusion.

  36. Gravatar of Larry Larry
    2. December 2017 at 12:17

    And just for the record: You want police, highways, military.

    Well somebody has to pay for it.

    Who has the most to defend and who makes the most use of public infrastructure?

    The rich.

    So who and how should it be paid for?

    Are you in favor of welfare for the rich and self-reliance for the poor or not.

  37. Gravatar of KevinA KevinA
    2. December 2017 at 12:46

    @Larry
    “Well, I write a substantial check every year and it feels like I feel the burden. How am I wrong? And my tax adviser tells me there is no way I can pay as small a percentage as Mitt Romney pays.”

    “Excise taxes are basically pass through taxes paid by the purchaser and forwarded to the government by the seller. They are not income taxes. We are talking income taxes here.”

    Larry, this is just the basic concept of tax incidence.
    https://en.wikipedia.org/wiki/Tax_incidence

    If you want an example using income tax, consider the payroll tax. Nominally, you pay half of your social security, and your employer pays the other half.

    The ultimate burden of the payroll tax, however, falls on the employee. That is, you explicitly pay half of your social security, and the other half you pay in the form of lower wages.

    Most economists agree that the payroll tax on employers is passed on to employees, ala the CBO:
    “CBOs analysis of effective tax rates assumes that households bear the economic cost of the taxes that they pay directly: individual income taxes (including taxes paid on dividends, interest, and capital gains) and employees share of payroll taxes. CBO also assumes do most economists that the employers share of payroll taxes is passed on to employees in the form of lower wages than would otherwise be paid. Therefore, the amount of those taxes is included in employees income, and the taxes are counted as part of employees tax burden.”
    https://www.cbo.gov/publication/24725

  38. Gravatar of Don Don
    2. December 2017 at 12:51

    I see 2 ways spending is reduced by this bill.
    1) chained-CPI. It starts with brackets and then hopefully is applied to transfer payments and other automatic spending. This little bit will be big in 20 years.

    2) pro-growth. higher growth reduces programmed spending on economic stabilizers.

    3) animal spirits. hopefully, jobs and greed hit the fly-over states and the “deplorables” get a job and put down the opioids. That is cost avoidance of at least $100B/year.

  39. Gravatar of KevinA KevinA
    2. December 2017 at 12:54

    Out of curiosity, larry, would you support the idea of a consumption tax, but one that was progressive so that it would hit the rich more than the poor?

    I’m interested to see if we can find common ground.

  40. Gravatar of Larry Larry
    2. December 2017 at 14:12

    KevinA,

    I would support any tax reform that made taxes more transparent and easier to administer and to understand. As far as I am concerned the current tax system is insane (I used to do tax returns for people so I know) and the Republican tax cut bill does nothing to cure it.

    So if you can raise enough revenue through a consumption tax to support our government and the safety net and there were no gimmicks tax lawyers could use to avoid it, I would support it.

    I guess my standard is if tax lawyers/CPAs go out of business I am for it.

    Thanks for asking.

  41. Gravatar of Major.Freedom Major.Freedom
    2. December 2017 at 14:29

    If this bill passed under a Democratic president, Sumner would have said it was mostly good, mostly positive, mostly beneficial, but just a few parts here and there that are bad.

    Lots of alt-left saying that reduced taxes is “fascist”. Funny, it would not be surprising at all if that was echoed on this blog

  42. Gravatar of Major.Freedom Major.Freedom
    2. December 2017 at 14:36

    Fake news in real time, then fake news being retracted

    https://i.imgur.com/uQv1FHb.jpg

  43. Gravatar of Starve The Beast Starve The Beast
    2. December 2017 at 14:53

    I find the “efficiency > low taxes” argument bizarre. Surely there is some margin at which higher simpler taxes are superior to more complex and lower taxes, but does anyone actually believe that we are near that margin??

    At the end of the day I know that I would much prefer dealing with a bit more complexity if I’ve got more money in my pocket. Is this controversial?

    As for starving the beast, didn’t Milton Freidman say something about fiscal conservatives being the enablers of government expansion? The government spends over 40% of GDP and the “responsible” ones are supposed to be the ones who pay for this largesse in an organized manner? I don’t think so.

  44. Gravatar of Major.Freedom Major.Freedom
    2. December 2017 at 15:36

    According to Sumner’s version of the EMH, the fact the stock market dropped on negative (and very fake) news about Trump’s admin, is evidence that the rise is (in part) due to Trump’s policies, and that as a result Sumner’s invested wealth is higher because of Trump.

    Blog authors in the alt-left propagandasphere on suicide watch.

  45. Gravatar of Michael Byrnes Michael Byrnes
    2. December 2017 at 17:25

    Do you think this from Karl Smith is wild-eyed optimism?

    https://niskanencenter.org/blog/notes/larry-lindsey-right-tax-reform-will-work-fed-wants/

  46. Gravatar of Jeff Jeff
    2. December 2017 at 18:29

    The Senate version leaves alimony alone, i.e., alimony is deductible for the payor, and taxable income for the payee. The House bill reversed that in a cynical attempt to shift taxable income to the payor who is likely in a higher tax bracket than the payee, so this was in reality a tax increase.

    The Senate bill also repeals the Obamacare heath insurance mandate. The House is likely to go along and Trump favors it, so it is probably a done deal. Obamacare was already actuarially unsound, this will hasten the collapse. That’s a good thing.

    Both the House and Senate bills double the standard deduction and end the deductibility of state and local income taxes. The House bill also ends the deductibility of property taxes, while the Senate only limits it to $10K. The Senate version is likely to prevail here, because otherwise they lose the vote of Susan Collins.

    The result of all of this is that many fewer people will itemize deductions. And that means that renters will not be subsidizing homeowners as much, and residents of low tax states and cities will not be subsidizing residents of high tax jurisdictions as much either. Both of these are good outcomes.

    Deductions for charitable contributions will also go down. That doesn’t mean charitable contributions will drop very much, just that claimed contributions will drop. I recall seeing somewhere a few years ago a study that surveyed a bunch of large charities to estimate true charitable contributions and found them to be much lower than deductions for contributions. So maybe the main effect here will be a lessening of small-time tax fraud. That’s not a bad thing either.

    I share the belief that we’d be better off taxing consumption rather than income. By reducing the number of taxpayers itemizing deductions, these bills reduce the number of people with a vested interest in maintaining the current system. This may turn out to be a necessary first step before we can move to a consumption tax.

  47. Gravatar of dtoh dtoh
    2. December 2017 at 18:45

    @scott,

    you said,

    “If the cuts produced an extra 2 points a year in real growth would you have a different view?”

    Yes, indeed if they produced an extra 0.2% growth I’d have a different view. But they won’t (except in the short run.)”

    If the tax cuts only produce an 0.2% growth increase in output, I’d have a different view also, i.e. the whole exercise has been a waste of time.

    But I have a couple of questions.

    What do you mean by “short run”?

    Where do you get the 0.2% number? Is it just a guess or is there some basis for it? Do have a view on how much output the economy gets for for every dollar of increase in net fixed investment.

    I think you will be spectacularly wrong on the effect on output that the tax cuts will have. You have pretty accurately documented your forecasts on growth in earlier blog posts so we shall see.

  48. Gravatar of ssumner ssumner
    3. December 2017 at 21:50

    robb, They are already incentivized to go underground.

    And I never said a consumption tax produces no distortions. For instance, it discourages work.

    Larry, You said:

    “And I am amazed how hard you try to fight that conclusion.”

    Maybe that’s because I understand the difference between the legal incidence of a tax and the economic incidence of a tax, something not many other people seem aware of.

    So you are convinced that corporations pass excise taxes on to consumers but don’t pass corporate income taxes on to consumers. Fine. Care to explain how you know that?

    You asked:

    “Are you in favor of welfare for the rich and self-reliance for the poor or not.”

    Not.

    I don’t even favor a tax cut right now.

    Starve the Beast, You are missing the point. You won’t have more money in your pocket. Complexity reduces GDP, making us all poorer.

    Jeff, I agree that the bills have some good things, but the House bill is far better.

    dtoh, If we got an extra 2% in real growth, then in 20 years our output would be 50% higher due to this tax bill. That’s insane. Other countries recently slashed their corporate tax rates. I don’t recall any such miracles in those other countries (UK, Canada, etc.)

  49. Gravatar of Benjamin Cole Benjamin Cole
    4. December 2017 at 02:58

    “The U.S. dollar has strengthened after the Senate passed a sweeping tax overhaul bill early on Saturday.
    Just one Republican, Bob Corker of Tennessee, voted against it on deficit concerns.
    However, the Senate bill differs from the tax bill passed by the House in mid-November. Those differences now must be reconciled and a final piece of legislation voted on by both chambers.
    Wall Street is betting that companies will use spare cash from the tax cuts to purchase boatloads of stock and beef up their dividends.”

    —30—

    Well, that’s how CNN put it. More stock buybacks and dividends.

    I guess we can still construct an argument that this will set off a real investment groundswell in the US….

  50. Gravatar of dtoh dtoh
    4. December 2017 at 05:59

    Scott,
    Not saying we will get 2%. I was just using it as an example to try to understand where you’re coming from on your skepticism of the efficacy of the tax cuts. I think you could easily get 2% with the right tax cuts, but I don’t think the bill that’s likely to come out of conference will get 2%.

    That said, I think your forecast that it will only generate a 0.@2% bump in the short run and nothing in the long run will turn out to be spectacularly off the mark. (I still can’t tell if you’re underestimating the effect of the tax cut on investment or if you’re underestimating the effect of investment on growth.)

  51. Gravatar of Cooper Cooper
    4. December 2017 at 10:27

    I don’t understand the logic behind AMT.

    The government creates special tax credits/deductions but arbitrarily decides that if your income is over X amount and your deductions are above Y percentage we’re going to add an additional tax.

    Why not just limit the value of these deductions and credits in the first place?

    AMT merely adds an extra layer of complexity and punishes people for trying to do the exact things that the tax code is designed to subsidize.

  52. Gravatar of Matthew Waters Matthew Waters
    4. December 2017 at 13:22

    Starve the Beast,

    “At the end of the day I know that I would much prefer dealing with a bit more complexity if I’ve got more money in my pocket.”

    But this isn’t true of tax cuts purely. Tax cuts, in and of themselves, have to be offset by spending cuts or increased debt. Increased debt eventually has to be paid with interest (i.e. taxes) or inflation.

    This is a zero-sum argument and there are positive-sum arguments for tax cuts (i.e. lower deadweight loss). There are also positive-sum arguments for some government spending. There is not a slam dunk case for always cutting taxes, especially if spending cuts never go with it.

    There IS a slam dunk case for tax efficiency. Time spent by accountants and lawyers on taxes is time they’re not spending on productive activities.

  53. Gravatar of Carl Carl
    4. December 2017 at 13:37

    I love the simplicity of Fred Foldvary’s three taxes: land value tax (lvt), pollution taxes and fees for government services. Under such a tax regime, the only thing the government would need to know about you is whether you own a piece of land and whether you are emitting measurable amounts of pollution. The rest is none of their business. As far as I know, LVT in theory has as little deadweight loss as any form of taxation. And taxing pollution is, of course, a tax on a negative externality.

    But, I also see that almost no other economist advocates this approach. I assume that is the case because almost nobody believes it can raise enough revenue. Nevertheless, should we still be looking to raise more revenue from LVT at the state level at least and possibly the federal level because of LVT’s inherent efficiencies?

  54. Gravatar of Christian List Christian List
    4. December 2017 at 14:12


    but the House bill is far better.

    Does this happen often? Which institution is usually more competent? Is it a good idea to have an institution like the Senate in which states like Alaska, Vermont, and Wyoming got as many votes as California, Texas, and Florida? Hard to see how this is truly democratic (in the sense of one man, one vote), not to mention that a similar weltanschauung made Trump POTUS.

  55. Gravatar of Benjamin Cole Benjamin Cole
    4. December 2017 at 17:30

    Carl:

    Orthodox macroeconomists rarely think about property, property zoning, urbanization and property taxes.

    But Blair in Great Britain is thinking.

    “Tony Blair calls for new annual property tax and rent caps to reform housing”

    Interesting question: If the propertied-financial class of a metropolitan region cramps the supply of housing, is rent control justified?

    Two wrongs make a right?

    Add on: homeownership rates have fallen by about 10% since 2008.

  56. Gravatar of Alka Alka
    5. December 2017 at 04:51

    Scott,

    For what reason do you accept that utilization charges are unbiased and don’t prompt wasteful aspects? I can consider bunches of approaches to change my conduct in order to diminish my assessment charge if my expenses are altogether in light of utilization.

    We as of now have the complex (and you don’t care for many-sided quality) governs around things like utilizing an organization auto. How might this assistance?

    I can’t help thinking this fair implies rich individuals go to places without utilization duties to do their utilization.

    What’s more, obviously it would imply that a wide range of semi private utilization (handyman, babysitter, yard work) would be boosted to go underground.

  57. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    5. December 2017 at 08:56

    The invaluable Tim Taylor checks in with a lengthy post;

    http://conversableeconomist.blogspot.com/2017/12/tax-reform-with-spending-and-taxes-at.html

    —————quote————-
    Thus, while the bill does reduce taxes at high income levels, that doesn’t seem to me the main thrust of the bill. The cost of the dramatic rise in the standard deduction and to a lesser extent in the child tax credit is very high. To me, one of the most interesting dimensions of this change is that with a much higher standard deduction, many fewer taxpayers would find it worthwhile to itemize deductions. Thus, if or when proposals resurface a few years from now to reduce popular deductions like the one for home mortgage interest or state and local taxes, many fewer people will be using those deductions, and the political calculus around them may shift.

    The bill also shifts business taxation, with a goal of reducing corporate tax rates and encouraging firms to repatriate earnings now held abroad. It’s hard to remember amidst the political din, but these were also announced goals of the Obama administration. ….

    The Obama administration was talking about cutting the corporate tax rate to 28%, not 20%. In addition, the Obama plan emphasized that changes to corporate taxes should be revenue-neutral. But on other other side, the Obama proposal is a white paper, not actual legislation, which means that it had not been put through the Congressional meat-grinder where seemingly every legislator is demanding a sweet tidbit of their own devising in exchange for supporting the bill.

    Assuming this tax bill moves forward and becomes law in essentially its current form, one of the most interesting aspects to keep track of will be its effect on investment. There is a widespread fear that ongoing low levels of investment are slowing US economic growth, both in the short-run and the long-term. A common solution proposed by Democratic-leaning economists has been to support a high level of infrastructure spending, and before President Trump was elected, it was common to hear arguments pointing out that if an infrastructure investment could be financed at today’s low interest rates, and if that infrastructure investment brought a long-term payoff, it would be economically sensible to undertake the project even if it increased short-run budget deficits. In effect, the current Republican tax bill repurposes that argument into a claim that if certain tax changes call forth sufficient private sector investment, then it is worth increased budget deficits as well.
    —————endquote————-

  58. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    5. December 2017 at 09:02

    Also from Tim Taylor;

    http://conversableeconomist.blogspot.com/2017/12/federal-income-taxes-at-highest-income.html

    ————–quote———–
    … the top 1% of income tax returns in 2014 accounted for 20.6% of all income, but 39.5% of all income tax. The top 50% of all tax returns accounted for 88.7% of all income and 97.3% of all income tax. Which in turn implies that the bottom half of all tax returns accounted for 11.3% of all income and 2.7% of all income tax.

    …. the top 0.001% accounts for 2.1% of all income and 3.6% of all income taxes.

    What are the income levels for these different groups? The top 10% kicks in at about $130,000; the top 1% is at $460,000.

    At the extreme upper end, the top 0.001% of tax returns reported income of nearly $60 million in 2014.
    —————-endquote————

  59. Gravatar of Larry Larry
    5. December 2017 at 09:28

    Scott says: “So you are convinced that corporations pass excise taxes on to consumers but don’t pass corporate income taxes on to consumers. Fine. Care to explain how you know that?”

    Easy peasy.

    You have 2 gas stations located in the same block and charge the same amount for gas.

    One station is run well and makes a profit and pays income tax on the profit.

    The second station is run badly and loses money on the same amount of sales.

    Both stations collect excise taxes and pass them on to the state.

    Are the customers at both stations bearing the burden of income taxes when one station pays no income tax at all?

    Of course not.

    I’ll mention one more thing. You said that are no real tax cuts because they will have to be paid for in the future. Just remember that those who see their tax bill reduced if the current tax cut bills pass will not be the same people paying the bill in the future.

  60. Gravatar of ssumner ssumner
    5. December 2017 at 10:31

    dtoh, You said:

    “I think your forecast that it will only generate a 0.@2% bump in the short run and nothing in the long run will turn out to be spectacularly off the mark.”

    That’s not my forecast, read my comment again. It could generate more than 0.2% for a couple years. In any case, if there was going to be rapid growth it would show up in higher T-bond yields. Right now they are predicting same old, same old.

    Ben, Rent control? Lovely.

    Alka, You said:

    “For what reason do you accept that utilization charges are unbiased and don’t prompt wasteful aspects?”

    I have no idea what that sentence even means.

    Larry, I have no idea what you think that example shows, but I’m pretty sure it doesn’t show what you think it shows.

    Suppose the excise tax only applies to gas stations where the owner’s last name begins with the letter “N”. Does that tax get passed on to consumers?

  61. Gravatar of Larry Larry
    5. December 2017 at 14:22

    Scott said “Larry, I have no idea what you think that example shows, but I’m pretty sure it doesn’t show what you think it shows.

    Suppose the excise tax only applies to gas stations where the owner’s last name begins with the letter “N”. Does that tax get passed on to consumers?”

    1. If only “N” owners had to pay excise tax, then “N” owners would change their names! Otherwise they would go out of business and no tax would be collected.

    2. Apparently, it’s important to you to believe that the income tax burden falls on a corporation’s customers despite the demands of the marketplace. I think that argument is deeply flawed. Yes, I know as a non-economist that’s a pretty arrogant claim for me to make.

    Yet…

    Think of this example: When I get a job with a corporation I sell my skills and my time to them. Therefore, per your argument, the income taxes I pay, are really a burden on the corporation I work for. LOL

    Just like you argue that the income taxes on a corporation are a burden on their customers! (And the key word is “their” customers because if I do not do business with that corporation I don’t pay their income taxes.)

    So, yes, I agree with you. If you earn a living selling services and or products to others they are paying your income taxes.

    The problem I have with your argument is that you cannot earn a living, unless you are born with a large bank account balance, without selling something to someone else and therefore, someone else is burdened with paying your income tax.

    That’s the nature of the beast.

    If you do not like the income tax, then argue for an alternative and do not close your eyes to the tax cuts for the rich in plain sight in the current tax cut bill.

    I could support that.

    3. The best argument I have ever heard for getting rid of corporate income taxes came from Meghan McCardle. If I remember correctly she argued that we should do away with corporate income taxes because corporations are too good at avoiding them. LOL

  62. Gravatar of KevinA KevinA
    5. December 2017 at 18:02

    @Larry

    Good! I’m always glad to see that there is room to agree between libertarians/conservatives and those with a more liberal mindset on taxes.

    The consumption tax is all about tax efficiency via lowering compliance costs, not about how much we tax or how we spend those taxes. The ideal tax system would have no compliance costs, and no need for CPA’s and tax attorneys. If those professionals would then convert their labor to ends that increased goods and services for the economy, we would all be better off.

    On the tax incidence debate between you and sumner… you are in danger of getting snared into a debate you can’t win. The concept of tax incidence has a rich literature backing it up.

    Your argument is the equivalent of a commentator claiming they disproved evolution on a biology blog, or someone trying to reason, on a physics blog, that gravity repels instead of attracts.

    While liberal and conservative economists disagree about how burden of corporate taxes is split, no one believes that the person who cuts the check necessarily is the person that bares the burden of the payment.

  63. Gravatar of Benjamin Cole Benjamin Cole
    6. December 2017 at 06:36

    I am banned at Econlog, so I will comment on Scott Sumner’s latest post here, a review of a MRU video on the pre-2008 “housing bubble” and the Fed causing the 2008 Great Recession.

    Scott Sumner’s review is fine, but it is depressing at this late date that orthodox macroeconomists, or even heterodox macroeconomists, cannot bring themselves to even mention “property zoning” and supply constraints when discussing house prices.

    Imagine if the number of new automobiles sold in the US was tightly circumscribed, by an allotted number of permits. And imagine there were great tax benefits to buying a car. Imagine further if you did not have a car you could be arrested for vagrancy, so you had to have a car, rented or owned, as legal matter, in addition to a practical matter.

    Would everyone talk about monetary policy as the key to higher auto prices and an “auto bubble”? Or would there be sensible and prominent discussions that the sharp limits on auto production were resulting in sharply rising auto prices?

    In no area are macroeconomists so lacking in insights as when they talk about housing bubbles and housing prices.

    I guess property zoning is so deeply embedded and embraced that it is not considered a structural impediment, as would be a limited number of permits for auto production.

    Still, quite a case of macroeconomic myopia.

  64. Gravatar of KevinA KevinA
    6. December 2017 at 10:16

    @benjamincole

    When I was over at my friends parents house for a bachelor party, a group of friends got into a conversation about housing (I forget how). To set the stage for my argument, I asked them to imagine a wonderful world in which property values fell to nearly zero and everyone had access to cheap, affordable housing.

    My friends parents overheard me, and went into a 20 minute semi-rant about how they are relying on their house for an equity line and, down the road, their retirement.

    And that’s the terrible truth of zoning and building regulations: they are perpetuated by the middle class. Having homeowners decide housing policy is a lot like having Exon Mobile decide Energy policy: they contort the rules to maximize the benefit to themselves.

    Here in the liberal bay area, homeowners like to complain that they are getting screwed by the rich, all the while, they form a cartel on the supply of housing which grossly increases homelessness and decreases the wealth of non-homeowners. Ridiculous.

  65. Gravatar of KevinA KevinA
    6. December 2017 at 14:44

    “You specifically designate areas for mobile homes, and this is no different,” he said. “We want this stopped. We aren’t against (zoning that allows three homes per acre). We are just talking about these types. It will greatly diminish our property values.”

    https://www.technocracy.news/index.php/2017/10/09/neighbors-revolt-tiny-houses-saying-will-destroy-property-values/

  66. Gravatar of Larry Larry
    6. December 2017 at 15:06

    @ KevinA

    “While liberal and conservative economists disagree about how burden of corporate taxes is split, no one believes that the person who cuts the check necessarily is the person that bares the burden of the payment.”

    I know I can be wrong about this subject. But, I will note, that none –let me say that again– none of the comments have led me to any source that could clarify my thought processes.

    If I questioned evolution, I would get lots of sources. Here I am, apparently committing an economic heresy, and no one has pointed me in the correct direction.

    Makes you think doesn’t it?

  67. Gravatar of KevinA KevinA
    6. December 2017 at 15:21

    @larry

    I linked to the concept of tax incidence here:
    https://en.wikipedia.org/wiki/Tax_incidence

    I thought Wikipedia would make an easy read:
    “Imagine a $1 tax on every barrel of apples an apple farmer produces. If the product (apples) is price inelastic to the consumer the farmer is able to pass the entire tax on to consumers of apples by raising the price by $1. In this example, consumers bear the entire burden of the tax; the tax incidence falls on consumers. On the other hand, if the apple farmer is unable to raise prices because the product is price elastic the farmer has to bear the burden of the tax or face decreased revenues: the tax incidence falls on the farmer. If the apple farmer can raise prices by an amount less than $1, then consumers and the farmer are sharing the tax burden. When the tax incidence falls on the farmer, this burden will typically flow back to owners of the relevant factors of production, including agricultural land and employee wages.”

    In addition, I linked to the congressional budget office, which emphasized that they, and most economist, believe the burden of payroll taxes fall on the employee. That is, even though your employer nominally “pays” half of your social security tax, they readily pass that burden on to you, in the form of lower wages.

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