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No, We Won’t See a Torrent of Investment From the Tax Bill

No, We Won’t See a Torrent of Investment From the Tax Bill

One of the arguments that Republicans are using to support their tax bill is that it will unleash investment.  The data says otherwise.  Currently, most US economic sectors are operating far below maximum capacity utilization.

Let’s start with manufacturing:

Figure 1

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Many parents face higher taxes under TCJA, even if Congress makes its credits permanent

Ernie Tedeschi as linked by Paul Krugman points to an interesting author. The math is in follow up post.:

Many parents face higher taxes under TCJA, even if Congress makes its credits permanent

This quick post looks at the effects of the Tax Cut and Jobs Act (TCJA, the House GOP’s proposed tax plan introduced last week), but (selfishly) I focus on a specific segment of the population: families with children under 18.

It turns out that parents do far worse under the TCJA than the population as a whole, and making the expiring credits in the TCJA permanent only modestly changes this story. More than 40% of families with children face a hike under TCJA in 2027, even with the security of permanent filer credits and assumptions about the benefit of corporate tax cuts.

As always, I’m using the excellent Open Source Policy Center (OSPC) TaxBrain model for this analysis.

To set the table: under the TCJA as written (what I’m calling “TCJA law”), 72 million filers or about 37% of the total get a direct tax increase in 2027. This number falls to 50 million, or 26%, if I distribute the benefit of TCJA’s corporate tax cut similar to how JCT did in their score of TCJA last week. [1]

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ARAMCO CEO Is Delusional

ARAMCO CEO Is Delusional

Financial Times reported yesterday that Amin Nasser, the CEO of the Arabian American Oil Company (ARAMCO, currently 100% owned by the Saudi government, although originally founded by four former US oil company majors), has declared that investors should feel pleased that Crown Prince Muhammed bin Salman has arrested and purged over 200 Saudi princes, government officials, and private businessmen.  This is because this was strictly an anti-corruption move, and foreign investors can be assured that there will now be no corruption in the Kingdom. Really, he said this.

Now I declared in my post title that Nasser is delusional, but I doubt it.  I suspect that he is a very smart guy. The question is whether he can convince any potential buyers of the upcoming possibly $2 trillion Initial Public Offering of 5% of ARAMCO stock that indeed this purge sends a good signal to them about buying ARAMCO stock.  Wow, the nation will now be rid of corruption, and, no, future investor, you need have no fear of being arbitrarily arrested or having your assets seized by MbS, none whatsoever, not that you were worrying about those things previously, but now you really do not need to worry about them at all.

Of course on the very same page of the FT there was another article about how MbS’s purge has rattled world oil markets, with oil prices now sharply falling after sharply rising after he made his purge.  Nobody knows what the implications are or what the heck is going on, but, hey, no problem, no need to worry, Inshallah bukra maalesh (God willing tomorrow no problem, a fave line in KSA).  In any case, Nasser’s public statement will undoubtedly completely reassure everybody, and all will become extremely calm before we know it.

Oh, there is also the matter of where this IPO will happen, touted to be the largest in history.  New York and London stock exchanges have actually been competing with each other to host it, but in fact in the end this may not be such a good idea and they may not be in the running for real anyway.  According to the FT the Saudis are also considering Hong Kong and Tokyo, but at the end of the article it was floated what I have all along expected and predicted: that the IPO will be handled out of Riyadh’s own exchange with specially targeted sales to specially targeted individuals, with a lot of them being local big money Saudis.  So maybe Nasser’s speech was not for all the foolish foreigners, but for the well-off locals: buy when we tell you to or else you can join the officially designated-to-be-corrupt 200 plus..

Barkley Rosser

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An Op Ed on Race Relations in the NY Times

The NY Times has an op ed entitled Can My Children Be Friends with White People?. (Dan here …Link corrected) I think this is the most interesting excerpt:

…I will teach my boys to have profound doubts that friendship with white people is possible. When they ask, I will teach my sons that their beautiful hue is a fault line. Spare me the platitudes of how we are all the same on the inside. I first have to keep my boys safe, and so I will teach them before the world shows them this particular brand of rending, violent, often fatal betrayal.

The author, Ekow N. Yankah, according to the Times is a professor at Yeshiva University’s Benjamin N. Cardozo School of Law. For an expert on criminal law, and one who cares about his sons’ safety, he seems surprisingly uninformed about what he termed “violent, often fatal betrayal.” I sincerely hope whatever other advice he is giving his sons doesn’t get them hurt. They shouldn’t suffer for his ignorance. And speaking of ignorance, the rest of the op ed is a tour de force for the proposition that if a person cannot or will not understand basic facts about their own field, they aren’t a reliable guide to much else either.

Regardless… this is no different than the views of far right white people who teach their kids they cannot have Black friends. Fortunately, I doubt that the NY Times would publish that sort of garbage unironically. But it isn’t any better that the NY Times published this one.

Note to the NY Times: this is how I believe one should discuss race.

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Progressive policies

Via Washington Post on Progressive policies

Of the many things that are terribly wrong with our current tax debate, one primary offender is the notion that tax cuts will unleash massive growth effects. If facts could kill this mythology, it would be long dead.

…but a great, new paper just landed on my desk that takes a clever approach to this question of the impact of progressive, market interventions on growth and jobs. Ian Perry of the University of California Berkeley Labor Center has a new paper out called “California Is Working” that tests this question in a sort of experimental framework by using California as an example of the conservative, anti-interventionists’ worst nightmare.

Moreover, we don’t need to set the evidentiary bar unnecessarily high in this sort of comparison. While his study is suggestive, Perry’s findings don’t convince me that progressive measures lead to faster growth and jobs. They do, however, in tandem with tons of other research, convince me that these progressive interventions do not hurt growth. The defense of the CPM against the onslaught of predictions of doom need not point to better growth outcomes. It could well be — in fact, I think it is — that these measures have little to do with growth and a lot to do with who benefits from that growth.

That’s why these issues generate so much heat from the affected industries and their lobbies. It’s not growth rates they’re really worried about. It’s who gets the money, the cleaner air, the health coverage and so on.

Remember this in the context of the tax debate, as its advocates assure us that unleashing growth requires tax cuts on behalf of wealthy households and multinational corporations. And keep these findings in mind next time conservatives inveigh against expanding affordable health coverage or raising the minimum wage or the overtime salary threshold. Though their cries will allege the squandering of growth and jobs, the evidence from California reminds us that what they’re really bemoaning is a more equitable distribution of wages, incomes and even power.

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Baltimore School Test Scores and Baltimore School Spending

I’ve noted before I have a bit of an interest in Baltimore because my wife originates from there (despite having convinced herself that she’s from the Los Angeles area). So I noticed this story:

An alarming discovery coming out of City Schools. Project Baltimore analyzed 2017 state testing data and found one-third of High Schools in Baltimore, last year, had zero students proficient in math.

Contrast that with this:

The Baltimore City Public School System spent the fourth most per student during the 2014 fiscal year out of the 100 largest public school districts in the country, according to a new report by the U.S. Census Bureau.

The city’s school district, which is the 38th largest elementary and secondary public school district in the country, spent $15,564 per pupil during the time frame. Maryland has four of the 10 highest per pupil spending public school districts, with Howard County Schools rounding out the top five with a per pupil spending of $15,358.

Montgomery County schools was sixth with $15,181, Prince George’s County was eighth with $13,994 and Baltimore County came in 12th with $13,338.

According to the Census Bureau, this is the seventh consecutive year Maryland has had four public school districts rank in the top 10 of per pupil spending. Baltimore City was beat out by Boston public schools ($21,567), New York City ($21,154) and the Anchorage School District in Alaska ($15,596).

The country as a whole saw a 2.7 percent increase to $11,009 in per pupil spending from 2013 to 2014. This was the largest increase in per pupil spending since 2008.

Maryland came in at 11th out of the 50 states plus Washington, D.C., in average per pupil spending across the state at $14,003. New York spend the highest per pupil at $20,610 and Washington, D.C., was second at $18,485.

Utah had the lowest per pupil spending at $6,500.

Why are test results in Baltimore so bad?  It obviously isn’t for lack of spending.

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Cutting Taxes on Profits and Reality

The post below is silly. It is based on bending over backwards to take silly arguments for the GOP tax plan seriously. This older post is the one with some relevance to the real world.

The silly argument is that lower taxes on profits imply a lower cost of capital for firms. Investors will demand the same return net of taxes and so demand less from firms if the IRS takes less. The story continues that this lower cost of investing will cause firms to invest more which causes higher labor productivity and wages. This argument makes no sense for the following reasons

1) If you want to change investment, change the tax treatment of investment not something else. The gain (if any) from the GOP proposal should be entirely due to expensing investment. Reinvested profits will not be taxed. This should encourage higher investment in physical capital compared to paying dividends, buying back shares, or accumulating financial assets. I think it is good policy (and have thought so for 37 years at least). But once you have expensed investment, the tax on profits doesn’t affect the cost to the firm of investing. So long as it is constant it shouldn’t affect investment at all. Cutting the rate is a pure gift to owners.

2) Business investment doesn’t seem to be much affected by the cost of capital. This appears in aggregate data. The cost changes a lot with monetary policy as the interest rate changes. These changes have huge effects on aggregate demand, because they have huge effects on investment, in houses. The investment which depends on the interest rate is residential investment. Bigger houses don’t cause higher productivity and wages. For some mysterious reason the housing bubble’s expansion and bursting hasn’t convinced most economists to pay any attention to housing. Krugman says it’s been forgotten since the days of the dinosaurs

Back in the old days, when dinosaurs roamed the earth and students still learned Keynesian economics, we used to hear a lot about the monetary “transmission mechanism” — how the Fed actually got traction on the real economy. Both the phrase and the subject have gone out of fashion — but it’s still an important issue, and arguably now more than ever.

Now, what you learned back then was that the transmission mechanism worked largely through housing.

3) Been there done that. W Bush claimed he was going to cause high investment and wages by changing corporate taxation. In particular, the second Bush tax cut changed the taxation of dividends. Previously they had been taxed twice first as corporate income then as personal income of the shareholder. This, it was promised, would reduce the cost of capital for joint stock corporations (C corporations in IRS talk) and cause them to invest more. Importantly, it would have no effect on pass through firms whose profits are just taxed as personal income of their owners (some of these are called S corporations by the IRS). This means it was an experiment. According to W, if you look at a bunch of otherwise similar firms some of which are C corporations and some of which are S corporations, then following the tax reform investment by the C-corporations should increase compared to investment by the S-corporations.

Danny Yagan at Berkeley notes that it didn’t. Also there was not a statistically signficant difference in the growth of employee compensation.
American Economic Review 2015, 105(12): 3531–3563

I find analysis of the results of this experiment to be very convincing.

4) Capital is like clay, soft when you work it, then rigid once it is fired. In models it is easy to substitute capital for labor causing higher labor productivity. But in the real world, firms mostly invest to increase capacity. The substitution of capital for labor is slow. It has a lot to do with new establishments (new factories say) but not so much with refitting old ones. It is limited by technology. This means that investment has a lot to do with lack of spare capacity and not so much to do with the cost of capital. This story fits the aggregate data on non residential investment.

5) Just ask CEOs. Matt Yglesias reports

An awkward — but extremely telling — moment arose yesterday at a Wall Street Journal “CEO Council” event that featured the Trump administration’s top economic policy hand, Gary Cohn, as a key speaker.

John Bussey, an associate editor with the Journal, asks the CEOs in the room, “If the tax reform bill goes through, do you plan to increase investment — your companies’ investment — capital investment,” and requests a show of hands. Only a few hands go up, leaving Cohn to ask sheepishly, “Why aren’t the other hands up?”

And there is video

I got this from Natalie Andrews
I almost feel sorry for Cohn (OK I don’t but almost).

update: Matt Yglesias has another live one — a CEO saying the GOP argument is bogwash

Also Paul Krugman is still a dinosaur.

update: I forgot the BOA/Merrill Lynch Survey of CEOs

A Bank of America-Merrill Lynch survey this summer asked over 300 executives at major U.S. corporations what they would do after a “tax holiday” that would allow them to bring back money held overseas at a low tax rate. The No. 1 response? Pay down debt. The second most popular response was stock buybacks, where companies purchase some of their own shares to drive up the price. The third was mergers. Actual investments in new factories and more research were low on the list of plans for how to spend extra money.

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Cutting the tax on corporate profits would probably reduce US national income

Paul Krugman has been explaining (very slowly and clearly) that if the US attracts foreign investment by cutting taxes on profits, then it will have to pay the foreign investors. The Tax Foundation appears not to have noticed that loans are not gifts.

First he quoted Stephen Rosenthal’s observation that the direct effect of cutting taxes on corporate profits is to give roughly 700 billion over 10 years to foreigners who own shares of US corporations.

This is the ultra-static effect of the cut in which its effects on behavior aren’t considered. Krugman went on to note that if there is a huge inflow of foreign cash (as promised by supporters of the bill) then there will be a huge increase in US payments to the foreigners. He calls this Leprechaun economics, because it is a very important reason that Irish GDP is much greater than their gross national income. He wrote

GDP is actually the wrong measure. If you’re going to be pulling in foreign capital, you’re going to be paying more investment income to foreigners; so gross national income – income accruing to domestic residents – is going to go up by less. And surely that’s the measure we care about.

and

There are really two bottom lines here. One is that the true growth impacts of Cut Cut Cut would be even more pathetic than the numbers you’ve been hearing. The other is that if you’re going to make international capital flows central to your arguments, you really need to think about the implications for future investment income.

Krugman raises a question

In fact, when you bear in mind the reduced taxes collected on foreign investors who are already here, GNI could actually go down, not up.

It is interesting. I think that somewhere he explains that the answer depends on another debated issue — the true incidence of taxes on profits. Enthusiasts for the tax cuts assert that, in the long run, all of the benefits will go to workers. People who look at data, estimate that about one quarter of the benefits of a reduction of taxes on profits go to workers

(before going on, there are no free lunches — the benefits are at the expense of the Treasury so other taxes will have to be raised or programs will be cut.)

This matters for the discussion of Gross National Income vs GDP, because roughly 35% of shares of US firms are owned by foreigners. So if the money goes to investors, 35% goes to foreigners. This is true both of the old foreign investment in the USA and the new investment attracted by the low taxes. After the jump I will try a lot of horrible pain ascii formulas attampting to answer Krugman’s question of whether a profits tax cut causes higher or lower domestic gross national income. The key parameters are the current tax rate, the incidence on workers, and the share of capital.

Doing the algebra, I conclude that unless more than half of the incidence of profits tax falls on labor, cutting the rate of taxes on profits below 35% reduces gross national income.

“Half” is embarrassingly close to a whole number, but it is what came out of the horrible algebra. Also 35% is coincidentally the current statutory rate. I regret the fact that messy calculations gave such a suspiciously simple result. I don’t totally trust my algebra and don’t think my effort added much to Krugman’s. The point is that, for plausible parameters, cutting the tax on capital income reduces US gross national income.

update:
thanks for comments. I didn’t explain the model well. I add a bit of explanation here. First it is assumed that tax reform doesn’t affect employment. In fact, it is standard to assume full employment in these models. This isn’t horribly silly at the moment. This means that total employment is equal to labor supply and can’t be changed by firms (who can compete with each other for the scarce workers).
However, increased capital does affect labor income by causing higher wages. The story is that it causes a higher marginal product of labor and higher labor demand for any given real wage. So there would be more demand for labor and the same supply, and so the price of labor (the real wage) would go up. This actually isn’t totally crazy. Real wages did go up in the late 90s and have otherwise stagnated since 1973.

end update:

Warning horrible horrible algebra after the jump

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Why are Republicans About to cut $25 Billion from Medicare ?

The PayGo law forbids bills which increase the national debt. Unless it is repealed or waived, the Republican tax cuts would cause automatic sequestration of, among other funds $ 25 billion from Medicare.

This is an excellent as usual Vox Explainer by Tara Golshan

It all comes down to the “pay-as-you-go,” or PAYGO, rule — a 2010 law that says all passed legislation cannot collectively increase the estimated national debt. In other words, if Republicans want to pass a tax cut, they have to pay for it with mandatory spending cuts — or, inversely, if Congress boosts funding for entitlement programs, it has to increase taxes.

If Congress violates this law, the Office of Management and Budget, which keeps the deficit scorecard, “would be required to issue a sequestration order within 15 days of the end of the session of Congress to reduce spending in fiscal year 2018 by the resultant total of $136 billion,” the CBO said in a letter to Minority Whip Rep. Steny Hoyer (D-MD).

Democrats can filibuster a bill which waives PayGo. But can they block a bill which defends Medicare ? If they do, will they be blamed for the sequestration ? Back to Golshan

“for Democrats, the pressure of impending Medicare and federal program cuts would likely be enough to get them on board — even though it is a budgetary gimmick to make up for a Republican tax bill they don’t want passed.”

I have a proposed strategy. Democrats demand that the bill waive PayGo and also restricts the budget resolution/reconciliation process with a claus saying budget resolutions and reconciliation bills may not be used to change Medicare. Basically, Republicans (especially Paul Ryan) have pretty much said they will try to reform (that is cut) Medicare and Social Security to close the huge deficits created by their tax cuts. Democrats can demand that they be given a veto on such reform (by requiring any such bills to be filibusterable). I think this is a line they can hold. It may be key to blocking the tax cut/ destroy the ACA bill.

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