Monday Smackdown: Revisiting the Trump-McConnell-Ryan Tax Cut Debate

Gross Private Domestic Investment Nominal Potential Gross Domestic Product FRED St Louis Fed

A year ago, during the Trump-McConnell-Ryan corporate tax cut debate, Greg Mankiw wrote that "a relevant exercise for my readers... [is assuming] the capital stock adjusts so that the after-tax marginal product of capital equals the exogenously given world interest rate r..." That was unprofessional. That is not a relevant model for a large country with a floating exchange rate. If you want an investment boom, cut the deficit—like Clinton-Mitchell-Gephardt did over 1993-1996.

Paul Krugman explains why: Paul Krugman: Why Was Trump’s Tax Cut a Fizzle?: "The blue wave means that Donald Trump will go into the 2020 election with only one major legislative achievement: a big tax cut for corporations and the wealthy. Still, that tax cut was supposed to accomplish big things. Republicans thought it would give them a big electoral boost, and they predicted dramatic economic gains. What they got instead, however, was a big fizzle...

...The political payoff, of course, never arrived. And the economic results have been disappointing.... There’s no sign of the vast investment boom the law’s backers promised. Corporations have used the tax cut’s proceeds largely to buy back their own stock rather than to add jobs and expand capacity. But why have the tax cut’s impacts been so minimal? Leave aside the glitch-filled changes in individual taxes, which will keep accountants busy for years; the core of the bill was a huge cut in corporate taxes. Why hasn’t this done more to increase investment? The answer, I’d argue, is that business decisions are a lot less sensitive to financial incentives — including tax rates—than conservatives claim. And appreciating that reality doesn’t just undermine the case for the Trump tax cut. It undermines Republican economic doctrine as a whole....

Changes in interest rates affect the economy mainly through their effect on the housing market and the international value of the dollar (which in turn affects the competitiveness of U.S. goods on world markets). Any direct effect on business investment is so small that it’s hard even to see it in the data. What drives such investment is, instead, perceptions about market demand.... Business investments have relatively short working lives.... There aren’t many potential business investments that will be worth doing with a 21 percent profits tax, the current rate, but weren’t worth doing at 35 percent, the rate before the Trump tax cut....

Proponents of the tax cut, including Trump’s own economists, made a big deal about how we now have a global capital market, in which money flows to wherever it gets the highest after-tax return.... The key word here is, however, “appear.” Corporations do have a strong incentive to cook their books... The vast sums corporations have supposedly invested in Ireland have yielded remarkably few jobs and remarkably little income for the Irish themselves....

That doctrine is all about the supposed need to give the already privileged incentives to do nice things for the rest of us. We must, the right says, cut taxes on the wealthy to induce them to work hard, and cut taxes on corporations to induce them to invest in America. But this doctrine keeps failing in practice. President George W. Bush’s tax cuts didn’t produce a boom; President Barack Obama’s tax hike didn’t cause a depression. Tax cuts in Kansas didn’t jump-start the state’s economy; tax hikes in California didn’t slow growth. And with the Trump tax cut, the doctrine has failed again...


#shouldread #economicsgonewrong #smackdown #fiscalpolicy #globalization

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