Thursday, August 31, 2017

Is it "populist" to cut taxes for Wall Street?

To call corporate tax cuts "populist" really achieves a new level in rhetorical depravity.

It's true that lowering the tax rate on inbound investment (including that which might otherwise be outbound without facing the domestic rate) should increase U.S. investment, all else equal, presumably with positive implications for wages and/or jobs.  Although, that said, two important points to keep in mind are:

(1) the labor market is complicated, and it's not a simple question how employment levels end up being set.

(2) the link between productivity and wages also is complicated.  It used to be more or less assumed that, if labor productivity increased, including due to added capital investment, wages were bound to go up, too.  But data from the last twenty years have cast doubt on this, as "capital" rather than "labor" - although the standard use of these terms may be questioned - has seemed to capture nearly all of the productivity growth.  One really has to look closely at how markets operate, how wages are set, who has market power and in what dimensions, and so forth, in order to answer that.

So, even in the best case, calling tax cuts for Wall Street a shot in the arm for American workers is simplistic and questionable, even though it's surely true, all else equal, that we would like U.S. investment to increase and that lower effective tax rates on business investment should tend to accomplish this.

But then we have further aspects to think about.  For example, the transition gain from cutting corporate taxes (or, more precisely, from a change in information regarding the likely future tax rate on corporate investment) goes to existing shareholders.  Note also that the lower tax rate applies to the fruits of old investment, which are no longer subject to choice based on new incentives.  (On the other hand, it is true that Auerbach-Kotlikoff models find a loss to old investment when new investment increases due to a cut in its effective tax rate.)

Also, unfunded tax cuts that the government has to finance through borrowing may lead to crowd-out of new investment.  So even the basic simple model in which investment increases so workers gain will not clearly hold.  And if you fund the rate cuts - however unlikely that might be in terms of the tax changes that the Republicans are seeking - then someone or something has to pay for it.  So middle class taxpayers (and poor people who get reduced services) will have to pay - since it's not going to be the high-income ones, with this crew - and/or there have to be offsetting tax increases on investment (although there is the same issue here of new vs. old investment) that might blunt the incentive effects right from the start.

Final answer: These are complicated issues, so if you want to respect all nuance there is no clear answer to exactly who wins and loses from cutting taxes from Wall Street.  And it also of course depends on the package's full details.  But if I were forced to give an unnuanced short answer, I would say that the initial optics are probably the best short summary: cutting taxes for Wall Street benefits Wall Street.  If that's populist, then it's clear the term has been substantially redefined.


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