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.



42 Responses to “Is tax reform falling apart?”

  1. Gravatar of msgkings msgkings
    11. December 2017 at 13:55

    Why do you think Trump or the Reps care about the blue states losing ‘intellectual capital’? For them that’s probably a feature not a bug.

  2. Gravatar of B Cole B Cole
    11. December 2017 at 15:37


    An intelligent layman, or even a mediocre layman, can read wildly varying accounts about the impact of Trump’s tax proposals (referred to as “reforms”).

    The 75,000-page federal tax code is incomprehensible, both currently or in proposed formats.

    How about we triple the standard deduction and call it a day? That way, at least some middle-class families will benefit. I think.

  3. Gravatar of Jose Jose
    11. December 2017 at 19:00

    Investment banks loosing intelectual capital ?! Seriously, that is one reason to support the aproved tax plans when reconciled. Investment banks are not the entrepreneurial firms of the early nineties anymore, although their current leaders believe they still are. Instead, they are gigantic corporations full of corporate bureacrats who vote for Dems…

  4. Gravatar of Major.Freedom Major.Freedom
    11. December 2017 at 20:29

    So Bernie still has a chance?

  5. Gravatar of Steve F Steve F
    11. December 2017 at 22:09

    I like that Major.Freedom reads The_Donald (I’m not the only one).

    No refunds!

  6. Gravatar of ssumner ssumner
    11. December 2017 at 22:49

    msgkings, Why do you think I think they care?

  7. Gravatar of Benjamin Cole Benjamin Cole
    12. December 2017 at 02:00

    OT, but sorta in the ballpark:

    “BEIJING, Dec 12 (Reuters) – Moody’s Investors Service said its outlook for Chinese financial institutions through 2018 is stable due to tighter government regulations on the industry and steadying economic growth.

    Since last year, Beijing has take steps to rein in financial risks and prevent a destabilising build-up of debt in the world’s second-largest economy, particularly the unregulated shadow banking sector.

    But the government has said it will balance its efforts to contain risks with the need to keep growth steady. Policy sources have told Reuters that China is likely to keep this year’s growth target of “around 6.5 percent” in 2018.

    “The government will remain keen on adopting coordinated policy measures to curb shadow banking and interbank activities and to address key imbalances in the financial system,” Sherry Zhang, a Moody’s analyst, wrote in a report.”


    I realize the credit-rating agencies completely missed the 2008 debacle, but nevertheless the China bears are getting very long in the tooth….

  8. Gravatar of msgkings msgkings
    12. December 2017 at 08:25

    @ssumner: Fair enough, I should have directed that comment to the author of the quote. Basically my point was, that quote is from someone who doesn’t get what the Reps are doing.

  9. Gravatar of Massimo Heitor Massimo Heitor
    12. December 2017 at 09:14

    The repeal of the AMT and the dramatic reduction in itemized deductions were two highlights of the tax reform effort. They are both falling apart.

    I agree with Sumner on those points. What I don’t understand is why Sumner is enjoying the bill falling apart rather than cheering for the bill to deliver genuine policy improvements to the country?

    And, no, Trump does not want to damage intellectual capital or innovation or productivity in blue states. That is a nutty conspiracy theory. Quite, the opposite, Trump wants to deliver wins. Which is his job.

  10. Gravatar of ssumner ssumner
    12. December 2017 at 10:00

    Massimo, What I don’t understand is why one commenter after another keeps attributing to me views that I do not hold.

  11. Gravatar of Benny Lava Benny Lava
    12. December 2017 at 10:58

    It is because of the way you write, Scott. The piece is critical of the tax reform bill, calling parts of it dumb. So there is already a tone or part of a thesis therein. You say you love reading certain quotes but don’t say why, which leaves it up to the reader to infer that you agree with the quotes.

    If everyone misunderstands you maybe it was on purpose?

  12. Gravatar of ssumner ssumner
    12. December 2017 at 11:15

    Benny, You said:

    “The piece is critical of the tax reform bill, calling parts of it dumb.

    The piece is critical of attempts to WATER DOWN the bill, by adding back loopholes. I’ve done numerous posts suggesting we need to cut back on deductions.

    As far as what I “enjoyed”, please read my sarcastic comment right afterwards.

    Funny how my smarter readers have no trouble figuring out what I’m saying. So no, not “everyone” misunderstands me, but certain people do repeatedly.

  13. Gravatar of Student Student
    12. December 2017 at 12:04


    Over and over people say you are saying things that you are not. I think this happens for a couple of reasons.

    1.) Many people are tribal. Therefore when they come across someone that praises and criticizes both tribes for various reasons, it creates anxiety in them. They don’t know what to make of you. Some people (even intelligent people) have trouble understanding people that hold views based solely on how they read things rather than on tribal allegiances.

    2.) you do seem to take pleasure or are amused or something by other people doing dumb things. For example, you enjoyed reading that the plan is a disaster. What’s enjoyable about that. I take is as you find it amusing that things are going as you thought they would.

    I must say, I find it entertaining because you literally have to comment on your commenters comments. I find the interaction quite entertaining.

  14. Gravatar of ssumner ssumner
    12. December 2017 at 12:14

    Student, I don’t enjoy reading that the plan is a disaster, I hate reading that. What I enjoy is blue staters who for years have been telling us that supply side tax cuts don’t matter (pointing to Kansas), suddenly telling us that supply side effects of state income taxes are super important.

    Very good point about the tribal issue. I go after both sides, and I notice that that really confuses the ideologues who read this blog.

    Personally, I find it kind of comical to watch people excuse sexual mischief from their own tribe, and bash the same behavior from the other tribe. It’s amazes me that people can be so unreflective about their biases. But heh, that’s human beings!

  15. Gravatar of Alec Fahrin Alec Fahrin
    12. December 2017 at 12:56

    Removing SALT deductions hurts the blue states and is politcally motivated, but from an eficiency standpoint, IT IS the correct reform.
    Similarly, the actions Bill Clinton took with young interns divided feminists (and continue to divide them) in a very ironic way.
    Just as the so-called “deficit hawks” who shut down the US government in 2011 and 2013 now approve $1.5 trillion in new deficits after a day of debate.
    Or how the current US president claimed the Electoral College was a broken system in 2012, yet argued in November that the popular vote is not meaningful.

    Hypocrisy is a normal human quality. Many of us put our own interests over those of others. Representative democracy is supposed to limit that problem. Yet, it does not.

    A man who most likely has pedophile tendencies may be elected to the US senate because the “other guy” supports the right to abortion. Evangelicals of all people support him in droves. The same people who look at most gays as pedophiles. Why? Because hypocrisy is a normal human quality.

    I wouldn’t expect anything different with the Bigger Deficits bill.

  16. Gravatar of Student Student
    12. December 2017 at 13:07

    Couple of additional random thoughts.

    There are times when efficiency and morality clash. There is a lot of that in this issue.

    Hypocrisy is something and we are all guilty though not by equal amounts. Alec brings up abortion. I find it crazy the freak out over sexual harassment while well over 500,000 babies are murdered a year… 51 million since 1970.

  17. Gravatar of Christian List Christian List
    12. December 2017 at 13:16

    I agree with Benny on this one. It’s at least to 50% because of the way you write, Scott. If it makes you happy, I take the other 50% on me because I’m too stupid to get your idea of sarcasm, intelligence, autism, or whatever it is. Just take the other 50% on you and show some self-reflection?

  18. Gravatar of Keenan Keenan
    12. December 2017 at 14:34|twitter&par=sharebar

    Scott, curious your thoughts as to Druckenmiller’s criticism of Fed policy. Normally, these guys obviously do not know what they’re talking about, but this is perhaps the most successful investor ever. Mainly, is misallocation of resources a legitimate complaint?

  19. Gravatar of Matthew Waters Matthew Waters
    12. December 2017 at 15:10


    Didn’t Druckenmiller have return his investors’ money, basically saying “I don’t get this market any more?” Many very good investors I respect are really wrong on monetary policy. Seth Klarman’s value investing ideas are great, but he signed the 2010 inflation letter (i.e. QE will create uncontrolled hyperinflation that never came).

    On Drunkenmiller’s first statement, he’s really giving the argument for NGDP targeting. Deflation or 0% inflation CAN be fine, if there is actually real growth pushing down prices rather than lacking demand.

    But the next part, that the Fed is “distorting market signals” is absolutely wrong. He gives example of ECB making a DIRECT loan as distortionary and wrong, which I agree with. But general interest rate policy or QE of government assets? Those don’t cause private actors to invest wrongly. If private actors invest wrongly (i.e. bitcoin IMO), then that’s on private actors. Calling it “monetary radicalism” is really, really wrong.

    I think Scott would agree with his first argument, but be very critical of his general VSP monetary arguments.

  20. Gravatar of ssumner ssumner
    12. December 2017 at 16:17

    Christian, I notice that people are never able to point to anything specific in my posts. Just vague generalities about “feelings”.

    Point to a single sentence where I say something a commenter says that I say.

    Having said that, I’m not surprised that you have trouble grasping what I am trying to say, as you are a troll, not a serious commenter.

    Keenan, He’s right that inflation targeting is a bad idea. As for the rest of his reasoning process, the less said the better.

  21. Gravatar of Michael Moran Michael Moran
    12. December 2017 at 17:19

    My only comment is about the cited article which states that the tax reform bill will cause corporations to move plants overseas. That premise is clearly false. I am a tax lawyer. The current Subpart F- CFC system of taxing non US profits of US corporations gives them a near permanent deferral on offshore profits (what is present value of taxes that never have to be paid?). Going to a territorial system makes the deferral permanent. This change is very minor. On the other hand, the lower corporate tax rate, which I few as the centerpiece of the reform bill, is quite important. The cited article plays on ignorance. I hope you understand that You should not have cited that article.

  22. Gravatar of Scott Sumner Scott Sumner
    12. December 2017 at 18:06

    Michael, You may be right (and certainly know more than me), but you haven’t addressed any of the specifics in the article. They provide very specific examples of how companies could invest overseas and not pay any more tax at the margin. If those examples are incorrect, what specifically is wrong with them?

  23. Gravatar of E. Harding E. Harding
    12. December 2017 at 20:06

    Thanks to the tireless efforts of Roy Moore and Donald Trump, tax reform has officially fallen apart.

  24. Gravatar of Scott Sumner Scott Sumner
    12. December 2017 at 21:45

    Harding, Good to see the voters of Alabama reject the racist message of scum like you and Bannon. A state the GOP usually wins in a landslide goes for the Dems. Here comes the 2018 landslide, and the impeachment to follow. Never has a political party so richly deserved a spanking.

  25. Gravatar of Scott Freelander Scott Freelander
    12. December 2017 at 21:53


    And the Democratic Party has done little, if anything to deserve this success. Voters like Harding are handing sweeping victories to Democrats by supporting these extremists, idiot candidates like Trump. If not for the insanity and incompetence of Republicans, all the news would be about the awful shape the Democratic Party is in.

  26. Gravatar of E. Harding E. Harding
    13. December 2017 at 08:45

    I said good and bad things about all three candidates prior to the primary. I only became a strong Moore supporter after he was nominated.

    BTW Moore did not run on a racist message; he ran on a pre-Trump GOP one. Religious conservatism is, luckily, out. The GOP must focus more on immigration (where it has a decisive advantage among the public) to win.

    Trump did better in AL than Romney and is more conservative than Romney.

    The eternal Brown/Jones voter disgusts all sensible men.

  27. Gravatar of Randomize Randomize
    13. December 2017 at 09:06

    Dr. Sumner,

    You may be looking for a reason to gloat on supply-side effects of marginal tax rates. The tax plan’s impact is more about tax-competition and general equity between the states than it is about the actual marginal rates themselves. New York’s loss of intellectual capital, for example, may be some other state’s gain.

  28. Gravatar of Benny Lava Benny Lava
    13. December 2017 at 09:22


    So you think it is smart to make assumptions out of vague writing that switches from thesis to thesis in the same post? Strange definition of smart you have.

  29. Gravatar of Massimo Heitor Massimo Heitor
    13. December 2017 at 13:01

    I would request that Sumner explain his viewpoint on race and racism and tribalism. In the past, he said he can’t do so, because the nation is so crazy you can’t have a reasonable discussion, but his views on race are clearly central to his political world view.

    It is racist for a people to want to keep their existing ethnic/cultural/religious/national/linguistic identity and restrict national immigration accordingly. Bannon absolutely advocates for that. However, this is the norm of human behavior. All the major ethnic/cultural/religious/national/linguistic group prefer themselves and don’t want to be ended or replaced by another. And even posing this issue is considered some despicable act of racism that can’t be dignified with a response.

  30. Gravatar of bill bill
    13. December 2017 at 13:26

    I don’t prefer my own ethnic/cultural/national/linguistic groups. I do have some preference for my own religious group (ie, “none”).

  31. Gravatar of foosion foosion
    13. December 2017 at 13:26

    “What I enjoy is blue staters who for years have been telling us that supply side tax cuts don’t matter (pointing to Kansas), suddenly telling us that supply side effects of state income taxes are super important.”

    I had thought the critique of Kansas was that cutting rates would not unleash the promised flood of increased economic activity, tax revenue and hiring and instead would result in cutting services with no apparent broad benefit. The critique turned out to be correct, didn’t it?

    The problem with eliminating the SALT deduction is that affected states may have to cut their taxes to offset the effect, which will result in less state revenue. With less revenue, those states won’t be able to provide the same level of services (schools, infrastructure, whatever). That’s what will cause the damage.

  32. Gravatar of Kam Kam
    13. December 2017 at 18:45


    What would be the impact to ngdp if the federal government didn’t collect any taxes, and instead directly financed spending via the Fed’s balance sheet? Would there be any way to implement such a solution (setting aside potential downsides for the moment) while still making ngdp growth stable?

  33. Gravatar of Mark Mark
    14. December 2017 at 04:51


    If capital flees high tax states for low tax states, would that not vindicate supply siders? Are you suggesting it’s a zero sum game, and the amount invested won’t change, just which states it gets invested in?

    In any case, SALT is likely here to stay now that Collins’s vote is necessary.

    While a midterm landslide is possible, Moore’s defeat isn’t good evidence of one; he was a uniquely bad candidate. Strange likely would’ve won by a healthy margin. In the long run, the GOP dodged a bullet with Moore losing. McConnel breathes a sigh of relief.

    Do you actually expect impeachment, Scott? Or are you being hyperbolic?

  34. Gravatar of ssumner ssumner
    14. December 2017 at 18:15

    Harding, I hate to break the news to you, but since the rise of Trump the US public has turned pro-immigration.

    Randomize, You said:

    “New York’s loss of intellectual capital, for example, may be some other state’s gain.”

    That’s exactly what the left has been denying. Read any of their articles on Kansas.

    Massimo, America’s “existing identity” is not white, it’s multi-racial.

    Foosion, I don’t understand your argument. Why will these states have to cut their taxes? Why will they lose revenue?

    Mark, I expect impeachment, but not conviction.

  35. Gravatar of John Thacker John Thacker
    15. December 2017 at 08:21

    “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.”

    Looks like they’re keeping the $10k cap, but all of property + choice of state and local income / sales taxes can be put towards the $10k. (Choice of income / sales necessary to get votes of states with no state income tax.) Not perfect, but I suppose manageable, given that at the same time they’re compromising on dropping the mortgage deduction limit from $1M to $750k (halfway of what the House did, but I don’t think it will exclude all second homes as the House did. New debt only. Might exclude cash-out refinances that increase principal unless used for home improvement.)

    My top two changes that I’d like are getting rid of SALT and getting rid of the mortgage interest deduction (in exchange for broader lower rates, though in the long term progressives should favor this too), so I can trade a bit less of the first for a bit more of the second.

    Individual AMT limit way up (more than Senate bill, deduction of a million was the number I saw) but not eliminated. A lot fewer people should have to even break out the form, though, if their gross income isn’t close to a million.

    The FIFO proposal seems to be definitely out, along with a number of base-broadening efforts. Grad student tuition waivers not taxed, though I’m not sure about university employee tuition benefits for dependents.

  36. Gravatar of Weekend Reading: Ignorance Is No Excuse | Weekend Reading: Ignorance Is No Excuse |
    15. December 2017 at 13:52

    […] Is Tax Reform Falling Apart by Scott Sumner via Econolog […]

  37. Gravatar of Weekend Reading: Ignorance Is No Excuse | Investing Daily News Weekend Reading: Ignorance Is No Excuse | Investing Daily News
    15. December 2017 at 14:46

    […] Is Tax Reform Falling Apart by Scott Sumner via Econolog […]

  38. Gravatar of E. Harding E. Harding
    15. December 2017 at 15:01

    “I hate to break the news to you, but since the rise of Trump the US public has turned pro-immigration.”

    No. I have no doubt it’s more pro-immigration than it was in 2014, but it’s in no sense “pro-immigration”.

  39. Gravatar of Jon Jon
    15. December 2017 at 18:49


    Final Bill is out. You can see the text here plus commentary from the conference committee.

    This document is a lot clearer than the news reports. Tax-lot rules for capital gains remain unchanged.

  40. Gravatar of ssumner ssumner
    16. December 2017 at 16:38

    John, Yes, the final bill was not as bad as I feared, there are a few good provisions. Biggest missed opportunity was health insurance deduction.

    Jon, I have a post at Econlog.

  41. Gravatar of Massimo Heitor Massimo Heitor
    17. December 2017 at 00:29

    “Massimo, America’s “existing identity” is not white, it’s multi-racial.”

    @Sumner, of course. Every nation is multi-racial and all races and species are mixes of ancestor races/species. That really isn’t answering my question. I was hoping you could explain your view on race and racism and why Bannon is racist. Is Japan, Israel, China, Qatar, or Mexico racist?

  42. Gravatar of foosion foosion
    19. December 2017 at 06:56

    Foosion, I don’t understand your argument. Why will these states have to cut their taxes? Why will they lose revenue?

    Killing the SALT deduction will raise taxes for many of their upper income residents. Those residents will lobby their representatives to reduce state taxes to prevent a net tax increase and upper income people often get what they want from politicians. The lower state taxes will lower revenue given state’s balanced budget constraint.

Leave a Reply