That’s the question that my colleague Tyler Cowen asks over at Bloomberg. His article is timely because most of the reporting on the president’s plan (or what we know of it so far) is about how “expensive” the plan is. And by “expensive,” they mean to the government. On that point, Cowen rightly points out that while there are some potential problems with the plan, “there is no fiscal reason such a tax plan ought be ruled out.” For one thing, he notes that less money going to the government isn’t systematically synonymous with economic cost. He writes:
Less money for the government is not the same as an economic cost. Most versions of the plan, if executed properly on the details, would most likely boost economic output and create new jobs.
The simplest way to think of an unfunded corporate tax cut is that the federal government has to borrow more money, say at rates in the range of 1 percent to 2 percent, while corporations have more money to invest. Estimates vary for the rate of return on private capital, but 5 percent to 10 percent is one plausible estimate. So in essence, society is borrowing money at 1 to 2 percent and may be receiving 5 to 10 percent in return. That is a net gain, not an economic cost.
Cowen also notes that in term of distribution, the deal is more favorable than what people think because the future payback will be paid by higher-income Americans rather than the poor. I would add that I wish lawmakers would make the case that a significant share of the corporate-income-tax burden is shouldered by workers in the form of lower wages and as such it is incorrect to say that cutting the rate is simply a giveaway to corporations.
But I am particularly taken by his reference to the fact that there is an inherent inconsistency when so many are willing to argue for government stimulus by spending — but not by private investment.
This argument for a corporate tax cut — “let’s borrow more now while rates are relatively low” — is remarkably like the argument that Keynesians have been using for more government infrastructure spending for years. The main difference is that here the spending would be done by private corporations rather than the federal government. You may or may not believe the private expenditures will be more socially valuable than the government expenditures, but if you think we can afford one kind of stimulus we probably can afford the other. And as I said, the private rate of return on investment probably is higher than the government’s borrowing rate, even if you think that government spending would yield higher returns yet.
To put it bluntly, I am suspicious of ideological motives when anyone says we can afford a big dose of government stimulus but we cannot afford a corresponding private stimulus.
Cowen points to reasons that we may worry about the plan but concludes that “in the meantime we should view the proposal as a possible economic boost, not a burden we cannot afford.”
Now, I will say that I could do without the individual side of the plan because that’s not where the real economic benefits of the plan come from. But here we have it.
Also, I don’t believe that we can grow ourselves out of all of our fiscal problems. As such, these tax cuts should be paired with spending cuts — entitlement spending in particular. So even if real economic growth will definitely make our financial problems much less dramatic, the rhetoric that future economic growth is the sole solution to all our problems is dangerous.