Five Thoughts About the Tax Bill
By David Henderson
Here are five thoughts about the tax bill: they are from big-picture economic analysis. Later today or tomorrow, I’ll post on how I plan to adjust my behavior before December 31, 2017 in response to the tax bill.
1. How economists judge tax cuts.
Economists across the political spectrum, to their credit, do not view the tax bill the way almost everyone else does. Most people look at how much more or less they will pay in taxes. Economists tend to look at the overall effects. I think, by the way, that this speaks well of economists. Whatever you think of Paul Krugman, for example, notice that he never talked about the effect of the tax bill on himself. Without knowing a lot of details about his income and deductions, I’m 99% sure that he will get a huge tax cut, much bigger than mine in absolute dollars, as well he should.
2. The corporate income tax rate cut.
The best part of the tax bill is the cut in the corporate income tax rate. While it’s true, as Krugman pointed out very well in my favorite book of his, Pop Internationalism, that nations don’t compete economically with each other, they do compete somewhat for capital. By dropping its corporate income tax over the years, from 50.9% in 1981 to 26.5% today (and this includes the provincial tax rates on corporate income), Canada has been saying to the world:
Give me your rich
Your huddled capitalists yearning to invest more freely
The well-heeled investors of your high-taxed country
Send these, the taxed-class, to me
I lift my lamp beside Vancouver, Calgary, and Toronto.
(copyright 2017, David R. Henderson)
Now the United States will compete more effectively with Canada and with many other countries.
With more capital, the capital to labor ratio will be higher and workers’ real wages will rise.
3. SALT and the standard deduction.
The second-best (and it’s a close second) part of the bill is the twofer: the limit on the deduction for state and local taxes (SALT) and the related increase in the standard deduction. The limit on the deduction for state and local taxes now means that residents of high-tax states like my own California will not get as big a tax break as they were getting and that, in turn, will probably force some fiscal discipline. (Co-blogger Scott Sumner wrote about this here.) The increase in the standard deductible–to $24,000 for a married couple filing jointly–will lead many more people to quit itemizing deductions and, instead, take the standard deduction. This reduces a big distortion in the tax code, a distortion that caused us to buy houses that were too expensive and to go along with state and local tax increases. It also, of course, could reduce the amount we give to charity: more on that when I talk about my own adjustments.
4. Odds and Ends.
There are a lot of things I don’t like about the bill. Co-blogger Scott Sumner has done a good job here of listing those things and of listing the things I like and the things that are neutral.
I have two disagreements and one possible disagreement with Scott.
The first disagreement is about the increase in the child tax credit being neutral, and about his reasons for it. Scott argues that this is “pretty simple to handle” and “does provide some needed tax relief to lower income families.” I think the increase in the child tax credit is bad–it gives people a credit for having a child and so “wastes” the tax cut where, instead, it could have been used to cut marginal tax rates slightly for everyone. Also, although it is simple to handle, the fact is that lower-income families pay little in federal income taxes.
The second disagreement is about the change in the corporate income tax to a territorial tax being neutral. I think it’s positive.
The one possible disagreement is that maintaining the “carried interest loophole” is a negative. I don’t understand it enough to say.
I’ve got to say that, on the whole, though, I’m impressed by so many Congress people being willing to vote for such a bill: it’s more reform than I would have expected.
5. The effect on debt must be separated from the effect on growth.
Here’s what Robert I. Lerman, an institute fellow at the Urban Institute and emeritus professor of economics at American University, wrote this morning:
Who would refuse an offer that yields about $180,000 in labor and investment income if you agree to borrow an additional $130,000? In a sense, the tax bill embodies this offer to the American public, assuming the Congressional Joint Committee on Taxation (JCT) estimates are accurate. Media coverage of the bill focuses on estimates showing that the tax bill will not pay for itself, that tax revenues induced by the tax bill’s stimulus to growth will be less than the gross tax reductions. These reports are important but they ignore the gains in economic growth that exceed the additions to federal debt. While the ratio of debt to GDP will go up, interest payments as a share of GDP will be only slightly higher because of the tax bill.
The whole thing, which is not long, is worth reading. HT2 Daniel Kuehn on this last.