If You Don’t Like It, What’s Your Plan?

The editors of the Wall Street Journal rise in defense of the president’s tax plan:

The White House rolled out its tax principles on Tuesday, investing new energy in the first serious reform debate in 30 years. While the details are sparse and will have to be filled in by Congress, President Trump’s outline resembles the supply-side principles he campaigned on and is an ambitious and necessary economic course correction that would help restore broad-based U.S. prosperity.

Many voters heard Mr. Trump’s make-America-great-again slogan as a promise to raise their incomes and improve economic opportunities after a long stagnation. Eight years of 2% growth since the recession ended in 2009 is the weakest recovery in the postwar era, and the result has been rising anxiety and diminished expectations for millions of Americans.

Faster growth of 3% a year or more is possible, but it will take better policies, and tax reform is an indispensable lever. Mr. Trump’s modernization would be a huge improvement on the current tax code that would give the economy a big lift, especially on the corporate side. The reform would sharply cut the business income rate to 15% from 35%, while simplifying the code for individuals and cutting some marginal rates.

Others, like the editors of the New York Times, castigate it as “cutting his own taxes”.

A few observations:

• GDP = C + BI + G + (X – I)
• The “BI” above is business investment and it’s been the weak link in GDP growth for nearly 20 years.
• The effects of low investment aren’t felt immediately.
• We will suffer the adverse effects of low business investment for decades into the future.
• Our present business tax rates are out of step with the rest of the OECD.
• They provide incentives for businesses’ moving their operations elsewhere and for keeping their offshore earnings offshore.
• U. S. consumer spending is the highest in the OECD already.
• So much of what we consume is made elsewhere that additional consumer spending doesn’t stimulate the economy as much as it used to.
• Government spending, the “G” in the equation above, has risen in real terms faster than either consumer spending or business investment.
• Government spending is a less efficient way of increasing growth because of deadweight loss.
• Government spending rarely helps the poor. At best we end up paying the rich to help the poor.
• Our economy is too large for us to base economic growth on exports.
• Everything we do to increase our exports immediately provokes a threat of trade war.

That we need to reform our business tax rates should be obvious and non-controversial. Instead it’s highly politicized. Maybe that’s well-intentioned. Maybe not.

Update

The editors of Bloomberg have mixed feelings:

The proposal aims to cut tax rates and greatly simplify the code — worthy goals. The U.S. corporate tax rate is one of the highest in the world and ought to be cut. And no American needs persuading that the personal-tax system is too complicated.

But a plan based on the president’s bullet points would involve a big increase in public borrowing, which would be unwise. In addition, starting from here, the political maneuvering needed to get it passed would cancel out much of the benefit.

What’s the solution? I can see several alternatives:

• Cut spending. If we reduced our military commitments, there’s still room for cutting military spending. Administrative reform could cut a little more. I really can’t believe that in the $500 billion per year net spending in Medicare there isn’t room for any efficiencies.
• Increase taxes. I don’t believe an additional bracket, a “millionaire’s tax”, should be out of the question. I’m skeptical that any cuts in personal income tax marginal rates will have much effect on economic growth.
• Borrow the money. At a 1 or 2% cost of borrowing, a 5% return at the rate of return of private capital investment is a no brainer as Tyler Cowen points out.
• Just extend the credit. Don’t borrow. Just “print” the money. As a percentage of the economy and even more relevant as a percentage of money it’s very small. The M2 money supply is around $13 trillion. Compared to that $240 billion is barely a rounding error. The downside risk is practically nonexistent.