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Apr 26 2017

Groundhog Day

Groundhog Day,” one of ek hornbeck’s favorite movies, is about a man caught in a time loop doomed to repeat the same day over and over until he examines his life and changes. Like Bill Murray’s character in the movie the US seems to be unable to move on from the bad tax policies that began under Ronald Reagan with his love of Milton Friedman’s economic policies and implementation of Arthur Laffer’s theory on tax cuts. “Trickle Down” and “Voo Doo” economics still live.

Today the Treasury Secretary Steven T. Mnuchin and White House National Economic Council Director Gary Cohn rolled out Trump’s blue print for the latest and greatest tax plan. Basically, it cuts taxes for corporations and the wealthy and add a few trillion to the federal deficit. Of course they claim this will stimulate growth and create jobs but, as the past has shown, that is just a well debunked myth that the GOP perpetuates.

Arthur Laffer’s Theory on Tax Cuts Comes to Life Once More
By Peter Baker, The New York Times

A white cloth napkin, now displayed in the National Museum of American History, helped change the course of modern economics. On it, the economist Arthur Laffer in 1974 sketched a curve meant to illustrate his theory that cutting taxes would spur enough economic growth to generate new tax revenue. [..]

Presidents Ronald Reagan and George W. Bush both cut taxes deeply on the promise of economic payoffs, putting aside concerns about deficits, which grew during their tenures. Mr. Trump at points during the campaign talked tough about deficits, promising not only to eliminate them but also to wipe out in just eight years the entire $19 trillion in national debt that has accumulated over the history of the United States — a pledge so wildly unrealistic that even he has since dropped it.

Indeed, since taking office, Mr. Trump has made no sustained effort to rein in deficit spending. In his first partial spending plan, called a skinny budget, he proposed $54 billion in cuts to domestic and foreign spending programs, some of them quite deep, to pay for $54 billion in additional military spending. That would leave the bottom line unchanged. In the current fiscal year, which started under former President Barack Obama, the government is spending $559 billion more than it is taking in through taxes, according to the Congressional Budget Office.

Mr. Trump’s plan reportedly will cut corporate tax rates to 15 percent from 35 percent, and cut taxes for small businesses and other firms that pay through personal income taxes as well. The administration has also promised tax breaks for middle-income Americans. And the plan may be paired with an expansive spending proposal to build new roads, bridges and other infrastructure. [..]

Presidents Ronald Reagan and George W. Bush both cut taxes deeply on the promise of economic payoffs, putting aside concerns about deficits, which grew during their tenures. Mr. Trump at points during the campaign talked tough about deficits, promising not only to eliminate them but also to wipe out in just eight years the entire $19 trillion in national debt that has accumulated over the history of the United States — a pledge so wildly unrealistic that even he has since dropped it.

Indeed, since taking office, Mr. Trump has made no sustained effort to rein in deficit spending. In his first partial spending plan, called a skinny budget, he proposed $54 billion in cuts to domestic and foreign spending programs, some of them quite deep, to pay for $54 billion in additional military spending. That would leave the bottom line unchanged. In the current fiscal year, which started under former President Barack Obama, the government is spending $559 billion more than it is taking in through taxes, according to the Congressional Budget Office.

Mr. Trump’s plan reportedly will cut corporate tax rates to 15 percent from 35 percent, and cut taxes for small businesses and other firms that pay through personal income taxes as well. The administration has also promised tax breaks for middle-income Americans. And the plan may be paired with an expansive spending proposal to build new roads, bridges and other infrastructure. [..]

The question comes down to how the effect of a tax cut is measured. Under what is called static scoring, changes are judged without assuming any difference in growth. Under what is called dynamic scoring, assumptions are made about how much growth will change. “Under dynamic scoring, this will pay for itself,” Mr. Mnuchin said at a public forum last weekend. “Under static scoring, there will be short-term issues.” [..]

Critics scoffed at the math. “There is not a shred of evidence to support the secretary’s pay-for-itself claim,” said Jared Bernstein, a top White House economics adviser under Mr. Obama. “Sure, significantly faster growth would spin off more revenues. But there’s simply no empirical linkage between tax cuts and growth that’s both a lot faster and sustained.”

Douglas Holtz-Eakin, a former Congressional Budget Office director who advised Senator John McCain’s Republican presidential campaign in 2008, was equally skeptical. “I can imagine cutting the rate to 15 percent,” he said. “I can imagine growing a percentage point faster. I can imagine raising $2 trillion in revenue. I can’t imagine them being one and the same policy.”

N. Gregory Mankiw, a Harvard University economist who was chairman of the President’s Council of Economic Advisers under the younger Mr. Bush, said tax cut supporters exaggerate the possible growth benefits while opponents overemphasize the budgetary cost. “A reasonable rule of thumb, in my judgment, is that about one-third of the cost of tax cuts is recouped via faster economic growth,” he said.

This from Dean Baker at his Blog

Yes, it’s Groundhog Day. Republicans are once again claiming that tax cuts will spur enough economic growth to pay for themselves. Well, old-timers like myself remember Round I and Round II when we tried this grand experiment. It didn’t work.

Round I was under President Reagan when he put in big tax cuts at the start of the presidency. These tax cuts were supposed to lead to a growth surge which would cover the costs of the tax cuts. Not quite, the deficit soared and the debt-to-GDP ratio went from 25.5 percent of GDP at the end of 1980 to 39.8 percent of GDP at the end of 1988. (It rose further to 46.6 percent of GDP by the end of the first President Bush’s term.)

Round II were the tax cuts put in place by George W. Bush. At the start of the Bush II administration the ratio of debt to GDP was 33.6 percent. It rose to 39.3 percent by the end of 2008.

In addition to these two big lab experiments with the national economy, we also have a large body of economic research on the issue. This research is well summarized in a study done by the Congressional Budget Office (CBO) back in 2005 when it was headed by Douglas Holtz-Eakin, a Republican economist who had served as the head of George W. Bush’s Council of Economic Advisers.

I commented on this study a few years back:

“In a model that examined the effects of a 10% reduction in all federal individual income tax rates, the economy was slightly larger in the first five years after the tax cut and slightly smaller in the five years that followed. In this case, using dynamic scoring showed the tax cut costing more revenue than in the methodology the CBO currently uses.

“The CBO did find that dynamic scoring of the tax cut could have some positive effects if coupled with other policies. In one set of models, policymakers assumed that taxes were raised after 10 years. This led the government to raise more tax revenue in the first 10 years because people knew that they would be taxed more later, so they worked more.”

In short, Holtz-Eakin considered the extent to which tax cuts could plausibly be said to boost growth and found that they had very limited impact on the deficit. The one partial exception, in which growth offset around 30 percent of the revenue lost, was in a story where people expected taxes to rise in the future. In this case, people worked and saved more in the low-tax period with the idea that they would work and save less in the higher tax period in the future.

That is not a story of increasing growth, but rather moving it forward. I doubt that any of the Republicans pushing tax cuts want to tell people that they better work more now because we will tax you more in the future. But that is the logic of the scenario where growth recaptures at least some of the lost revenue.

Having said all this, let me add my usual point. The debt-to-GDP ratio tells us almost nothing. We should be far more interested the ratio of debt service to GDP (now near a post war low of 0.8 percent).

Also, if we are concerned about future obligations we are creating for our children we must look at patent and copyright monopolies. These are in effect privately imposed taxes that the government allows private companies to charge as incentive for innovation and creative work. The size of these patent rents in pharmaceuticals alone is approaching $400 billion. This is more than 2 percent of GDP and more than 10 percent of all federal revenue. In other words, it is a huge burden that honest people cannot ignore.

 

Well, we could just mint that $100 trillion platinum coin to fix it all and call it the end of the movie.