Lawrence Summers: One last time on who benefits from corporate tax cuts

recently asserted that Kevin Hassett deserved a failing grade for his “analysis” projecting that the Trump administration proposal to reduce the corporate tax rate from 35 to 20 percent would raise the wages of an average American family between $4,000 to $9,000. I chose harsh language because Hassett had, for what seemed like political reasons, impugned the integrity of people like Len Burman and Gene Steuerle who have devoted their lives to honest rigorous evaluation of tax measures by calling their work “scientifically indefensible” and “fiction.” Since there have been a variety of comments on the economics of corporate tax reduction, some further discussion seems warranted.

The analysis from Hassett, chief of the White House Council of Economic Advisers (CEA), relies heavily on correlations between corporate tax rates and wages in other countries to argue that a cut in the corporate tax rate would boost returns to labor very substantially. Perhaps unintentionally, the CEA ignores our own historical experience in their analysis. As Frank Lysy noted, the corporate tax cuts of the late 1980s did not result in increased real wages. Actually, real wages fell. The same is true in the United Kingdomas highlighted by Kimberly Clausing and Edward Kleinbard. These examples feel far more relevant to the corporate tax issue analysis than comparisons to small economies and tax havens like Ireland and Switzerland upon which the CEA relies.

There has been a lot of back and forth, but notably no one has defended the $4,000 claim as a “very conservatively estimated lower bound,” let alone endorsed the plausibility of the $9,000 claim. In fact, the Wall Street Journal op-ed page published two very optimistic versions of what the wage increase could be, which were below CEA’s lower bound.

Casey Mulligan and Greg Mankiw also do not defend CEA’s numbers, but do make use of simple academic abstract models that do not capture the complexities of a policy situation to argue that wage increases could be larger than the tax cut. The inadequacy of their analyses illustrate why well-resourced, team-based institutions with a strong culture of attention to detail like the Congressional Budget Office, the GAO, the Joint Tax Committee Staff or the Tax Policy Center are so important.

Mankiw’s blog is a fine bit of economic pedagogy. It asks students to gauge the impact of a corporate rate reduction on wages in a so called “Ramsey” model or equivalently in a small fully open economy, with perfect capital mobility. Even with these assumptions, he does not get answers in the range of the CEA’s estimates.

As a device for motivating students to learn how to manipulate oversimplified academic models, Mankiw’s blog is terrific as one would expect from an outstanding economist and one of the leading textbook authors of his generation. As a guide to the effects of the Trump administration’s tax cut, I do not think it is very helpful for three important reasons.

.. First, a cut in the corporate tax rate from 35 to 20 percent in the presence of expensing of substantial or total investment has very little impact on the incentive to invest. Imagine the case of full expensing. If a company is permitted to deduct all of its investment costs and then is taxed on all of its investment profits, the tax rate has no impact at all on the investment incentive. If investments are financed in part with deductible interest, as would be true even under the Trump plan (where expensing would be total), a reduction in the corporate tax rate could easily reduce the incentive to invest.  Mankiw assumes implicitly that capital lasts forever and companies take no depreciation and engage in no debt finance.  This is not the world we live in.

The United States is not a small open economy. If it were, the effect of an effective investment incentive would be a major increase in the trade deficit as capital inflows forced an excess of imports over exports. I imagine that President Trump at least feels that a greatly augmented trade deficit is not good for American workers.

Third, a big cut in the corporate rate does not happen in isolation as a break for new investment.  Mankiw’s model does not recognize the possibility of monopoly profits or returns to intellectual capital or other ways in which a corporate tax cut benefits shareholders without encouraging investment. It means either increases in other taxes or enlarged deficits, both of which have adverse effects on households. It also means that capital moves out of the noncorporate sector into the corporate sector, tending to hurt workers in the noncorporate sector.

.. The main point of my paper, which Mulligan entirely ignores, was that because of slow adjustment costs, the impact of tax changes was felt primarily on asset prices for a long time. This meant that as my paper showed, the primary impact of a corporate tax cut would be to raise after-tax profits and the stock market. This in turn, as I noted, primarily benefits wealthy individuals.

.. It is worth noting that Larry Kotlikoff and Jack Mintz’s response to criticismsof the Trump tax plan suffers from the same deficiencies as Mulligan’s. The authors include no corporate tax detail, no recognition of the impact of the tax proposal on asset prices, and no treatment of the budget consequences of tax cuts.

.. The newest boldest bit of claim inflation regarding the tax bill comes from the Business Roundtable: “a competitive 20 percent corporate tax rate could increase wages sufficient to support two million new jobs.” This would, coupled with job growth projected even in the absence of a corporate rate cut, take the unemployment rate well below 3 percent! I would be very interested to see the underlying analysis.  I would be surprised if it is convincing.

.. By far the highest quality assessment of corporate tax issues has been provided by Jane Gravelle, writing under the auspices of the Congressional Research Service.  It looks at all the literature. It recognizes that the issues are complex and cannot be captured by a single model or regression equation. It does not start with a point of view. Unfortunately it provides little support for claims that corporate rate cuts will raise revenue, help the middle class or spur rapid wage growth.
.. During my years in government, I served with 7 CEA chairs — Martin Feldstein, Laura Tyson, Joe Stiglitz, Janet L. Yellen, Martin Baily, Christy Romer and Austan Goolsbee. I observed all of them fighting with political figures in their Administrations as they insisted that CEA analysis had to be of a kind that would be respected and validated by outside economists. They refused to cheerlead for Administration policies at the expense of their professional credibility. I cannot imagine any of them releasing an estimate as far from the professional mainstream as $4000 to $9000 wage increase from a corporate rate cut claim. Chairman Hassett should for the sake of his own credibility, that of the Administration he serves and the institution he leads, back off.

Kavanaugh accuser Christine Blasey Ford moved 3,000 miles to reinvent her life. It wasn’t far enough.

Ford had already moved 3,000 miles away from the affluent Maryland suburbs where she says Kavanaugh sexually assaulted her at a house party — a charge he would emphatically deny. Suddenly, living in California didn’t seem far enough. Maybe another hemisphere would be. She went online to research other democracies where her family might settle, including New Zealand.

“She was like, ‘I can’t deal with this. If he becomes the nominee, then I’m moving to another country. I cannot live in this country if he’s in the Supreme Court,’ ” her husband said. “She wanted out.”

.. On the day that Ford publicly identified herself as Kavanaugh’s accuser in an interview with The Washington Post, her husband was driving their 15-year-old son and his friends from a soccer tournament in Lake Tahoe. He couldn’t answer the calls that were blowing up his phone; by the time they reached home, a crowd of reporters was waiting.

.. Russell struggled to explain it to his children. “I said that Mommy had a story about a Supreme Court nominee, and now it’s broken into the news, and we can’t stay in the house anymore,” he recalled. The family was separated for days, with the boys staying with friends and their parents living at a hotel. They’ve looked into a security service to escort their children to school.

.. Quietly, she garnered a reputation for her research on depression, anxiety and resilience after trauma — telling almost no one what she herself had endured.

.. Ford’s inner circle was, “How do you say this? The pretty, popular girls,” explained Andrea Evers, a close friend. “It wasn’t like we were a bunch of vapid preppies, but God, we were preppy then.”

.. the drinking age was 18 then

.. frequently left the girls feeling embattled.

“The boys were pretty brutal,” Evers said. “They would do what they could to get you drunk, and do whatever they would try to do to you.”

.. Kavanaugh and his classmate Mark Judge had started drinking earlier than others, she said, and the two were “stumbling drunk” when they pushed her into a bedroom.

.. Her biggest fear afterward, she recalled 37 years later, was looking as if she had just been attacked. So she carried herself as if she wasn’t. Down the stairs. Out the door. Onto the rest of her high school years, she said. On graduation day, she wore the required white dress and carried red roses. She told no one.

.. Years later, Ford would describe college as a time when she “derailed,” struggling with symptoms of trauma she did not yet understand.

.. She’d been a cheerleader in high school and joined a sorority, but the lifestyle was too much like the place from which she’d come. Despite the talent for math she had shown in high school, one college classmate recalled Ford failing a statistics class.

.. “He said, ‘You’re really smart, and you’re just like totally [messed] up,’ ” Ford recalled. She remembers him saying, “ ‘What are you doing? . . . Everybody’s getting it together but you’re like not.’ It was kind of a harsh talk.”

If she was going to graduate on time, he said, she ought to major in psychology. The major didn’t require students to take classes in a specific order, so Ford could take them all at once.

That was how Christine Blasey Ford came to spend her life researching trauma and if it is possible to get past it.

.. “I think she had really reinvented herself,” said Jeff Harris, her supervisor at the University of Hawaii counseling center. “A surfer from California is a different image than a prep-school girl from Bethesda.”

.. He knew that more than a love of water had brought her west.

“She didn’t always get along with her parents because of differing political views,” Russell said. “It was a very male-dominated environment. Everyone was interested in what’s going on with the men, and the women are sidelined, and she didn’t get the attention or respect she felt she deserved. That’s why she was in California, to get away from the D.C. scene.”

.. As their relationship deepened, Ford told him she’d been physically abused years earlier. He would learn the specifics of the event, including Kavanaugh’s name, during a couple’s therapy session years later. But then, he just listened.

.. Her master’s thesis explored the relationship between trauma and depression.

.. admired by colleagues for her analytical mind and inventive mathematical models.

.. She took a particular interest in resilience and post-traumatic growth — the ideas that people who endure trauma can return to normal and even wind up stronger than before. Ford said she has given speeches about this topic to students, telling them, “You can always recover.”

.. She will probably be asked to detail every moment of the alleged attack. How much she had to drink. Why she went upstairs. What she was wearing.