More Glen “No connection” Hubbard and Taxes

I came across this very recent interview with Glenn Hubbard (chair of the President’s Council of Economic Advisors, in which Dr. Hubbard talks about “The Fundamentals of Tax Reform”. I first mentioned Hubbard and tax reform here, give links to other stories on Consumption and Income Taxes here , and give a more comprehensive summary here. Finally, my three part series on dividend taxes are (in order) here, here, and here.

Here are some quotes from Dr. Hubbard, with comments. Note that I am not familiar with The Library of Economics and Liberty, the organization conducting and publishing the interview, but I do characterize the interview as very sympathetic to Hubbard’s position.

Quote 1: …especially important in the wake of the recent corporate governance scandals, the tax code is biased in favor of retained earnings instead of a more transparent system and greater dividend pay-outs.

Analysis: The second half of the sentence is true, as I explained in the previous post. But it’s not causally related to the antecedent. Hubbard is trying to imply that if there were no dividend taxes then there would not be corporate fraud. I don’t see the mechanism for this. Independent boards, strong oversight, and independent auditors affect corporate scandals. The relationship to dividends is tenuous at best. For example, perhaps the second largest scandal (behind Enron) was Tyco International. As this chart shows, they regularly paid dividends over the last decade.

Quote 2: But on the issue of the dividend plan, if companies pay a dividend to a shareholder, the shareholder would not pay tax on the dividend, provided corporate tax had already been paid.”

Analysis: The last caveat is a big issue. A recent paper by a Finance Professor at Harvard Business School finds that the gap between the profit companies report to shareholders (“book income”) and the profits reported to the IRS (“tax income”) increased over the 1990s (for the wonks: well beyond that explained by the increased use of stock options over the same period). In the early 1990s both types of corporate income were pretty close to equal; by 1996, corporations were on average reporting profits 40% higher to shareholders than those reported to the IRS. (The vast majority of this is not corporate fraud, just using existing loopholes).

Quote 3: About ten years ago, the Treasury Department and the American Law Institute both did very significant studies of corporate tax integration, that is, removing the double tax on corporate source income. Both of those studies found quite significant effects on economic activity going forward so that one could raise the economy’s growth rate by a couple of tenths of a per cent over a very, very long period of time.”

Analysis: Great and probably true, but why use 10 year old studies? I’m not saying these studies are wrong, just a bit dated. This raises some skepticism because it excludes 1993 and after. Clinton’s 1993 Tax Plan imposed some very modest tax changes that increased corporate taxes, yet corporate profits went up. This might complicate the analysis. There are surely more recent studies.

Quote 4: We believe that the revenue feedback effects were they to be [dynamically] scored for the dividend piece could be as high as 40%.”

Analysis: Anyone remember the Laffer Curve? Not that the cuts aren’t stimulative, but the would-be cutters always exaggerate the stimulative effect. Remember “dynamic scoring” and the 2001 tax cut? Here’s a funny Bruce Bartlett quote from 1999:

Although dynamic scoring is no panacea for the Republicans’ budgetary problems [the problem being the inability to sell tax cuts to the public], it would make it easier to both cut taxes and still maintain a large surplus.

Quote 5: I’m not a very political person. But I have observed in this President a great concern about long-term growth.

Analysis: On the first part, ask what lead Hubbard to recently deny a connection between deficits and interest rates. For the second, see Alan Greenspan.