Glenn Hubbard’s consistency test

Glenn Hubbard (registration required), in a Financial Times review of Robert Rubin’s new book, throws down the gauntlet. You might recall that Hubbard was one of the architects of Bush’s dividend tax cut plan.

Hubbard argues that deficit-cutting is motivated by the view that lower real interest rates will stimulate private investment. But then private investment must be sensitive to price incentives, and a tax cut on investment returns should stimulate investment as well. He describes Rubin (and others) as believing in an asymmetric response, whereby investment is interest-sensitive but not tax-sensitive. Either investment is price-sensitive or it is not, and we should hold a consistent attitude for either lower interest rates and lower tax rates.

My take: Hubbard is right. We should not hastily conclude, however, that a tax cut on dividends was the best way to go. Dividends transfer money from one pot to another, and this is distinct from constituting a real net rate of return. I would sooner have cut and reformed the corporate income tax. In the meantime, however, let us all apply this consistency test to ourselves, are you listening deficit hawks?


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