Paul Krugman on why the Trump corporate tax cut did not 'work'
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May 07, 2021, 03:14:37 PM

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  Paul Krugman on why the Trump corporate tax cut did not 'work'
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Author Topic: Paul Krugman on why the Trump corporate tax cut did not 'work'  (Read 377 times)
Geoffrey Howe
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« on: April 09, 2021, 12:45:54 PM »

Interesting piece by Paul Krugman in the New York Times.
https://www.nytimes.com/2021/04/09/opinion/trump-corporate-tax-reform.html

To summarise:

1) He is quite sceptical of the argument that cutting taxes in general increases incentives. He shows that the marginal rate on wealthy New Yorkers is around 60% and they are not known for being 'slow-moving and lazy'.

(The main argument for the tax cut was to deter capital flight to places like Ireland. It did not help because)

2) 'A tax on profits is not a tax on capital'

Interest on loans is tax-deductible, so a profit tax only falls on the income over and above the interest, so it will not deter investment (if it is financed by debt).

3) 'Business investment isn’t that sensitive to the cost of capital, anyway'

Investors will want to invest in a company which earns the return on capital ÷ (1 - tax rate); so, under the tax-cutting logic, if you reduce the tax rate there will be more investment.
But most business assets are short-term - software etc. - and, Krugman says, short-term investments are not very sensitive to the cost of capital. He gives the example of mortgages (house-buying is very sensitive to interest rates) and car loans (not very sensitive).

4) Monopoly

Companies like Amazon, Google, Facebook have, he says, 'quasi-monopol[istic]' positions. Tax on monopoly profits do not deter investment because 'monopoly profit is not a return on capital' (is this because monopolists do not need to invest to make a profit?). One Treasury study suggested 3/4 of the tax base is from excess monopolistic returns. So the tax cut has just gone to monopoly profits.

5) Offshoring

The argument is that jobs are leaving America because the tax rate is higher than elsewhere. But this hasn't happened - most of the profits are reported in places like Bermuda which is obviously not where the jobs are. So it didn't deter capital flight because there was no capital flight.



I thought you might find this interesting and wish to discuss. For my part, I'm not defending because I do not understand economics well and I agree with the last thing I have read. But the data do seem to suggest that he is right.
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Kingpoleon
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« Reply #1 on: April 09, 2021, 07:31:04 PM »

He is skeptical that cutting taxes in general increases incentives. But Krugman, rather famously, tends to minimize the differences in corporate taxes, consumption taxes, payroll taxes, income taxes, estate taxes, and capital gains taxes. This is broadly inaccurate because it ignores the different functions of different taxes.

Of course, in my view Krugman starts from the wrong place entirely. Mankiw and Acemoglu are generally more mainstream and are not talking heads like Krugman and Summers tend to be.
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Geoffrey Howe
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« Reply #2 on: April 10, 2021, 02:51:32 AM »

He is skeptical that cutting taxes in general increases incentives. But Krugman, rather famously, tends to minimize the differences in corporate taxes, consumption taxes, payroll taxes, income taxes, estate taxes, and capital gains taxes. This is broadly inaccurate because it ignores the different functions of different taxes.

Of course, in my view Krugman starts from the wrong place entirely. Mankiw and Acemoglu are generally more mainstream and are not talking heads like Krugman and Summers tend to be.

I am usually quite wary of academics who build a large online network of fans, which I suppose Krugman does. His articles always get the most comments in the NYTimes, and they almost always revolve around the same theme.
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Frank
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« Reply #3 on: April 10, 2021, 07:31:49 PM »

He is skeptical that cutting taxes in general increases incentives. But Krugman, rather famously, tends to minimize the differences in corporate taxes, consumption taxes, payroll taxes, income taxes, estate taxes, and capital gains taxes. This is broadly inaccurate because it ignores the different functions of different taxes.

Of course, in my view Krugman starts from the wrong place entirely. Mankiw and Acemoglu are generally more mainstream and are not talking heads like Krugman and Summers tend to be.

Mankiw is 'wrong about everything.'
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Frank
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« Reply #4 on: April 10, 2021, 09:17:15 PM »
« Edited: April 11, 2021, 11:46:07 AM by Frank »

Interesting piece by Paul Krugman in the New York Times.
https://www.nytimes.com/2021/04/09/opinion/trump-corporate-tax-reform.html

To summarise:

1) He is quite sceptical of the argument that cutting taxes in general increases incentives. He shows that the marginal rate on wealthy New Yorkers is around 60% and they are not known for being 'slow-moving and lazy'.

(The main argument for the tax cut was to deter capital flight to places like Ireland. It did not help because)

2) 'A tax on profits is not a tax on capital'

Interest on loans is tax-deductible, so a profit tax only falls on the income over and above the interest, so it will not deter investment (if it is financed by debt).

3) 'Business investment isn’t that sensitive to the cost of capital, anyway'

Investors will want to invest in a company which earns the return on capital ÷ (1 - tax rate); so, under the tax-cutting logic, if you reduce the tax rate there will be more investment.
But most business assets are short-term - software etc. - and, Krugman says, short-term investments are not very sensitive to the cost of capital. He gives the example of mortgages (house-buying is very sensitive to interest rates) and car loans (not very sensitive).

4) Monopoly

Companies like Amazon, Google, Facebook have, he says, 'quasi-monopol[istic]' positions. Tax on monopoly profits do not deter investment because 'monopoly profit is not a return on capital' (is this because monopolists do not need to invest to make a profit?). One Treasury study suggested 3/4 of the tax base is from excess monopolistic returns. So the tax cut has just gone to monopoly profits.

5) Offshoring

The argument is that jobs are leaving America because the tax rate is higher than elsewhere. But this hasn't happened - most of the profits are reported in places like Bermuda which is obviously not where the jobs are. So it didn't deter capital flight because there was no capital flight.



I thought you might find this interesting and wish to discuss. For my part, I'm not defending because I do not understand economics well and I agree with the last thing I have read. But the data do seem to suggest that he is right.

I think the key point here is that long term business investment is more sensitive to tax rates.  This suggests that, over time, new corporate investment might gravitate to lower cost jurisdictions, even as the current investments are likely to remain.

So, it is far too early to judge whether the Trump corporate tax cuts will have any positive impact.

However, I also think a key point is that just as corporations compete with different strategies (some are lowest cost product/service, low quality, others compete with higher cost product services and higher quality, some compete with a great deal of spending on research and development while other companies remain profitable by penny pinching ever dollar, for instance) so can governments and nations.

So, a government/nation that has a relatively high tax structure (the mix of taxes can also be important, but that is another matter) if the money is spent efficiently.  Every truck driver knows that being stuck in traffic costs money as does the business that is waiting for the truck to arrive.

Overall, there are about 20 screens that a business looks at when deciding to invest and tax rates are just one of them.

The right wing ethos that Greg Mankiw cheerlead and help prolong with his first year micro and macro economics textbooks overstated the importance of tax rates.  It's possible that Krugman understates them.
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HisGrace
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« Reply #5 on: April 10, 2021, 09:22:02 PM »

Krugman won his Nobel Prize for work on international trade. He's not an expert on fiscal policy despite it being the main thing he talks about in his popular work. Even other Keynesians consider his writing on it to be over simplified. As has been noted, his reasoning here is very crude and doesn't account or context.
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Kingpoleon
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« Reply #6 on: April 13, 2021, 08:05:19 PM »

I think the key point here is that long term business investment is more sensitive to tax rates.  This suggests that, over time, new corporate investment might gravitate to lower cost jurisdictions, even as the current investments are likely to remain.

So, it is far too early to judge whether the Trump corporate tax cuts will have any positive impact.

However, I also think a key point is that just as corporations compete with different strategies (some are lowest cost product/service, low quality, others compete with higher cost product services and higher quality, some compete with a great deal of spending on research and development while other companies remain profitable by penny pinching ever dollar, for instance) so can governments and nations.

So, a government/nation that has a relatively high tax structure (the mix of taxes can also be important, but that is another matter) if the money is spent efficiently.  Every truck driver knows that being stuck in traffic costs money as does the business that is waiting for the truck to arrive.

Overall, there are about 20 screens that a business looks at when deciding to invest and tax rates are just one of them.

The right wing ethos that Greg Mankiw cheerlead and help prolong with his first year micro and macro economics textbooks overstated the importance of tax rates.  It's possible that Krugman understates them.
You remind me of another academic’s online entourage. James Tour is a talented, talented chemist who has spent hours “debunking” abiogenesis, and his followers fail to understand that synthetic chemistry and origins of life biochemistry are two wholly different fields. He is accomplished in one of the fields, but not the other.

To THEN suggest that Mankiw, who might be the world’s most prominent economist on fiscal policy, has made a mistake but maybe (both sideism), just maybe Krugman made the opposite mistake is hysterical. Mankiw’s thesis about the impact of tax rates and differentiating between different types of taxes is far more serious macroeconomics than anything Krugman writes on the subject. That would be like comparing Daron Acemoglu to Larry Summers - it’s nonsense.
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Frank
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« Reply #7 on: April 13, 2021, 10:43:19 PM »
« Edited: April 14, 2021, 12:27:18 AM by Frank »

I think the key point here is that long term business investment is more sensitive to tax rates.  This suggests that, over time, new corporate investment might gravitate to lower cost jurisdictions, even as the current investments are likely to remain.

So, it is far too early to judge whether the Trump corporate tax cuts will have any positive impact.

However, I also think a key point is that just as corporations compete with different strategies (some are lowest cost product/service, low quality, others compete with higher cost product services and higher quality, some compete with a great deal of spending on research and development while other companies remain profitable by penny pinching ever dollar, for instance) so can governments and nations.

So, a government/nation that has a relatively high tax structure (the mix of taxes can also be important, but that is another matter) if the money is spent efficiently.  Every truck driver knows that being stuck in traffic costs money as does the business that is waiting for the truck to arrive.

Overall, there are about 20 screens that a business looks at when deciding to invest and tax rates are just one of them.

The right wing ethos that Greg Mankiw cheerlead and help prolong with his first year micro and macro economics textbooks overstated the importance of tax rates.  It's possible that Krugman understates them.
You remind me of another academic’s online entourage. James Tour is a talented, talented chemist who has spent hours “debunking” abiogenesis, and his followers fail to understand that synthetic chemistry and origins of life biochemistry are two wholly different fields. He is accomplished in one of the fields, but not the other.

To THEN suggest that Mankiw, who might be the world’s most prominent economist on fiscal policy, has made a mistake but maybe (both sideism), just maybe Krugman made the opposite mistake is hysterical. Mankiw’s thesis about the impact of tax rates and differentiating between different types of taxes is far more serious macroeconomics than anything Krugman writes on the subject. That would be like comparing Daron Acemoglu to Larry Summers - it’s nonsense.

1.I mentioned that the mix of taxes is a separate issue, I wasn't about to address that here.

2.You can look yourself at the criticisms of Mankiw's first year micro and macro textbooks from multiple websites.

https://braveneweurope.com/peter-bofinger-best-of-mankiw-errors-and-tangles-in-the-worlds-best-selling-economics-textbooks

http://economixcomix.com/2014/11/19/what-is-our-children-learning-or-greg-mankiw-and-the-terrible-horrible-no-good-very-bad-textbook/

https://www.researchgate.net/publication/264318601_Mankiw's_economic_principles_in_light_of_student_criticisms

https://www.washingtonpost.com/opinions/its-time-we-tear-up-our-economics-textbooks-and-start-over/2019/06/23/54794ab8-9432-11e9-b570-6416efdc0803_story.html

The general criticism of Mankiw's textbooks are that many of his arguments are based on unproven assumptions and biases and are simply assertions.  I never said that Mankiw in his textbooks 'made a mistake', I think it's clear I have much wider criticisms of him than that.

The biggest thing about him is that he's a hack who championed the W Bush tax cuts and took the United States from 'surpluses as far as the eye can see' to 'deficits as far as the eye can see.'

I don't really care if you think highly of him and claim that others do (which I dispute), Mankiw is a hack for the wealthy elites.
https://scholar.harvard.edu/mankiw/content/bush-leader-economy-can-trust

(I agree with him on school choice, but the rest is embarrassing.)

However, I can appreciate that Mankiw can admit that he might be wrong on things:

"After more than a quarter-century as a professional economist, I have a confession to make: There is a lot I don't know about the economy. Indeed, the area of economics where I have devoted most of my energy and attention -- the ups and downs of the business cycle -- is where I find myself most often confronting important questions without obvious answers..."

https://www.theatlantic.com/business/archive/2013/06/should-we-trust-economists/276497/
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PR
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« Reply #8 on: May 05, 2021, 04:03:59 PM »

I mean, it seems pretty obvious that cutting corporate taxes in a good economy is a dumb idea. Where are they going to put those savings, other than juicing up their share values on Wall Street?
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Frank
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« Reply #9 on: May 05, 2021, 05:37:15 PM »
« Edited: May 05, 2021, 05:47:14 PM by Frank »

I mean, it seems pretty obvious that cutting corporate taxes in a good economy is a dumb idea. Where are they going to put those savings, other than juicing up their share values on Wall Street?

Research and development?

In case anybody thinks I might be contradicting myself given my previous comments (if anybody cares) I was previously commenting only on the impact that cutting/raising corporate income taxes has on the corporate decision of where to locate and arguing that it does not make a big difference, at least not in the short term.

For what it's worth, I have never really liked corporate income taxes as they can both lead corporations to cut discretionary spending (like research and development) and/or they can be passed on to consumers in the form of higher prices/less production.

That said, the stupidest tax on corporations is clearly the employer part of the payroll tax as that is literally a tax on jobs.
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