Earlier this month, Council of Economic Advisers chairman Kevin Hassett took the podium at the Tax Policy Center. The center had recently issued a report suggesting that the “Big Six” tax-reform proposal would add nearly $2.4 trillion to the budget deficit over the next ten years, raise taxes on many upper-middle class households, and slash taxes for the top 1 percent. Mr. Hassett was invited to respond to the report. His remarks were, unsurprisingly, unsparing. After all, the government’s top economist shouldn’t sit quietly while premature invectives are launched at the administration’s signature fiscal proposal.
He accused the Tax Policy Center of rushing to judgment and issuing a report before key details were available. The Big Six had released only a framework designed to guide negotiations, not a reform plan. In lieu of those details, the Tax Policy Center made a host of assumptions, nearly all disfavorable to the plan and some in direct contrast to the guidance laid out in the framework.
For example, the framework explicitly leaves open the possibility for a fifth tax bracket for high-income earners, calls for expanding the child tax credit without giving a specific number, and states that the new system should be at least as progressive as the current one. But in assessing the proposal’s progressivity, the Tax Policy Center assumed there would be no fifth bracket and only a modest ($500) boost to the child tax credit. More crucially, the Tax Policy Center made sweeping assumptions about the impact of corporate tax cuts without making those assumptions transparent.
Recent research has suggested that workers bear an increasing share of the burden from the corporate tax. In the modern global economy, where capital is highly mobile, high-tax jurisdictions see corporations relocate either physically or virtually to lower-tax areas. This reduces the revenue gains from higher tax rates and imposes losses on workers.
It is for this reason that the Obama administration in 2012 proposed lowering the top corporate-tax rate to 28 percent, midway between the current rate of 35 percent and the Big Six’s proposed rate of 20 percent. Reasonable people can disagree about what the ideal rate would be. However, that discussion should acknowledge the changing dynamics of the corporate tax. Indeed, the Obama corporate-tax-reform plan envisioned raising revenue despite cutting the rate, thanks to reduced deductions and the ineffectiveness of the current high rate.
Thus, Mr. Hassett’s criticism of the Tax Policy Center report was well justified. By ignoring the framework’s progressivity goals and making no mention of the changing dynamics of corporate taxation, it introduced partisanship into what has been the most bipartisan proposal to come out of the Trump administration so far.
Consider for a moment the effect of the framework’s proposed changes in the individual-income-tax code. The Tax Policy Center’s report obscures this, but even in their own analysis the framework shifts the burden of taxation from the lower and working classes toward the affluent and the rich. We know this because table 3 of the report shows the tax burden falls for the bottom 80 percent of the population and rises for the 80 through 95th percentiles. Though, the tax burden for the top five percent also falls, the Tax Policy Center attributes this to changes in the business-income tax code. This implies the changes to the individual tax code alone derease taxes for the lower 80 percent and raise them for the upper 20 percent.
Nonetheless, in the days that followed, it was Mr. Hassett who faced the harshest critique, and not the Tax Policy Center’s report. Former Treasury Secretary Larry Summers wrote in the Washington Post that Mr. Hassett and his colleagues were “some combination of ignorant, disingenuous and dishonest.” New York Times columnist and Nobel Laureate Paul Krugman accused Hassett of “shlock” reminiscent of the dangerous predictions during the Great Recession that low interest rates would be deflationary or that the economy would collapse if the debt-to-GDP ratio rose above 90 percent.
These critiques are unfortunate and do not serve the larger debate.
These critiques are unfortunate and do not serve the larger debate. One of us spent much of the crisis on Mr. Krugman’s side, arguing against the dangerous predictions to which Mr. Krugman refers. Those critiques were dangerous in large part because they justified complacency in the wake of debilitating financial crisis and a stagnant recovery. This time, however, it is Mr. Krugman and Mr. Summers who are on the side of complacency.
Mr. Summers in particular has been right to point out the looming specter of secular stagnation, a combination of low interest rates, low investment, poor wage growth, and asset-price bubbles due to the aging of the globalization and aging populations in the developed world, among other factors. The business-tax reform that the Big Six framework offered is an effort to combat the very forces that are behind secular stagnation.
Research on the corporate tax championed by Mr. Hassett is an effort to grapple with the effects of those new realities. The plan deserves a fair hearing. Despite criticism from a number of individuals and organizations, we cannot afford to sit idly while our economy languishes.
— Karl Smith is the director of economic research at the Niskanen Center. Brandon Arnold is the executive vice president of the National Taxpayers Union.
Editor’s note: This piece has been emended since its original posting.