Gary Cohn, Steven Mnuchin and Donald Trump: some doubt whether the administation's tax reform plan will substantially increase growth © Getty
Experimental feature

Listen to this article

00:00
00:00
Experimental feature
or

The US administration’s tax plan is not a plan. It is a mélange of ideas put forth without precision or arithmetic. It is not clear enough to permit the kind of careful quantitative analysis of budget costs, economic impacts and distributional implications that precedes legislation in a serious country. It is clear enough to demonstrate that the claims of Steven Mnuchin, Treasury secretary, Gary Cohn, director of the National Economic Council, and Kevin Hassett, chair of the Council of Economic Advisers, are some combination of ignorant, disingenuous and dishonest.

I have strong disagreements on tax policy with Republican economists like Greg Mankiw, Glenn Hubbard and Martin Feldstein and with Treasury alumni like Nick Brady, John Snow and Hank Paulson. Nothing I have ever heard or read from them seems absurd or dishonest in the way that almost everything coming out of this administration has that character.

We know enough to know that a tax reform plan along the lines of the administration’s sketch will not substantially increase growth, will blow out the budget deficit and will make America an even more unequal place.

The administration pushes the idea that cutting the corporate tax rate will spur investment. It is certainly possible that with a lower rate, accountants will locate more corporate income in the US but a big spur to investment seems very unlikely. With long-term interest rates well below 2 per cent, the stock market sky high and business able to write off investments immediately, capital costs have never been lower.

True, there is much cash parked outside the US. But almost all the companies with large cash holdings outside the US also have cash hoards in the US that they choose not to invest. The first order impact of a “territorial system” that renounces a US tax claim to corporations’ overseas income will be to encourage the relocation of productive activity from America to tax-haven jurisdictions, and so to slow US growth.

It should not be forgotten that the most rapid growth in gross domestic product that the US has seen took place in the 1950s, 1960s and 1970s when top tax rates were nearly twice as high as now. Those rates were surely too high and punitive rates would be a huge mistake in the current context. Yet it is absurd to suggest that reductions from current levels will call forth some renaissance of hard work.

What about the budget deficit? In order for tax cuts to pay for themselves, as Mr Mnuchin sometimes asserts, they would have to massively spur growth. Since it is unlikely they will have any important effect on growth, they will bloat the budget deficit at a time when we should be preparing for the next downturn, for rising entitlement costs, and potentially for the need for increased national security spending.

It is worse than this. Many in the administration’s orbit have expressed the belief that the Federal Reserve’s quantitative easing programme has inflated asset prices. If so, increasing the supply of bonds should have a significant depressing impact on asset prices and the economy. Any possible supply-side benefits of the tax programme have to be weighed against the damping impact of future deficits on economic growth.

Finally, there is the question of fairness. Those secure in their beliefs do not, as Mr Mnuchin did, seek to de-publish studies by apolitical civil servants. There is very little doubt among serious economists that the immediate impact of corporate tax cuts would be to help corporations and that the vast majority of corporate shareholding is concentrated among those at the top of the income and wealth distribution.

Anyone in doubt about fairness should note that the administration chooses to exclude the estate tax from discussion when it considers fairness and is unwilling, as all previous Treasuries have been, to present a revenue and distributional analysis of its plan.

This week the world’s finance ministers and central bank governors will gather in Washington for the annual International Monetary Fund-World Bank meetings. These meetings used to be a time when the US urged other countries to respect the laws of economics and arithmetic in formulating economic policies. This time the lecturing should go in the opposite direction. The international community should make sure that US officials have a very uncomfortable week. Just possibly, that will be enough to get the administration economic team to consult their consciences as well as their Twitter accounts.

The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary

Copyright The Financial Times Limited 2017. All rights reserved.
myFT

Follow the topics mentioned in this article

Follow the authors of this article