Archive for the Category Supply-side economics


Is tax reform falling apart?

First we have the Senate reinstating the AMT.  And now this:

On Friday, Gary Cohn, the president’s senior economic adviser, suggested the White House might push for a cap on federal deductions for state income taxes, rather than an elimination.

Both the House and Senate have already passed bills that cap SALT deductions (for property taxes) at $10,000.  Why put this idea out there now?  This is just mind-bogglingly dumb.

And now we discover that the corporate income tax changes will encourage firms to move plants overseas.

PS.  I enjoyed reading this:

As written, the plan is “a disaster”, said the head of another powerful New York-based investment bank, who asked not to be named for fear of being attacked by Mr Trump on Twitter.

He added: “This won’t happen over the period of a quarter or a year, but in five to 10 years, when we’ll look back at the amount of intellectual capital lost by New York City and other blue [Democratic-led] states because of Trump’s tax reform, we’ll get the full extent of how damaging all this is.”

But wait, I thought it’s been “proved” that supply-side economics is wrong; marginal tax rates don’t affect behavior.

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.

A supply-sider is a progressive who’s been elected governor

People used to say that a conservative is a liberal who’s been mugged.  I wonder if the same sort of principle applies to progressives who have been elected governor, and assume responsibility for the health of their state’s economy:

Here’s New York Governor Andrew Cuomo:

New York will be destroyed if the deductibility of state and local taxes is included in any final plan that passes the House.

His next door neighbor Connecticut is a perfect example of a state economy wrecked by “progressive” high tax policies.

PS.  In a previous post I wrongly claimed that 53 Alabama pastors had signed a letter in support of Roy Moore after the recent scandal.  That was not accurate; the letter was written several months ago.  But this Boston Globe story suggests that not much has changed:

Over the last week, the Globe called dozens of evangelical pastors in Alabama and elsewhere who had supported Moore before the allegations emerged, gleaning from a list of names posted to the Facebook account of the candidate’s wife.

None of the nearly 10 pastors reached by phone said the allegations of sexual misconduct changed their views about Moore. Several said the allegations made them more proud to vote for the former judge.

Repeatedly, the pastors attempted to discredit Moore’s accusers in personal terms, with some dismissing their emotional stories as “crocodile tears” and “fake news.”

“I don’t know how much these women are getting paid, but I can only believe they’re getting a healthy sum,” said pastor Earl Wise, a Moore supporter from Millbrook, Ala.

Wise said he would support Moore even if the allegations were true and the candidate was proved to have sexually molested teenage girls and women.

“There ought to be a statute of limitations on this stuff,” Wise said. “How these gals came up with this, I don’t know. They must have had some sweet dreams somewhere down the line.

“Plus,” he added, “there are some 14-year-olds, who, the way they look, could pass for 20.” . . . “You’re asking me to believe them,’’ Raddish said, “when their own mother didn’t have enough red blood in her to . . . go and report this? Come on.”

And here’s how Jim Geraghty of the National Review responded to the pastors:

Yeah, why didn’t those mothers go down to the local district attorney and report that their daughters were being inappropriately sexually pursued by . . . the local assistant district attorney?

Meanwhile . . .

Donald Trump’s national security adviser reportedly mocked the US president and called him a “kindergartner” during a private dinner. . . .

During the meeting General McMaster mocked Mr Trump calling him an “idiot” and a dope, adding he had the intelligence of a “kindergartner”, five sources told BuzzFeed News. . . .

Last month it was claimed secretary of state Rex Tillerson referred to Mr Trump as a “moron” during a meeting at the Pentagon.

When the reports emerged, Mr Tillerson repeatedly refused to answer when asked whether he had made the comments.

Meanwhile Republican senator Bob Corker has previously likened the White House to “adult daycare”.

I’ve decided to stop insulting Trump.  From now on I’ll just report the views of his staff.

Steph Curry and Steve’s Bike Shop

Here’s the PR statement put out by the Republicans:

The Tax Cuts and Jobs Act includes specific safeguards to prevent tax avoidance and help ensure taxpayers of all income levels play by the rules under this new fairer, simpler tax system. Our legislation will ensure this much-needed tax relief goes to the local job creators it’s designed to help by distinguishing between the individual wage income of NBA All-Star Stephen Curry and the pass-through business income of Steve’s Bike Shop.

Is it true that Steve creates jobs while Curry does not?  Not really.  In a sense both people create jobs.  Because of Steve and Steph, some cashiers have jobs at Steve’s bike shop and some concession stand people have jobs at the Golden State arena.  So certain specific jobs are created by their actions.

On the other hand, neither cause the job total in America to be higher than otherwise.  Those employed at the bike shop and basketball arena would have jobs somewhere else if not for Steve and Steph (due to monetary offset.)

The real argument for the lower pass through rate (if I understand it correctly) is that capital income should not be taxed at all, and a portion of business income is capital income.

Why is Curry the only person mentioned in the GOP document, and why in a less than favorable way?  I’m not sure.  In my view, Steph Curry is far more valuable to society than Steve (for standard diamond/water paradox reasons).  But I’d guess that many GOP voters resent the high incomes earned by African-America athletes, especially those who don’t seem grateful to America.  This is probably why Trump keeps picking a fight with the NFL—he knows it appeals to his base.  It’s all part of our stupid culture wars.

Some have argued that high wage earners often benefit from government subsidies, such as government funding of sports arenas.  That’s true, but businesses also get massive government subsidies, and only a very tiny share of Steph Curry’s income is due to these subsides; it mostly reflects his extremely high productivity (which leads to big TV ratings).  I have no problem with taxing high wage earners like Steph Curry at a 50% or 60% rate, but let’s not kid ourselves and claim that businesses are somehow more virtuous that high wage earners.  Productivity is productivity, whether from white businesses or African-American workers.  And Steph is way more productive than Steve.

PS.  It’s not good when the very first bullet point in your PR document is inaccurate:

The Tax Cuts and Jobs Act delivers tax relief at every income level – while maintaining the top 39.6% tax rate on high-income earners.

This post explains why.

Trick or treat?

Suppose that 6 months ago you had told some progressive pundits like Matt Yglesias that the GOP tax plan would keep the top income tax rate unchanged, in other words, they would endorse Barack Obama’s decision to raise the top rate from 35% under Bush (and 39.6% under Clinton) up to 43.4%.  They would probably have assumed that you were crazy.  And yet according to the AP, that’s exactly what’s about to happen:

Although they had settled on some key details — such as a cut in the corporate tax rate to 20 percent and maintaining the top personal income tax rate for the wealthy of 39.6 percent — other elements still had to be resolved, including the income levels for the tax brackets.

[As usual the media gets it wrong, the top rate is 43.4%, not 39.6%—as there are two federal income taxes, and the rich must pay both of them.]

Yes, the top corporate rate will be cut, but even the Dems favored that move.

Elections have consequences.  Elect a libertarian President and Congress, and see Obamacare repealed and the top income tax rate cut.  On the other hand if you vote for the Dems or the GOP then Obamacare stays in place and the top rate stays at 43.4%.  So yes, it does make a difference who you vote for.

Remember how the supply-siders got all excited when Trump proposed a 25% top rate?  And remember what I predicted?