Jason Furman on the House tax reform plan

by on November 5, 2017 at 2:54 pm in Current Affairs, Economics, Law | Permalink

Find the slides here, 44 pp., very useful.  I found (what seems to be) #36 most interesting, namely to the extent interest deductibility remains, many corporations will face a negative marginal rate under the new reforms.

I do think Jason could have offered more praise to how the plan limits various inefficient deductions, a long sought-after goal.

Hat tip goes to Greg Mankiw.

1 Bill November 5, 2017 at 4:52 pm

Wow. Everyone should read the powerpoint. Have not seen discussion in the papers matching this analysis.

“reduces economic growth, increases foreign borrowing, lowers wages, and raises the overall cost.”

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2 mulp November 5, 2017 at 5:29 pm

This bill will create Jobs!

Instead of hiring a single new worker for $100,000 using profits that belong to shareholders at a net after tax cost to shareholders of $65,000, managers will hire two new workers for $100,000 because the shareholders will pay only $95,000 more for the second worker, $80,000 each out of after tax profits!

Milton Friedman complained the 50% Federal profits tax plus the added State profits taxes cause too many workers being hired and paid too much. He pointed out that managers and business owners hired workers and increased wages to make their labor relations better with the tax man paying more than half the added labor costs. And small business owners put all their relatives on the payroll instead of giving them gifts because these deadbeats pay tax rates less than the 50%+ tax on profits. An the gift tax added insult to injury, so putting them on the payroll is a tax dodge, even if they never do any work.

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3 Meets November 5, 2017 at 7:50 pm

Reduces economic growth?

The stock market seems to disagree.

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4 Bill November 5, 2017 at 9:16 pm

Yeah, can ya imagine, Trump raised the Japanese and European stock markets too at the same time. Or, maybe the world economy has been growing, with the US as well, and you just didn’t notice.

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5 GoneWithTheWind November 6, 2017 at 10:17 am

I am shocked that a left wing economist is opposed to a tax cut. Shocked ! I tell you.

The left are tax and spend politicians and they never saw a tax that they didn’t love. They would rather tax us all into a depression than cut government spending.

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6 Anonymous November 6, 2017 at 11:05 am

I think you have boxed yourself to “math is a left wing conspiracy!”

“Tax cuts good. Math bad.”

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7 GoneWithTheWind November 6, 2017 at 9:38 pm

I have to assume that you mean the math that a tax cut will result in less revenue. Well of course that certainly isn’t true since a tax cut will improve the economy resulting in more income for more people which means more revenue. But what I prefer is the math where the government only spends what they take in even if it isn’t enough to satisfy everyone’s dreams. Tax cuts good; math good, excessive spending bad.

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8 Kevin Erdmann November 5, 2017 at 4:52 pm

It seems as though that analysis is based on (1) marginal investments coming through leverage with a cost equal to the interest rate on debt, and (2) returns based on a static before-tax market rate of return and flexible after-tax returns. I’m not sure what we can learn from that, since neither of these assumptions are reasonable in practice or theory.

I don’t know if this is a product of the silo effect and economists just don’t talk to finance academics, or if there is something going on here that I don’t understand. But, this idea that marginal investment happens through leverage with a discount rate equal to interest rates on marginal new debt seems to be a common assumption underlying many economic conversations.

The idea that firms are using low interest rates to borrow and buy back stock. The idea that short term rates, driven low by the Fed lead to new investment based on the low rate which results in over-leverage for unsustainable projects. The idea that long periods of stability lead to complacency, which reduces credit spreads and borrowing costs, again, leading to marginal investment through leverage that is only sustainable at those low rates…..etc.

If there is one lesson that every corporate finance course tries to impart it is this. The Weighted Average Cost of Capital is the important metric for measuring marginal new investment. You can’t just lower the WACC by adding leverage with cheap debt, and you definitely can’t just pretend that new marginal investments are purely funded by new debt at the interest rate paid for debt.

In fact, if corporate income tax rates are lowered, then the tax benefits of debt would be decreased, and we might expect that leverage would decline in that context.

And, I would expect it to be the standard assumption that prices, wages, etc. would change so that before-tax returns changed, leaving after-tax returns relatively stable. Maybe that doesn’t happen 100%, but surely everyone agrees that it isn’t close to 0%.

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9 mulp November 5, 2017 at 5:16 pm

Good data exists showing the quantity of shares is significantly lower than several decades ago, but other by reduced numbers of firs, and by reduced numbers of shares outstanding. Only by businesses buying shares of past issued share can these declines be explained. The number of corporate liquidations is far too small to account for this.

Other than Elon Musk, who can you name as selling significant shares to pay workers to build new capital, the ONLY VALID INVESTMENT IN MACRO ECONOMIC THEORY.

Buying an old drug production capability and increasing the drug price by 10 to 100 times is not a macro economic investment.

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10 byomtov November 5, 2017 at 6:36 pm

The Weighted Average Cost of Capital is the important metric for measuring marginal new investment.

Um. I thought the theoretically correct metric is the (market) required return on investments with equal systemic risk. Not all corporate investments are equally risky. There does not seem to be a good reason to measure them with the same discount rate.

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11 Jonathan November 5, 2017 at 7:07 pm

Ummm. The WACC is not the same across firms. Modigliani-Miller, though, explains how it is independent of leverage, modulo the assumptions of MM theory.

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12 byomtov November 5, 2017 at 8:45 pm

I didn’t say it was. I said it might not be the right rate to use.

Isn’t it obvious that different projects have different risks?

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13 RB November 12, 2017 at 5:40 pm

Perhaps this is a bit cheeky, but despite the fact that economists may be able to learn from corporate finance academics, based on your response it seems the latter could learn how to cite relevant literature (vs. making sweeping claims) from the former. 😉

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14 mulp November 5, 2017 at 5:02 pm

Until labor cost deductions are eliminated to make the US business taxes competitive with China (17% tax on labor costs) and Europe, (19% in Germany), but taxed only once by the nation that benefits from the value added by labor and intellectual property rights in consumed production, the US business taxes will be grossly inefficient as global corporations export all labor for both production and investment out of the US to dodge US taxes.

And the GOP is doing everything possible to maximally reward exporting all labor costs and rents on past labor costs (IP).

But to fund consumption in the US, the GOP is increasing the US government payments to the global corporation by either directly paying for production, or giving money to consumers in “tax cuts” that are really just welfare payments to consumers (eg EITC, housing vouchers, SNAP, Medicaid, Medicare).

Granted, many in the GOP are trying to eliminate the welfare going through the hands of the working poor, or former workers now poor because no business is willing to pay them, but these people are not promising to bankrupt drug companies, hospital chains, real estate trusts, by slashing their revenue by 10% to 50%. Somehow, they believe everyone will believe that eliminating costs will not cut incomes. Granted, Reagan did convince a lot of people, they would be better off paid less money by employers because prices would go down far faster than their incomes.

In any case, the GOP is clearly trying to implement only part of the VAT that almost every other nation uses, the parts of VAT that would tax only non-US labor costs, while not taxing US labor costs. But US labor costs will continue being taxed in the rest of the world just like local labor costs. US workers and US businesses will not benefit because they will have the burden of social welfare in the US plus pay for social welfare in Europe if they export to Europe. Sell into Germany and pay for German health care and Germany job training, while one way or another also paying for health care and job training of your workers. The best case, the GOP ends all international trade by creating broad trade barriers.

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15 Anonymous November 5, 2017 at 5:20 pm

A great slide show, but I believe everything in it was “background knowledge” to every economist doing a hot take on this or that line of this “not well designed” bill.

So what happens next? Does it pass because the cacophony is flowing downhill?

What would be ideal in my opinion would be that it fail, and some moderate bipartisan types use this opportunity to improve their standing.

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16 Viking November 5, 2017 at 5:54 pm

Mulp, you should comment early more often. Despite your comments, signal to noise ratio improved.

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17 A clockwork orange November 5, 2017 at 5:54 pm

The Brazil Great Southern Railway (BGS) was founded in 1877. It was developed by Jose Candido Gomes who, with English investors, created the Brazil Great Southern Railway Company Limited

M’namara v, I.M. 120, 78=column of digest ibid, the Iris Law Times and Solictor’s journal.

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18 Al November 5, 2017 at 6:17 pm

Democratic shill says he finds issues with republican plan?

Mild shock.

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19 Anonymous November 5, 2017 at 6:31 pm

This is a crazy, unfounded, unfunded, stimulus plan. But it is a stimulus plan. Why is it never called that directly?

Is it because the internal contradictions would be too much to bear?

Democrats had to scrape through to pass stimulus for the Great Recession. Republicans demanded multipliers and models and full accounting. They hated the whole idea of government debt for stimulus. There were “debt showdowns” again and again.

Now? I hate to drop “nothing matters anymore” on you again, but that seems to be it. Just cut tax because you want it. Pretend stimulus-not-stimulus will work in some magic way.

.. and blame Democrats. Because that is always good.

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20 byomtov November 5, 2017 at 6:38 pm

Maybe you can explain why we need a stimulus package at all. Then you can explain why, if we do, this is a good one.

Once again, this plan has no real economic purpose. It is purely a political move.

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21 Anonymous November 5, 2017 at 6:46 pm

I think stimulus has a place, usually in recessions, with high unemployment, and falling demand.

I know of no economic theory for debt driven stimulus in the middle of a long running expansion, with unemployment falling to 4%.

I am just trying to put the GOP claim that “cutting tax will increase growth” in context. That’s “stimulus.”

Show us some math, anyone who really believes it. Don’t just pull never before seen GDPs out of thin air.

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22 Anonymous November 5, 2017 at 11:25 pm

Is it controversial that tax cuts increase growth? I don’t see how that is stimulus. Stimulus is spending money. This is removing deadweight loss.

Increasing the debt is a terrible idea, but there is efficiency-increasing tax reform in the bill as well

23 Anonymous November 6, 2017 at 9:55 am

It has been called stimulus before, but it has never given the magic growth promised now!

https://en.m.wikipedia.org/wiki/Economic_Stimulus_Act_of_2008

24 Paul November 5, 2017 at 8:14 pm

Anyone else take issue with his chosen 11% state income tax rate to show how middle America would be the same or worse off? Most states are almost half that. CA is the only that meets or exceeds 11% as far I can tell from this chart. Literally the rest of the country would be slightly better off before considering the other deductions being limited or eliminated.

https://taxfoundation.org/state-individual-income-tax-rates-and-brackets-2016/

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25 Anonymous November 6, 2017 at 10:38 am

“There’s nothing wrong with running a budget deficit if you’re accomplishing something worthwhile. But to go $18,500 in debt in order to secure a $3,550 tax cut is preposterous. And yet something like that is an inevitable consequence of the Republican tax plan’s original decision — an unpopular and unworkable scheme to reduce the corporate income tax rate from 35 percent to 20 percent.”

https://www.vox.com/platform/amp/policy-and-politics/2017/11/6/16606812/republican-tax-plan-corporate-cut

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26 Anonymous November 6, 2017 at 10:47 am

“It’s a shame that the word “supply” has become associated with this sort of overblown claim. Cutting taxes can sometimes help the economy, but in recent decades, all they’ve done is raise deficits without giving growth a measurable boost.”

https://www.bloomberg.com/amp/view/articles/2017-11-06/how-supply-became-a-dirty-word-in-economics

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