The Corner

Economy & Business

Marco’s Makeover Shows The Senator Doesn’t Understand Tax Policy

Sen. Marco Rubio speaks at a Senate Foreign Relations subcommittee hearing, January 9, 2018. (Kevin Lamarque/Reuters)

In a recent interview with The Economist, entitled “Marco’s makeover” in the U.S. print edition, senator Marco Rubio demonstrated that he doesn’t understand how tax cuts work. Here is one example from the interview:

 There is still a lot of thinking on the right that if big corporations are happy, they’re going to take the money they’re saving and reinvest it in American workers. . . . In fact they bought back shares, a few gave out bonuses; there’s no evidence whatsoever that the money’s been massively poured back into the American worker.

Sorry, what? You expect this type of comment from a Democrat, but not from a senator who used to be the darling of the Tea Party moment. And in fact, as an article in Business Insider notes:

Rubio’s argument is nearly identical to that of Democrats: Instead of giving the savings to workers, they say, corporations will reward shareholders through share buybacks and increased dividends.

That’s exactly the wrong way to think about the benefits of the tax cut. Indeed, economists usually agree that lowering marginal tax rates on investment (or any other taxes) gives companies incentives to earn more taxable income, thus leading them to invest in other businesses and the expansion of their factories. This additional investment, in turn, raises workers’ productivity, and ultimately leads to higher wages. This process takes time.

In other words, the benefit of the tax cut will manifest itself by incentivizing companies to invest more. On the other hand, the case for the rate cut has little to do with what these companies do with the extra cash in the short term, as Rubio argues. Whether they buy back stocks with their cash or they distribute bonuses to their employees tells you nothing about whether the tax cuts will or will not benefit workers.

I could tell the senator that he needs to get better informed and that he needs to read the work put out by the Tax Foundation or the current CEA chairman Kevin Hassett. But he may see them as having been too influenced by Reaganomics, which he decries in the Economist interview as a dead end.

So here is a suggestion. How about reading a column by University of Michigan economics professor Justin Wolfer about how to assess the impact of the rate cut that just passed? No one can accuse him of being a raging follower of supply-side economics! And yet he writes:

The economic case for corporate tax cuts has almost nothing to do with what corporations do with the extra cash.

He also quotes AEI’s Alan Viard:

As Alan Viard, an economist at the American Enterprise Institute, has written: “The economic case for corporate tax rate reduction is not based on how companies ‘use’ their tax savings. It is based on how companies change their behavior in order to obtain larger tax savings.”

Finally, I can’t help but point out this passage from the Economist article about Rubio’s plan:

The details of Mr Rubio’s new programme are unclear, but he suggests they will involve more interventions such as the increased child tax credit he inserted into the tax reform passed last year, and a provision for paid family leave he is working on now. He mulls the need for more public spending on technological research and for education reform, to prioritise vocational skills. . . .

“Government has an essential role to play in buffering this transition,” he says. “If we basically say everyone is on their own and the market’s going to take care of it, we will rip the country apart, because millions of good hardworking people lack the means to adapt.” Economic liberty, in this retelling, becomes something the government is required to guarantee. It is the freedom to enjoy “the dignity of work”, says Mr Rubio. “There needs to be a conservative movement that addresses these realities.”

The Economist adds:

Most Republican congressmen meanwhile remain entranced by the limited-government shibboleths he has shaken off, as his fight over the tax bill revealed.

Come again? Are we really supposed to believe that Rubio’s vision stands in contrast with those of his colleagues who are advocating for plans to shrink the size of government? Alternatively, are we to believe that Rubio’s vision is to expand the size of a government that does too little for too many? Neither is true. The government spends a massive amount of money and its budget is exploding. We have large entitlement programs and a large array of welfare programs on our books already. The biggest programs are insolvent and many others are duplicative. And sadly, contrary to what The Economist claims, Republicans being in power doesn’t threaten that growth. It actually feeds it.

A generous interpretation is that the senator would like first to make room for the kind of spending he suggests by cutting and reforming existing programs. But I don’t get a sense that this is the case. Adding new government programs on top of the old ones, many of which are responsible for the disincentives to work that hinder the labor market, won’t prepare the U.S. for the future that the Senator describes.

Meanwhile, The Economist seems to think Rubio is a visionary in his own party. But the truth is that if this is truly the future of the party, the GOP will have to compete with the Democrats — who have been in favor of expanding the government long before Rubio was even in politics.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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