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Larry S. Lousy on Tax Reform?

Not exactly. In the Financial Times Larry Summers cites three signs of pure self-interest behind the bill introduced in Congress Thursday.  One is lousy in my view, the rest fine.
Summers’s arguments are that:
(1) “The plan would increase the deficit by $1.5 trillion in the decade and potentially more in the future.” Unfortunately, outstanding debt is already on an “explosive path,” given anticipated spending needs. Since the economy is reaching full employment, Summers avers, only revenue-neutral plans should be under consideration.
(2) No clear need is apparent for a corporate tax rate reduction or a move toward a territorial system, which would only accelerate a “race to the bottom” in the hunt to encourage the relocation of income. A true reform bill would in principal be revenue-neutral to corporations, reducing their rates and cutting their loopholes in the interests of increasing simplicity and reducing incentives to act in certain ways merely to get a tax break.
(3) The plan’s tax reductions for wealthy households are unacceptable from the perspective of fairness and equality in income distribution. In Summers’s words, “Why include new complexities that help the richest taxpayers while taking steps that hurt middle income families?”

I more or less agree with points (2) and (3).  On the other hand, I would argue with (1) as follows:

(A) From an MMT (Modern Monetary Theory*) perspective, spending is effectively always paid for with money, even if the budget is balanced. To explain, checks can be issued and cashed independently of tax revenues. Taxes must be collected to avoid overstimulation and corruption associated with the temptation to spend unlimited amounts, and to prevent an overaccumulation of government liabilities–but not to get money to spend. Hence, in federal-level fiscal policy, a gain for the rich does not directly imply a loss for someone else.
(B) “Long run projections” that the deficits will explode are imprecise and of little relevance to economic actors with decisions to make today. They depend on projections coming true, when shocks occur every month. Projections will depend on decisions policymakers make today, tomorrow and the next day, which can immediately undermine the assumptions that underlie growth projections. But we do know what is known now. Congress must react to current information, or deficits may indeed be too high or low this year. Deficits will indeed turn out to be too high today if the economy is slumping today. If the economy is booming in five years, policymakers then base their decisions on the situation in 5 years. We cannot count on a boom in 5 years at the current date.
(C) Sometimes tax cut or spending changes are so huge that revenues have to be raised on a more-permanent basis. Otherwise a huge increase in deficits is implied that cannot be offset as needed in the future based on future conditions. So, the need for taxes to offset spending exists with regard to large, more-or-less permanent, changes in the tax code, in one way or another.

What are the implications for the tax code of these (in fact, not always well-understood) principles?

Revenue neutrality is not required or generally desirable. The real need for balance exists between fiscal looseness and the indicators of the need for net stimulus, including unemployment, inflation, etc.–as if Congress had to think a bit like a good chair of the Fed! Treasury-Fed sector deficits (1) do exist on average and (2) balance voluntary net acquisitions of U.S. assets by the private and foreign sectors. In any case, the Fed does its part by choosing an interest rate based on macro-policy considerations.

Getting back to the (potentially fast-tracked) tax bill, the implication is that no need exists for provisions that hurt people of low or modest incomes, including: (1) lowering of personal exemptions (Albert Hunt saw this coming in the one-page tax plan outline); (2) cuts in “middle class” personal income tax deductions; (3) ACA cuts in the House bill that would reduce the number of people covered and levels of research funding. (Link is to New York Times article.)

While the state income tax deduction offsets directly help itemizing taxpayers, who tend to be well off, they also help state and local governments pay for programs that greatly benefit the least well off–belying “justifications” that see too much help for the upper-middle tax brackets in the big tax expenditures.

The revenue-raisers of various kinds included in the bill do not and cannot “pay for” spending or tax cuts at the federal (national) level, which is in MMT language an issuer of a sovereign currency. That is where hope remains for improvements in policies that can be supported by all major political factions with power in the federal government. None of which of course should detract from Summers’s other two points (cuts smuggled in with reform and bias in the cuts toward the currently rich).

Coming in a future post: Greg Mankiw’s take in a recent column.

*For MMT, see posts in that category on this site, Randy Wray’s book Modern Money Theory (Alibris’s page for the published book; alternative free version at New Economic Perspectives),  the earlier, less fully-worked-out Understanding Modern Money, our MMT-category posts, or various links on our link page.


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