In What Capacity Is Lawrence Summers Speaking?

In his Washington Post op-ed in opposition to the Republican tax reform plan, Lawrence Summers combines good reasons for that opposition with bad ones or, at least hard to justify ones:

There are three aspects of the proposal that I find almost inexplicable, except as an expression of the power of entrenched interests.

First, what is the rationale for passing tax cuts that increase the deficit by $1.5 trillion in this decade and potentially more in the future, instead of pursuing the kind of revenue-neutral reform adopted in 1986? There is no present need for fiscal stimulus. The national debt is already on an explosive path, even without taking into account large spending needs that are almost certain to arise in areas ranging from national security to infrastructure to addressing those left behind by globalization and technology.

Borrowing to pay for tax cuts is a way to defer pain, not avoid it. Ultimately, the power of compound interest makes necessary tax increases or spending cuts that are even larger than those tax reductions. But in the meantime, debt-financed tax cuts would raise the trade deficit and reduce investment, thereby cheating the future.

Second, what is the case for cutting the corporate tax rate to 20 percent? For at least five years under the GOP proposal, businesses would be able to write off investments in new equipment entirely in the year that those investments are made. So the government would be sharing to an equal extent in the costs of and returns from investment, eliminating any tax-induced disincentive to invest. The effective tax rate on new investment would be reduced to zero, or less, even before considering the corporate rate reduction. A corporate rate reduction serves only to reward monopoly profits, other rents or past investments. Given the trends of the past few years, are shareholders really the most worthy recipients of such a windfall?

Proponents of the House approach defend it by pointing to international considerations. Unfortunately, the “territorial” approach being pushed by the House, which would renounce the objective of taxing the global income of U.S. companies, could easily encourage offshore production. Wouldn’t it be much better for the United States to lead an initiative to prevent a race to the bottom in global corporate taxation than for it to try to win a race to the bottom?

Third, why include new complexities that help the richest taxpayers while taking steps that hurt middle-income families? Why should passive owners of businesses that are already avoiding the corporate tax get a big rate reduction to 25 percent when those who actually operate and work in such businesses pay at a higher rate? What is the rationale for eliminating the estate tax when it is paid by only 0.2 percent of estates?

Whether they are good or not appears to depend on whether he’s speaking in his capacity as economist or in his capacity as politician or, alternatively, political camp follower.

The argument he expresses in his first sentence is solid from a Keynesian standpoint. You engage in deficit spending to offset the shortfall in aggregate demand during contractions. The economy has been expanding since June 2009. Consequently, using the same Keynesian argument, we should not have been exploding the debt since then. The Obama administration was in place during most of that period. I don’t recall his making that argument then. I do recall his repeatedly arguing that the amount of demand that should be offset was was $800 billion. Presumably, he was speaking in his capacity as politician then.

Each point he raises in his second “inexplicable”, e.g. lower corporate tax rate, current year expensing, merely places the U. S. on a comparable footing to other OECD countries. We’re the outlier on both of those issues with higher taxes and our byzantine depreciation system. It would make our tax code more efficient and reduce the propensity for large U. S. companies to move their headquarters out of the United States (and the HQ jobs with them). I found this:

the government would be sharing to an equal extent in the costs of and returns from investment, eliminating any tax-induced disincentive to invest

interesting. Is there actual empirical evidence that a high corporate tax rate results in higher business investment than would otherwise be the case? There’s ample evidence that it results in companies holding large cash balances overseas and engaging in rent-seeking to reduce their tax bills. That latter measure is an effective subsidy to large corporations who hire fewer new employees to the detriment of smaller, newer ones who hire more. Presumably, he’s speaking in his capacity as politician in that paragraph.

Since there are no economic argument contained in his third inexplicable, he’s presumably speaking in his political capacity there. IMO it would be very helpful if Dr. Summers were to carry two flags, one white, one blue and raise the white flag when speaking as an economist and the blue one when taking a political stand.

But that’s the point, isn’t it?

There are plenty of things to argue against in the Republican tax plan. As an economist, why not make economic arguments? And why not make economic arguments in which you didn’t take the opposite stance when Democrats were in power?

I believe that tax cuts are a slender reed on which to base one’s plans for economic growth. They may be helpful but unless much more directed won’t result in as much growth as might otherwise be the case. Given his opposition to tax cuts, I believe that Dr. Summers has a moral obligation to explain to us how he would produce more economic growth in the United States. Hundreds of government programs are already failing because their assumptions of higher growth aren’t being met. We can’t turn those programs back; we need to grow more.