Category Archives: Taxes

What a coincidence! Maybe better policy can lead to faster growth.

It’s fascinating to see those commentators and economists, who insisted for nearly a decade that 2% was the best the U.S. could do, grapple with the apparent uptick in economic growth and improving labor markets. Secular stagnation, technological stagnation, financial recessions are different, better get used to the “new normal” – these were the explanations (excuses?) for the failure of the economy to recover from the Panic of 2008. Millions of Americans had permanently dropped out of the labor market, robots were taking their jobs, or (paradoxically) technology was impotent, an aging population meant the U.S. would never grow faster than 2% again, and a global dearth of demand meant the economy would be stuck for many years to come. Wages for most workers weren’t growing, and inequality increased because of monopolies or greed or . . . whatever – anything but a failure of policy to encourage growth. Only bigger government could restart the stagnating secular engine, but even then, don’t expect too much.

All of the sudden, however, we’re hearing stories of tight labor markets, and 2017 will likely exhibit the fastest growth for a calendar year since 2006. We think there are three key reasons for the 2017 uptick: (1) an abrupt cessation of the anti-growth policy avalanche; (2) dramatic policy improvements, such as wide-ranging regulatory reforms and a major tax overhaul; and (3) the beginnings of a tech-led productivity freshening.

As Adam Ozimek (@ModeledBehavior) writes:

It’s refreshing to hear a mainstream economist call out the massive failure of the last decade – a devastating “growth gap” that we’ve been railing against for many years (also, e.g., Beyond the New NormalTechnology and the Growth Imperative; Uncage the Economy; etc.). It’s more than a little odd, however, that Ozimek singles out for criticism several economists who were arguing that the economy could have been growing much faster, if we’d let it, and were suggesting policies that could help boost employment. Shouldn’t he specifically call out the stagnation apologists instead? Isn’t the “giant mistake,” as Ozimek calls it, the insistence the economy was growing as fast as possible and the arguments that diverted attention from bad policy, unnecessarily slow growth, stagnating wages, and a huge drop in employment?

Growth Gap - thru 3Q 2017

Many stagnationists are now searching for possible explanations for the nascent uptick. Some are looking toward a possible resurgence of technology and the idea that productivity growth might improve from its decade-long drop. Larry Summers says the apparent uptick is merely a “sugar high” that won’t last. But you can see many of the stagnationists labor to avoid any acknowledgement that better policy might be at the heart of economic improvement. (By the way, I’m thrilled that our tech-led “Productivity Boom” thesis is getting this attention. The recent converts, however, seem to say that a new tech-boom is now inevitable, when just months or weeks ago they said tech was over. I think the policy improvements of 2017 will accelerate technological innovation in many lagging sectors.)

It’s too early to know whether these encouraging signs are the beginning of a long-term growth acceleration. But it’s good to see lots of people finally acknowledge the depth of the growth gap and the higher innovative potential of the American economy.

Tax reform can boost technology, productivity . . . and pay

Our take, in The Hill, on the prospects for tax reform and its effects on investment, productivity, and wages.

Tax reform can boost technology, productivity and, yes, your wage

by Bret Swanson | The Hill | December 14, 2017

What’s the link between robots, artificial intelligence and tax reform? We’ve been debating whether new technologies can ignite a productivity resurgence or whether tech has lost its potency; whether increased productivity will benefit workers or eliminate jobs altogether.

Understanding these relationships can help show why tax reform might boost all three — technology, productivity, and pay.

One of the most serious anti-tax reform claims is that it won’t help the average worker. Investment, productivity and growth, this argument says, are accruing mostly to the fortunate few. So, even if we could boost those top-line metrics, we may not be doing much for the typical American. (more…)

What’s the best way to help the middle class? Targeted benefits or an economic boom?

On Sunday, Ross Douthat of the New York Times questioned the courage of Speaker Paul Ryan, asking why he hasn’t stood up more forcefully against Donald Trump. I, too, wish Ryan and other GOP leaders would (or could) explicitly denounce or otherwise frustrate the Trump candidacy. The complexity and delicacy of Ryan’s task, however, should not be underestimated. In today’s environment, might denunciations from the Speaker of the Establishment actually fuel Trump’s fire?

If I sympathize with Douthat’s frustration at GOP “paralysis,” however, I confess befuddlement at Douthat’s key takeaway: that the GOP should consider abandoning a growth-oriented agenda in favor of more Trump-like policy pandering.

One reasonable response to this kind of stark challenge, this incipient revolution, would be soul-searching and a course correction. Trump would not have gotten this far, would not have won so many votes — especially working class votes — if the Kempian vision had delivered fully on its promises, if mass immigration, free trade, deregulation and upper-bracket tax cuts had really been the prescription for all economic ills.

This is baffling. Douthat’s premise is that Ryan’s pro-growth agenda was enacted, and failed. Where has he been for the last 15 years?

Deregulation? The last two administrations, but especially the Obama administration, have built new mountains of regulation in finance (Sarbox, Dodd-Frank), energy (Clean Power Plan, ad infinitum), health care (Obamacare), education, the Internet (Title II), and a host of executive actions.

Tax cuts? The George W. Bush administration mildly cut dividend and capital gains rates the top individual rate, but Obama has mostly reversed those actions and added new taxes as well. The top tax rate is thus 15 points higher than the Reagan-“Kempian” 28% (more like 20% when accounting for state taxes), and much of the rest of the world has in the interim leapfrogged the U.S. in corporate and individual tax policy.

Trade? The Bush administration ran a weak dollar policy explicitly to help U.S. manufacturers and counter the China “threat,” just as Trump might have advised. But the effect was to inflate energy and home prices and contribute to the financial crisis.

Douthat is also worried about Ryan’s proposed entitlement stinginess. But the George W. Bush administration substantially expanded Medicare through the Part D dug benefit, and other safety net programs like food stamps have exploded.

The idea that the ambitious agenda of Ryan, who has been Speaker for a couple months, has not worked is just weird. We’ve been doing just the opposite for the last decade and a half, and the economic results show it.

A Decade of Subpar Growth - 02.16<

Douthat has written thoughtfully for many years on the plight of the middle class and, with his coauthor Reihan Salam, presciently urged the GOP to focus on the growing ranks of citizens, invisible to Washington, who now appear to be voting for Trump. For the last several years, conservatives have engaged in a polite debate over the best way to help. Douthat and a host of very smart and admirable policy thinkers have advocated something they call reform conservatism, earning the name Reformicons. The theoretical case, most powerfully explicated by Yuval Levin, emphasizes the importance of human capital – fertility, family, education – and the civic institutions needed to support these things. The cost of raising productive children is rising (I know, I’ve got four between the ages of 8 and 14), and the experiences of Japan, Italy, and other aging societies should be a warning. The resulting policy agenda, however, has proved less inspiring. The basic idea is to more narrowly focus various subsidies, entitlements, and tax benefits on the invisible low- and middle-income groups and explicitly renounce “tax cuts for the rich.”

The Reformicons like to needle growth advocates that they are nostalgic for Ronald Reagan and the 1980s, that we need to modernize our economic program. But I think they have it backwards. Reform conservatism appears to be mostly a rebranding of George W. Bush’s compassionate conservatism – big spending, more entitlements, a focus on targeted tax cuts and benefits, trade protectionism to help blue collar manufacturing, such as the weak dollar policy and Chinese steel tariffs, and efforts to improve human capital, such as No Child Left Behind. It was all well-intentioned, but not so successful. Especially for the Americans those programs sought to help.

I think the Reformicons should be commended for their focus on the middle class in “real America” and especially for their emphasis on human capital. But their attacks on a 21st century growth agenda these last few years may be endangering the very people for whom they are fighting. No doubt, the decline of cultural capital that Charles Murray warned of in Coming Apart is crucial and ever more apparent. But tax credits are unlikely to bring the type of cultural renewal that’s needed. And adopting Democratic tax policy and tax rhetoric isn’t going to win economically or politically. Another substantive problem is that as we build up means-tested credits and benefits for lower and middle income workers, we also impose high marginal tax rates on them due to phase outs. Economics isn’t everything. But the biggest drivers of well-being for moderate income Americans, including the opportunity to escape the cultural vortex and form robust civic connections, are still innovation, productivity, and economic growth.

“Sclerotic growth is the overriding issue of our time,” writes economist John Cochrane.

From 1950 to 2000 the US economy grew at an average rate of 3.5% per year. Since 2000, it has grown at half that rate, 1.7%. From the bottom of the great recession in 2009, usually a time of super-fast catch-up growth, it has only grown at two percent per year2. Two percent, or less, is starting to look like the new normal.

Small percentages hide a large reality. The average American is more than three times better off than his or her counterpart in 1950. Real GDP per person has risen from $16,000 in 1952 to over $50,000 today, both measured in 2009 dollars. Many pundits seem to remember the 1950s fondly, but $16,000 per person is a lot less than $50,000!

If the US economy had grown at 2% rather than 3.5% since 1950, income per person by 2000 would have been $23,000 not $50,000. That’s a huge difference. Nowhere in economic policy are we even talking about events that will double, or halve, the average American’s living standards in the next generation.

I’ve been shouting these ideas from the rooftops for the last five years (see The Growth ImperativeThe Growth Agenda, and many more). Although I had no idea Donald Trump would run for office, let alone gain any following, I wrote a memo in 2014 warning of the social implications of an underperforming economy.

“The consequences for human welfare involved in questions like these,” the Nobel laureate economist Bob Lucas wrote in 1988, referring to the topic of economic growth, “are simply staggering: once one starts to think about them, it is hard to think about anything else.” As Lucas explored what made some nations wealthy and others less so, he looked at a number of developing countries and reported the stark differences in growth rates and thus standards of living. Between 1960 and 1980, India, for example, grew 1.4 percent per year, while South Korea grew at an annual rate of 7.0 percent. At those rates, Lucas concluded, “Indian incomes will double every 50 years; Korean every 10. An Indian will, on average, be twice as well off as his grandfather; a Korean 32 times.”

Einstein referred to the same idea when he quipped — apocryphally, it turns out — that compound interest is the most powerful force in the universe. Whoever put those words in Einstein’s mouth was smart. The same idea is behind Moore’s law of microchips. Compound growth is transformative. It trumps all — maybe even a poisonous political environment.

The slow recovery from the Great Recession, on the other hand, is capping middle class incomes, driving Americans out of the workforce, piling up debt, and straining our social fabric. The politics of “inequality” and resentment are a natural outgrowth of such a malaise and can lead to a downward policy spiral if leaders do not offer an optimistic, compelling alternative.

The economy has not reached 3% growth, our historical average, in any of the last 10 years. Not because Paul Ryan’s growth agenda has failed but because in too many cases we did just the opposite.

Screen Shot 2016-03-06 at 4.43.45 PM

There is of course no guarantee of 3% growth. It is merely an historical average. And yet there’s lots of evidence that our economy is operating well below potential. Yes, some structural factors like demographics are weighing on growth, but all the more reason to address the policy obstacles holding us back. Cochrane and John Taylor both think with better tax and regulatory policy we could grow at 4% for several years before returning to the long-run path around 3%. By all means, if we improve tax and regulatory policy to unleash the economy and we find pockets of Americans still struggling because of structural defects, let’s work to help those citizens in targeted ways. But it makes little sense to insist on, as the centerpiece of your program, and at the expense of a broader growth agenda, a host of complicated programs, credits, and subsidies seeking to ameliorate the very real effects of a stagnant economy: joblessness, underemployment, a stall in wages, and many resulting social problems.

Some of the Reformicons say its really regulation that’s holding the economy back, so we shouldn’t address taxes. Over-regulation is indeed a massive problem. But we don’t have to choose one or the other. We need to both downsize and modernize the Administrative State and reform the tax code.

And on language: The goal is tax reform — not tax cuts for this group or that. The objective is a new tax code — radically simpler, fairer, and pro-growth. Insisting that Republicans match the Democrats in a pledge against any tax reductions for anyone making $250,000 or more is self-defeating. It adopts the framing of big government advocates. And it makes tax reform impossible. Even corporate tax reform, which the Reformicons support, will reduce taxes for those making more than $250,000. So it appears to be little more than political capitulation that will do nothing to help the invisible Americans they so admirably would like to lift up. The Tax Foundation shows that tax reforms proposed in this campaign would deliver big benefits in jobs and wage growth while boosting GDP and delivering needed government revenues. Let’s not give up before we’ve begun.


“Sclerotic growth is the overriding economic issue of our time.” 

– John Cochrane


Bartlett’s Familiar Misanalysis

This tax-and-budget analysis from Bruce Bartlett is wrong on many levels — in both its particulars and its overall sweep.

Bartlett claims the famous supply-side tax-cutters at The Wall Street Journal editorial page have, in a major reversal, opened the door to a Value Added Tax and thus a major expansion of overall taxation and American government. He thinks a new Journal opinion article from Columbia Business School dean Glenn Hubbard represents a big shift in the thinking of economic conservatives. I don’t see it that way at all. (more…)

Altman’s treatment: Bleeding the patient

Roger Altman sees many of the same slow-growth problems that David Malpass warned against . . .

federal deficits may average a stunning $1 trillion annually over the next 10 years. This worsened outlook is stirring unease on Main Street and beginning to reorder priorities for President Barack Obama . . . .

The burst of spending in recent years and the growing likelihood of a weak economic recovery. The latter would mean considerably lower federal revenues, the compiling of more interest on our growing debt, and thus higher deficits. . . . the latest data suggests that we’re on a much slower path. Probably along the lines of the most recent Goldman Sachs and International Monetary Fund forecasts, whose growth rates average about 2% for 2010-2011.

A speedy recovery is highly unlikely . . . .

. . . but unlike Malpass’s pro-growth strategy, Altman proposes to make matters worse:

we’ll have to raise taxes.

Today, the U.S. ranks next to last among the 28 Organization for Economic Cooperation and Development nations in total federal revenue as a share of GDP. Our federal revenues represent 18% of national output, down from 20% just 10 years ago. That makes the mismatch between our spending and our revenue very large, producing the huge deficits we face.

We all know the recent and bitter history of tax struggles in Washington, let alone Mr. Obama’s pledge to exempt those earning less than $250,000 from higher income taxes. This suggests that, possibly next year, Congress will seriously consider a value-added tax (VAT). A bipartisan deficit reduction commission, structured like the one on Social Security headed by Alan Greenspan in 1982, may be necessary to create sufficient support for a VAT or other new taxes.

. . . it is no longer a matter of whether tax revenues must increase, but how.

Tax facts … and forecasts

Keith Hennessey with two posts containing lots of good charts on tax trends over the decades and where we are likely headed.

Quote of the Day

“Even when you make [a tax form] out on the level, you don’t know when it’s through if you are a crook or a martyr.”

— Will Rogers, as relayed by Tom Herman, the excellent long-time tax writer for The Wall Street Journal, in his last column today, April 15, 2009

Innovations in Tax Cleverness

Among the economic doldrums, we’ve spotted an industry ripe with innovation: Tax accounting! Our ingenious estate tax is forcing increasing numbers of taxpayers to create “intentionally defective grantor trusts.” How, you might ask, can I get one of those? Easy . . .

she will start the trust by giving it some money — $193,670 — to buy the buildings. She won’t owe any gift tax on that transfer, because taxpayers get a lifetime $1 million credit to shield their gifts.

With the $193,670 in seed money, plus a loan for $643,030 from the couple, the trust will buy their stake in the buildings, currently valued at about $1.2 million. The interest rate over the loan’s nine-year term: a mere 2.15%.

In another positive twist, the trust won’t have to pay Drs. Massiah and Emanuele back the full $1.2 million. Because the couple owns the real estate through a limited liability corporation, they can discount the value of the stakes they sell to the trust.

The upshot: The trust only has to pay back $643,030, plus 2.15% interest, says Rudy Fusco, the couple’s estate-planning lawyer at Leeds Morelli & Brown PC in Carle Place, N.Y.

The estate tax doesn’t benefit families, the economy, and not even the government. It raises very little revenue but imposes huge dead weight losses on the economy. It helps only estate lawyers and tax accountants.

“the worst bill since the 1930s”

Harvard’s Robert Barro interviewed about Keynesian spending, tax cuts, Paul Krugman, and. . .

Tax cuts are bound to be better. I think the best evidence for expanding GDP comes from the temporary military spending that usually accompanies wars — wars that don’t destroy a lot of stuff, at least in the US experience. Even there I don’t think it’s one for one, so if you don’t value the war itself it’s not a good idea. You know, attacking Iran is a shovel-ready project. But I wouldn’t recommend it.

Quote of the Day II

“tax increases appear to have a very large, sustained, and highly significant negative impact on output.”

“tax cuts have very large and persistent positive output effects.”

tax cuts do “not have any clear impact on revenues at horizons beyond about two years.”

Christina Romer, Berkeley economist and Obama appointee as chair of the Council of Economic Advisors, in two working papers, the most recent versions of which are very timely: November 2008 and July 2008.