Mike Kimel on tax cuts plan economics

Dan Crawford | December 3, 2017 6:23 pm

Taxes/regulation
US/Global Economics

(Dan here…lifted from an e-mail)

I’m not registered with seeking alpha so I cannot read the whole article (I had sent), but what I read looks a lot like what I’ve written over the years.  Here are some statements which, working off memory, I have written posts about and which I think are supported by US macroeconomic data from the last 100 years:

1.  A tax cut generally gooses the economy in the short run (one – two years). That story is a Republican story – it boosts consumption which leads companies to expand to meet supply, etc.
2.  Beyond the short run, assuming marginal tax rates of about 70% or less, a reduction in tax rates is correlated with slower economic growth.  The classic Democrat story (lower tax rates –> lower collections –> lower government expenditure –> less transfers to poorer people who have a higher marginal propensity to consume) is partly right.  But the bigger issue is that when tax rates are high, people who have made successful investments have more of an incentive to continue those investments than they do to cash in their chips and do something else (e.g., increase consumption, or move their investments into other areas which will, on average, be less successful because the investor given it is outside the person’s area of expertise).  The explain it to your grandma version:  if you are considering selling your business to buy a yacht, you will have less of an incentive to do it when tax rates are at 70% than at 20%, since at 70% you’d be getting a much smaller yacht with what is left.
3.  A Republican might note that there is some conflict between stories 1 and 2.  After all, in 1 freed up money –> more consumption –> more business activity, but in 2, freed up money –> more consumption –> less business activity.  I think the difference between 1 and 2 has to do with sustainability.  Much of the spending in story 1 is from pent up demand, which is to say, its a one time thing.  The businesses created to satiate that pent up demand sooner or later find themselves without customers and going under.  But story 2 is based on continuing v. cashing out of existing successful businesses or economic activity.

4.  Optimal (real economic growth maximizing) top marginal tax rates for the US economy in the last 100 years or so has been somewhere in the neighborhood  of 55% – 70%.
5.  Tax rates have been below the optimum since 1982.  Often well below.  Not coincidentally, this is the period of time which constitutes what Tyler Cowen calls the Great Stagnation.
6.  The view that lower tax rates are better is one we have successfully exported to other countries.  Not coincidentally, countries capable of operating at a level of activity comparable to, say, Western Europe in the 1980s have been enjoying something like our Great Stagnation too.
7.  The Laffer curve is not wrong.  Or rather, to quote Wolfgang Pauli discussing a different theory, it is not even wrong.  It bears no relationship to any data I have ever seen.  I have tried to fit it to US data at both the national and state levels, and to international data.  If this bell-curved relationship  between tax revenues and tax rates exists, I have yet to see it.  Even its proponents never seem to find a way to fit data to a curve of that shape, but that doesn’t stop them from discussing it as if its a real thing.  To me hearing someone claiming to be an economist talk about the Laffer curve is like hearing a purported chemist talking about phlogiston, a supposed physicist discussing the aether, or someone claiming to be a biologist waxing eloquent about Lamarckian evolution. (That isn’t to say there aren’t a lot of academics in fields with names like “X Studies” that aren’t peddling nonsense that reads like Lamarck, but that’s a different issue which I have been also been beating on lately.)
8.  Back to item 1 – because of that short term boost, tax cuts often feel successful at first, which means they often win elections.
9.  Given the form of the current tax bills working their way through Congress, I’m not sure how much of effect 8 there will be this time around. My wife has played around with numbers and believes there is a reasonable probability this tax bill will reduce our after tax income.  I understand there are a fair number of people who may be in the same boat depending on the final form of the law.   If enough members of the non-1% find their tax bills going up, the short term boost can go away too.
Mike Kimel edit 13/3/2017 6:57 PM…  edited the second sentence in item 9, replacing my wife’s name with the words “my wife” to make the post more clear to readers.
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