Scott Sumner  

Much ado about very little

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It's been interesting to read the commentary of the left and the right regarding President Trump's first year. While they disagree on whether Trump has improved the country, they do seem to agree that his economic policy changes have been very consequential. I believe they are both wrong.

Let me start with the left. While I share their strong antipathy for Trump, I think it's a mistake to let that judgment color one's perception of the recent tax bill. The tax bill is significant, but far less so than you'd imagine from some of the overwrought criticism.

1. Let's start with the personal income tax reforms. There is some simplification, as many more taxpayers will be able to use the standard deduction. On the other hand, there's some added complexity in the new deduction for "pass through" businesses. On net I am slightly encouraged by the bill, as I see it as a first step toward eliminating deductions from the tax code. But we still have a long way to go.

The distributional consequences of the tax cut are not very important. The top rate comes down a bit, but that's offset by the fact that state and local taxes can no longer be deducted. Some of the tax cuts benefiting lower income people are scheduled to expire, but almost no one thinks that will happen.

2. The estate tax exemption was doubled, but this threshold has been rising very rapidly for many decades. It's a change, but hardly revolutionary. Recall that the House bill called for its elimination.

3. The big corporate income tax cut is the single most significant provision. But even President Obama favored a rate cut to 28%. This excellent WSJ article shows that even after the federal corporate tax rate is reduced to 21%, the total corporate tax rate (including state taxes) is in the middle of the pack for developed countries. It was inevitable that the US would eventually move the rate down to meet global competition---hardly a revolutionary change.

I also think Trump's GOP supporters exaggerate the success here. Because the "temporary" cuts are likely to get extended, the deficit numbers will end up even worse than advertised. But let's suppose I'm wrong and the cuts are temporary---what then? Most likely, the next time the Democrats take power they'd raise taxes on the rich (including investment income), which will largely negate the benefit of having a lower corporate tax rate.

That's why I keep going back to the tax simplification; it's one of the few areas where the changes are likely to be accepted by the Dems. But the GOP did not address the tax deductibility of health insurance, far and away the worst aspect of the tax code.

I also think the regulatory changes have been greatly exaggerated by some GOP pundits. First, there are not many areas where deregulation can move the needle on real GDP growth, and the GOP has not touched those areas. The big two are health care and zoning. The GOP is afraid to deregulate health care in a way that would slash costs, and zoning is mostly a local issue. Occupational licensing is another area crying out for deregulation, and also an area mostly controlled by state and local governments.

If you look at areas where the Federal government is heavily involved, the moves have often been in the wrong direction. On issues like the drug war, the war on terror, trade, immigration, etc., Trump has very interventionist instincts. Regulations have increased in a number of areas. Energy is a mixed bag, with some deregulation, but also a recent proposal that would massively increase government regulation of coal and nuclear, and impose enormous costs on consumers. This proposed regulation is opposed by experts on both sides of the spectrum, and will be decided upon in January.

On the plus side, there's been some useful deregulation in labor markets, education and the internet. I'm less keen on moves in areas like finance and the environment, as the GOP seems unable or unwilling to come up with alternative approaches to address problems such as moral hazard and externalities.

I don't know if the net effect of all this is more or less regulation, much less more or less aggregate utility, but it's very unlikely to change trend RGDP growth by even 0.1%. (Especially since some of the better moves have set aside Obama-era regulations that had not yet been implemented.) Tax reform might be a bit more effective, but you'd need a radical shift to a consumption tax to have a truly dramatic impact on growth.

To summarize, I see little evidence to support the claims of either the Democrats or Republicans. The tax bill is certainly not revolutionary, although it does have some useful reforms. But it also boosts the budget deficit, which is bad for investment. There has been increased regulation in some areas and reduced regulation in others. In addition, there have been no significant moves to slow the growth in overall government spending. The Libertarian Party only got about 3.3% of the votes in the 2016 election, so it's no surprise that the GOP decided not to try to implement a libertarian policy regime.

From my perspective, the fact that Trump was unprepared to be President turned out to be a plus in terms of economic policy, as he had to rely on the GOP establishment, which has better policy instincts than he had---or at least better than the policies he campaigned on. (BTW, don't take this as an endorsement of being unprepared; we'll have to see how things work out in foreign policy.)

This post is consistent with my long held view that people vastly overestimate the consequences of individual politicians. For instance, I think it very likely that President Carter would have fired the air traffic controllers if he had been re-elected in 1980s. He knew the world was rapidly moving in a neoliberal direction, and that his economic policies were ineffective. He also knew that he was perceived as being weak. The 1981 air traffic controller strike would have been greeted as a golden opportunity to establish that he would not be pushed around any longer, and that we had to take some painful medicine to get inflation under control. (Yes, you and I know that labor unions had nothing to do with the inflation problem, but Carter didn't know that.)

Almost every developed country moved in a neoliberal direction after 1980 (regardless of whether they were ruled by the left or the right), there is almost no chance that the US would have been an exception.

PS. Nothing in this post should be taken as a defense of Trump, who may well be the worst president in US history. But if he is horrible, it's not because of his economic policy moves in 2017, which are mixed bag, but rather due to other aspects of his performance.


Comments and Sharing


CATEGORIES: Regulation , Tax Reform




COMMENTS (24 to date)
john hare writes:

First, there are not many areas where deregulation can move the needle on real GDP growth, and the GOP has not touched those areas.

Did I read this wrong? I can think of many ways that deregulation could theoretically increase GDP.

Jon writes:

The tax bill machinations are expected in this post-truth era. Somehow...

1) Partially moving to a territorial corporate system*
2) Lowering the corporate tax rate to about the OECD average

has been portrayed as the 2nd coming of hell on earth.

What? We have voices in the media who could be strong technocratic unifiers (Krugman, Blinder) but who choose to give voice to the party-line instead.

* Obama's response to inversions was bizarre -- he described them as, “most insidious tax loopholes out there” and part of what makes this tax reform kind of stinky is a complex set of rules... to target foreign profits.

This reform reflects the country getting what it deserves given the mealy-mouthed debate on policy that takes place.

Floccina writes:
The big two are health care and zoning. The GOP is afraid to deregulate health care in a way that would slash costs, and zoning is mostly a local issue.

Isn't healthcare a state and local issue too.
Utah healthcare spending per capita is lower than Canada and Arizona just a little higher.

Scott Sumner writes:

John, By "move the needle" I meant significantly boost growth.

Floccina, There is lots that the Federal government could do. Eliminating the tax deductibility of health insurance would dramatically lower costs. Allowing unlimited immigration of doctors and nurses would lower costs. Allowing people to buy health insurance across state lines would lower costs.

They could reform Medicare and Medicaid to lower costs.

Really? writes:

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john hare writes:

@ Scott

I'm not sure if we are arguing the same point. I am an owner in a small construction company with all the licences and insurance requirements. The cash economy people can do work for 1/2 to 2/3 of my prices most of the time. They are limited to smaller jobs as they don't have the credentials for the permitted work we do for the most part. With some rational deregulation, my costs and prices would drop allowing more construction per dollar. It is not certain that I would prosper though competing against all and sundry.

On many commercial jobs, permitting can take years and a significant fraction of the total cost. Most of the actual requirements could be condensed to days with reasonable agency coordination and transparency. The impact fees and permitting charges are far more affordable than all the time and costs of mandated engineering of obvious standard requirements along with the time and costs of chasing down the different agency requirements. A recent Hungry Howies permit took the contractor 3 years and several tens of thousands of dollars. Virtually all the needed compliance issues with DOT, SWFMUD, EPA, etc, could have been settled in a week with a rational process.

Again, I'm not sure we are talking about the same thing as I see large areas of possible growth with rational restructuring of choke points. Construction is only the field that I happen to be well aware of and I think it could easily be applied to education, transportation and other fields.

Max writes:

I think you are wrong that there are only 2 sectors in which deregulation have a positive impact.

I believe that regulation and especially wrongful & wasteful regulation is the most pressing concern for all developped economies.
May it be the nearly 2000 laws & regulations constraining farming in the US or the stipulations of labor law that constrict the Californian non-tech sectors.

I think you greatly underestimate the impact of these regulations on smaller & medium-sized businesses!

Bob writes:

Excellent post. Made me feel better about the state of the country. I do think that this tax bill rewards certain sectors such as finance and commercial real estate that already receive too much favor, but i expect those changes will be reversed when the deficit increase becomes apparent. And on inflation, it's important to remember that Reagan did not appoint Volker, Carter did.

Adam writes:

"inevitable that the US would eventually move the rate down to meet global competition"

"Inevitable"? Robert Gordon led economists in the great 2016 debate about "slowing growth"? No mention of tax cuts or global competition. Who raised tax cuts and fair trade?

Casey Mulligan drew economist's ire by pointing to Summers' 1980's work on the benefits of corporate tax cuts.

Economist rate a BIG fail in the tax cuts and reform--virtually all in for more government control of daily minutia and investment.

Why aren't tax cuts a big win for libertarian choice?

Adam writes:

Worth a chuckle: a glance back at what economist's blamed in 2016:

https://www.theatlantic.com/business/archive/2016/10/why-economic-growth-is-so-lackluster/504989/

Chris H writes:

Since you didn't mention it, I take it that you don't view repealing the individual mandate as a significant change from the tax bill? I'm personally a bit skeptical of the effect of the mandate on insurance buying, but the CBO keeps estimating decently large effects on the number of people choosing to purchase coverage. Even if they are overestimating the impact, this would seem to be one of the larger effects of the bill. So do you have an opinion on that part of the tax changes?

Thaomas writes:

1. I cannot see how you can be so sanguine about increases to the structural deficit. If there were a corresponding increase in public investments meeting an NPV rule, that would be different, but without it, it seems destructive of future income.

2. I cannot see how you think that the reduction in the corporate tax rate without an offsetting increase in taxes on owners' incomes is not an important distributional change.

3. I see little advantage in "simplification" per se. If the kinds of consumption that the tax code encourages is a good thing, then itemizing the amounts consumed so the taxpayer can receive a partial tax credit (not a deduction) seems reasonable enough.

Reading between the lines, it seems that you do not approve of the consumption distortions introduced by encouraging charitable contributions, consumption of owner occupied housing, and purchase of health insurance. (And isn't the insurance purchased on behalf of employees by employers as bad or worse?) It seems more honest to argue against these directly rather than hide them under "simplification."

4. I still have not been able to understand the consumption decision that you see as being distorted by the deductbality of SALT.

5. In an opportunity cost sense, I'm surprised that you did not favor eliminating the capped wage wage tax and increasing the deductability of income saved and not consumed as a way of moving the system towards progressive taxation of consumption.

Brian writes:

"This post is consistent with my long held view that people vastly overestimate the consequences of individual politicians. For instance, I think it very likely that President Carter would have fired the air traffic controllers if he had been re-elected in 1980s."

Scott,

I agree with you that people grossly overestimate the effect of individual politicians, particularly the president on national outcomes, especially economically. On the other hand, I think there's zero chance that Carter would have broken the ATC union. That would have gone against everything the Democrats claimed to hold dear. That's not where there was no difference between Carter and Reagan. The place where no difference exists is in the result of the decision. I think firing the ATCs had little-to-no impact on the overall direction of the country.

Alan Goldhammer writes:

Scott - very nice post and in accord with much of what I am thinking as we end this weird year. Regarding this tax reform package, let's not forget that former Ways and Means Chair Dave Camp (R-MI) had a solid legislative proposal in the last Congress that didn't balloon the deficit and did away with more tax preferences than the one that just passed. After some good work by Mr. Camp, the Republican leadership decided not to even let it get out of committee.

I think that once the tax lawyers and accounts get there work done early next year we will see incredible gaming of the system with lots of pass through corporations being formed (Kansas redux????). I hope to be proven wrong but maybe it will force a serious clean up of the whole code.

My preference would be to reduce the corporate tax to Irish levels and get rid of all the preferences (interest deduction, health insurance for employees, etc.) and put a broad scale VAT in place to make up for lost revenue.

Scott Sumner writes:

John, I certainly agree with your points. I was arguing that the actual recent deregulation doesn't have much impact on growth. There are 10,000s of regulations that could and should be eliminated, and if all were removed then growth would be significantly affected.

Chris, I view the mandate repeal as a work in progress. It will trigger other changes in health care, and we'll have to see how it all pans out. I don't see how the current system works---you can wait until you get sick to buy health insurance? And can't be turned down? That sounds great for me, but how will that affect insurance rates?

The GOP may not like it, but the current system is now "GOPcare". It's a system created by GOP actions and inactions. I think they have a lot more work to do.

Adam, You said:

"Why aren't tax cuts a big win for libertarian choice?"

Since when do libertarians favor massive tax cuts when we already have a huge and growing budget deficit and the President and Congress are unwilling to cut spending? Is that now "libertarianism"?

Thaomas, You said:

"I cannot see how you can be so sanguine about increases to the structural deficit."

I am strongly opposed to increasing the budget deficit.

You said:

"I still have not been able to understand the consumption decision that you see as being distorted by the deductbality of SALT."

I explained it in a previous reply to you.

And I do favor shifting to a consumption tax, even if I don't mention it in every single tax post.

Brian, Yes, it had very little effect.

Alan, I agree.

silver writes:

Regarding the corporate tax rate, I keep hearing the argument that it is only officially but not actually lower than in most other countries, because loopholes in the USA are particularly bad, and the tax bill doesn't change this significantly.

But the way you talked about this implies that this is false. Why is it false?

robc writes:

A deontological libertarian would oppose taxation regardless of the willingness/unwillingness of congress to cut spending.

They are two separate issues. That I also oppose the spending is entirely beside the point.

TMC writes:

Very thoughtful post until "Nothing in this post should be taken as a defense of Trump, who may well be the worst president in US history."

After his predecessor's poor national policies, and dismal foreign policy, Trump has no cause for alarm for his place in history. Even Carter was doing a victory lap at Obama's failures (removing Carter from the worst in history)

Mark writes:

"Nothing in this post should be taken as a defense of Trump, who may well be the worst president in US history."
Scott, I thought you were a consequentialist? From a utilitarian standpoint, Trump's presidency has been pretty unremarkable, in any direction. He hasn't done anything catastrophic enough to come anywhere close to being the worst president even in modern history. To get there, you have to heavily weight the things he says (or tweets), but the consequences of his crazy tweets are, in the end, beyond some hurt feelings, basically negligible.

Let's have a sense of proportion here. FDR named a klansman to the supreme court, sent tens of thousands of American citizens to concentration camps, intended to use nuclear weapons on cities, and ordered farmers to burn crops while people were starving. And many consider him the best president in history. Trump, bad? sure. Worst ever? Not even remotely.

Hans writes:

"PS. Nothing in this post should be taken as a defense of Trump, who may well be the worst president in US history."

Dean Herodotus, is asking that you make an appointment.

Speaking of history.

" The cuneiform inscription in the Liberty Fund logo is the earliest-known written appearance of the word "freedom" (amagi), or "liberty." It is taken from a clay document written about 2300 B.C. in the Sumerian city-state of Lagash."

Dan Jennings writes:

Deficit increase? Assumed via static scoring. Yet, this isn’t how it works. we don’t know what the increased deficit will be, if there is any, at all.
Quite frankly, since govt spending is the real problem and taxing can never keep up with govt spending, I care more about keep more money, in my pocket, now.
Nevertheless, I am for tax cuts for anyone, any reason, and at any time.

Dan Jennings writes:

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Scott Sumner writes:

robc, If you don't cut spending, then you either end up with higher taxes in the long run, or the government defaults on its debt.

Brian writes:

" If you don't cut spending, then you either end up with higher taxes in the long run, or the government defaults on its debt."

Umm...I don't think so. Reducing spending/GDP may not be the same as cutting spending, but it could reduce the deficit. Besides, we have have been roughly doubling the debt every 8 years for decades without any sign of defaults or significantly higher taxes. Over those decades I've seen precious little evidence that deficits and debt have any impact worth talking about. I'm sure there's a limit to that somewhere, but don't see any evidence we are anywhere near that limit. Do you have some to offer?

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