Kevin Hassett accuses me of an ad-hominem attack against his economic analysis of the Trump Administration’s tax plan. I am proudly guilty of asserting that it is some combination of dishonest, incompetent and absurd. TV does not provide space to spell out the reasons why, so I am happy to provide them here.
I believe strongly in civility in public policy debates, and prior to the Trump administration do not believe I have ever used words like dishonest in disagreeing with the policy analyses of other economists. Part of my rationale for speaking so strongly here is that Kevin called into question the integrity of the Tax Policy Center, a group staffed by highly respected former civil servants, by calling their work “scientifically indefensible” and “fiction”.
Then, Kevin invokes Art Okun as support for his spurious arguments. To paraphrase Lloyd Bentsen—I worked with Art Okun; I knew Art Okun; Art Okun was my friend. Kevin, you are no Art Okun.
As CEA chair, Art stood for honest, objective economic analysis rooted in the professional consensus. In the last year of his life, he made clear how dubious he found the claims of supply side economics. In contrast, Kevin throws around the terms scientific and peer-reviewed, yet there is no peer-reviewed support for his central claim that cutting the corporate tax rate from 35 to 20 percent would raise wages by $4000 per worker.
The claim is absurd on its face. The cut in corporate tax rates from 35 to 20 percent will cost slightly less than $200 billion a year. There is a legitimate debate among economists about how much the cut will benefit capital and how much it will benefit labor. Kevin’s “conservative” claim that the cut will raise wages by $4000 in an economy with 150 million workers is a claim that workers will benefit by $600 billion or 300 percent of the tax cut! To my knowledge, such a claim is unprecedented in analyses of tax incidence. Kevin though doubles down by holding out the further possibility that wages might rise by $9000.
Yes, I am aware that some of the wage increase might be expected to come from the growth-inducing benefits of a corporate tax cut. Such a cut might spur investment. But any possible growth benefit is attenuated by the facts that (i) the economy is very close to or at full employment; (ii) costs of capital are already at record low levels; (iii) the tax cuts will put upward pressure on interest rates; and (iv) the move to a territorial system which reduces taxes on overseas income of US companies will encourage outsourcing. None of this is factored into Kevin’s analysis or the studies he cites.
At a more technical level, professional economists will recognize that the CEA’s analysis and Kevin’s TPC speech are shot through with error. Some examples: in the presence of full expensing, a corporate rate reduction has no effect on the cost of capital for equity-financed investments and raises the cost of capital for debt-financed investments. Changes in transfer pricing practices induced by tax policy changes do not represent changes in economic welfare or real incomes of Americans. In modern economic science, regressions of wage growth on tax rates cannot be understood as causal without a theory of the level of tax rates. Theory suggests relationships between changes in corporate taxes and changes in wages rather than between the level of corporate taxes and wage growth. The observation that low tax rates coincide with significant growth in Eastern Europe is of dubious relevance to the United States. Lower corporate taxes, as Stantcheva and others have argued, raise managerial incentives to hold down wages on behalf of shareholders.
Considering all this, if a Ph.D student submitted the CEA analysis as a term paper in public finance, I would be hard pressed to give it a passing grade. I predict that as debates on tax policy unfold there will be many serious Republican economists who endorse parts of the Trump plan. I doubt that any will associate themselves with the CEA analysis. If Kevin wishes to preserve the CEA’s reputation and his own, next time he will not attack honest analysts and will himself be much more careful.