Last time on Freakonomics Radio, we spoke with one of the chief architects of the controversial new Republican tax package.
HASSETT: I’m Kevin Hassett, I’m the 29th chairman of the President’s Council of Economic Advisers.
Hassett discussed the theory behind cutting the corporate-tax rate from 35 percent to 21 percent.
HASSETT: There’s this thing called the capital-deepening contribution to productivity growth.
And he defended the plan against its critics.
HASSETT: You know, we’re hoping to prove them wrong, and I think that the data so far are doing that.
If you’re an economist with a background in academic and policy research — which Kevin Hassett is — then becoming chair of the Council of Economic Advisers is pretty much a dream job. Here’s how three former C.E.A. chairs describe it:
Glenn HUBBARD: Well, the job of the C.E.A. chair is interesting because you really have one client, and it’s the President.
Austan GOOLSBEE: An old friend of mine gave me the advice when I took the job, he said, “A good C.E.A. chair, like a good gardener, is 90 percent pulling weeds and 10 percent planting seeds.”
Jason FURMAN: Well, partly it was about helping to develop economic policies. But we also spent time helping to market and sell those policies we agreed with, which in my case was about 90 percent of the administration’s policies.
You might think that economists — pledging allegiance as they do to empiricism and hard data — would be fairly unified as to what constitutes something like good tax policy. You might also think there wouldn’t really be such a thing as a Democratic economist or a Republican economist. Right?
GOOLSBEE: But that’s totally wrong. That’s totally not true.
Today on Freakonomics Radio: the Democratic economists’ response to the Republican tax package:
FURMAN: The core arguments the administration made over and over again were completely false.
GOOLSBEE: The overwhelming evidence is that the trickle-down, magic-beanstalk beans argument is just nonsense.
And a fellow Republican’s defense:
HUBBARD: To say it’s a disaster seems over the top.
The Tax Cuts and Jobs Act of 2017: what’s in it, what’s not in it — and why, even if you love the tax cuts, you might still be really worried:
GOOLSBEE: I mean, $3 trillion is a lot of money!
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We’ve already met Kevin Hassett, chairman of President Trump’s Council of Economic Advisers. Time now to meet our three former C.E.A. chairs. First, Glenn Hubbard.
HUBBARD: I am dean of Columbia Business School, where I’m also a professor of finance and economics. And in the early 2000s, I was chairman of the Council of Economic Advisers in the White House.
We’ve also got Austan Goolsbee…
GOOLSBEE: I’m a professor of economics at the University of Chicago’s Booth School of Business. I’m the former chairman of the Council of Economic Advisers under President Obama.
And Jason Furman:
FURMAN: I’m a professor of practice at the Harvard Kennedy School and was chairman of the Council of Economic Advisers from 2013 through 2017.
DUBNER: But we should say that your government service and quasi-governmental service is even more substantial than that, right? Can you talk about your other posts with C.E.A. and N.E.C. and World Bank?
FURMAN: Sure. I was at the Council of Economic Advisers and the National Economic Council during the Clinton administration. In between those, I spent a bit of time at the World Bank. And then I was in the White House for all eight years of the Obama administration.
DUBNER: Gotcha. O.K. So when Donald Trump talks about the swamp, you are the swamp, Jason.
FURMAN: I would like to think I’ve spent more time on tax policy than any other policy topic.
For economists, tax policy is an inherently complex topic. There are a lot of variables to consider; a lot of competing interests; and — oh yeah — a lot of politics. Kevin Hassett, who also spent years researching tax policy, was tapped by President Trump to carry out the political promises that Trump made — both on the campaign trail…
Donald TRUMP: It begins with bold new tax reform. Don’t worry, they’re going down, not up, they’re going down.
and once he was elected…
TRUMP: Tax reform will protect low-income and middle-income households. Not the wealthy and well-connected.
Some people wondered whether, or why, radical tax reform was necessary. The economy seemed to be doing pretty well, at least for some people. Here’s why Kevin Hassett saw the need for reform:
HASSETT: We’ve had this unprecedented slow wage growth and slow economic growth. So we had really kind of like a raging problem that required antibiotics of a tax reform.
Hassett discussed the new tax plan in detail back in January during a panel discussion at the American Economic Association annual conference. Among the other panelists that day were Jason Furman, Austan Goolsbee, and Glenn Hubbard, which is why we’ve reassembled them for this episode. To hear what they like and dislike about the new tax package, what they would have done differently, and how it compares to the tax moves they made while in office. And there’s a lot to discuss. In addition to the corporate-rate cut, there are cuts for most individuals and for pass-through businesses, like limited liability companies, or L.L.C.’s; there are increases to the standard deduction and child credit; changes in the deductibility of mortgage payments and state and local taxes; and quite a bit more. Okay, let’s start with Glenn Hubbard. Keep in mind we were speaking before all the tariff turmoil that’s been happening; so the conversation stuck to the new tax plan.
DUBNER: Now, you were chairman of the C.E.A. under President George W. Bush, and you were — as I understand it, and as I’ve read — the chief architect of his tax cuts —
President BUSH: I believe in the energy and innovative spirit of America’s workers, entrepreneurs, farmers, and ranchers, so we unleashed that energy with the largest tax relief in a generation.
DUBNER: — which lowered the highest personal income-tax rate, reduced the rate on capital gains and dividends. Now Democrats especially, but a lot of Republicans in hindsight say that these cuts, that tax plan, did not accomplish the job and wage growth that you and President Bush promised.
BUSH: Because we acted, our economy is growing again and creating jobs and nothing will hold us back.
DUBNER: I’m just curious to know in hindsight how you would assess that tax policy of yours.
HUBBARD: Well, it’s a great question. You know, the decade that followed the original 2001 tax plan — you mentioned acts that were both 2001 and 2002 and 2003 in your question. That decade had a lot going on, including 9/11, including recessions. It’s very hard to parse things out. I think cuts in marginal rates that President Bush advocated were definitely the right policy. There were things in the 2001/2003 tax acts that I thought were actually quite expensive and probably contributed little to economic growth. But I think on balance it was still the right policy.
DUBNER: It’s also — I mean, a big variable in there is a couple of very expensive wars. Yes? Was that part of the original projection?
HUBBARD: Definitely. Well, no, of course it wasn’t in the original projection. Interestingly, you know, when Bush campaigned in 2000, the prospect of good times ahead was clearly there.
DUBNER: Yeah, we were in the Great Moderation there for a while.
DUBNER: More recently, you worked on Mitt Romney’s economic plan when he ran for president in 2012. Then during the 2016 election, when you were asked if Donald Trump had sought your economic advice, you said, “He has not. It’s hard for me to believe any economist is advising him, given the crazy economic policies he’s espousing.” So, Glenn, now more than a year into the Trump administration, how crazy are, overall, would you say, his economic policies? In other words, what you were hearing during the campaign — does the reality seem a lot more sensible or no?
HUBBARD: I think I’d answer it on two levels. The reality seems much more sensible at a low-frequency level. Meaning, if you just focus on the big ideas — so, the tax bill that the administration just got through Congress, I felt was largely very positive for the economy. The trend in regulation that President Trump has championed, on cost-benefit analysis and a sounder approach to regulation, makes a lot of sense. The appointment of Jay Powell at the Fed. That’s all good. The noise. The tweets. The stepping on your own lead with comments. That’s unfortunate. But if you focus on the few big things, I think they’re awfully good.
DUBNER: O.K., so let’s talk about the tax reform, the new set of tax laws now. Let me ask firstly: why did we need tax reform now? So a layperson, like me, might say, “Well, you know, employment is high. Stock markets are at record highs. Corporate profits are very strong.” What problems was this tax act trying to solve?
HUBBARD: Well, it’s a great question. I always say to people in public policy it’s a Jeopardy! test: if the act is the answer, you have to guess the question. And here, I think I would start with the corporate piece of the tax reform. That’s what this was all about in terms of economics. The U.S. had become very uncompetitive in the location of businesses. And it was a millstone we were carrying around our neck. And it wasn’t just about corporations. It was about investment in the United States and wages. In the U.S., because a lot of businesses are not corporations, any tax reform has to open them up, too. And I think that’s why the bill became very, very large and very, very complicated. But I think at its root, it was about corporate taxation, business taxation, and it was aimed at the long run. So it wasn’t trying to be stimulus. It was trying to build capital and productivity for the long run.
FURMAN: The United States really does have a problem that it’s had too little business investment, too little innovation and part of that, I think, is because our business tax code has been broken for some time.
Jason Furman again.
FURMAN: But at the end of the day the question is: is this legislation well-designed or not? I think it’s not well designed.
DUBNER: So if you wanted to design it better to produce — let’s say your number one priority was wage growth. What would you add or subtract?
FURMAN: I would, first of all, pay for it. Second of all, make all of it stable so you have permanent provisions that are predictable. Third, I’d have more incentives for R&D going forward. And finally, some things in the bill that I think were quite good: letting businesses write off their equipment investment. I would have made sure that those were permanent and not something that was phased out after five years.
DUBNER: So how involved, then, is a given C.E.A. chair in, let’s say, creating new tax legislation of the sort that we’re here to talk about today?
FURMAN: Well, I personally was very involved. President Obama put out a Framework for Business Tax Reform at the beginning of 2012. And I was at the N.E.C. at the time, and my job was overseeing and running the process that developed that plan. And I continued to be one of the main people in the administration, probably the Treasury Secretary and myself, who would go out, engage on the plan, talk to people about it, refine it.
DUBNER: So, pardon my ignorance. I don’t follow Washington very closely, but I have not heard of the Framework for Business Tax Reform. Does that mean it wasn’t a thing — that the reform never happened?
FURMAN: We tried really hard to reform the business tax code. We put out a plan for it in 2012.
OBAMA: Our tax code is so riddled with loopholes and special-interest tax breaks that a lot of companies, who are doing the right thing and investing in America, pay 35% in their taxes.
FURMAN: We got some Republican interest and some Republican convergence around the ideas …
OBAMA: Corporations who’ve got fancy accountants and stash their money overseas, they pay little or nothing in taxes. That’s not fair and it’s not good for the economy here.
FURMAN: …but never got all the way there. And I think that was partly because we had this quaint idea that the whole thing should be paid for, and it turns out that’s a lot more difficult politically.
GOOLSBEE: In the end, it always comes back to politics. As it turns out, politics is very political.
Austan Goolsbee again.
GOOLSBEE: I was a big advocate — as you know, or you can go back and look at my public record — that we ought to be thinking through how to be able to reduce the corporate tax rate on the books. It was always my desire to do it 1986-style, where we paid for it. But I don’t object in spirit to cutting the rate.
Obama called for lowering the corporate rate to 28 percent. Trump initially called for cutting it all the way to 15 percent, but settled on 21 percent. And with a Republican majority in both houses, Trump did get it all the way there. So how do Democrats like Goolsbee feel now?
GOOLSBEE: I would have liked to seen it done at least with some awareness of this issue of not just wanting to have windfall gains, that you’re just handing large amounts of money to people for things that they already did, because that has a low bang for the buck. I think you’re going to, over the next two to four years, see a whole lot of discussion by corporations themselves, probably different ones than the ones who got the benefits, who say, “Wait, hold on, now we’re phasing out the R&D tax credit? What — why did we do that?
We should point out that Goolsbee, by the time he became C.E.A. chairman, had known Barack Obama for years.
GOOLSBEE: Well, I’ve been at the University of Chicago for 23 years, and President Obama was — he was a professor over at the law school. We had a bunch of common friends. People forget Michelle was more famous than he was, so when he first started running for the U.S. Senate in 2003 or 2004, his policy person called me and said, you know, can I help? I was like, “Wait, Michelle Obama’s husband? Yeah, I’ll help. That guy from the birthday parties?” You know, he lived — he was my state senator. So I started, you know, pitching in back then. And one thing came to another, and a guy that was my neighbor ended up running for President and winning. So you know, there was a lot of randomness but I went back a fair ways with him.
The first Obama term coincided with the onset of a deep recession caused by a financial meltdown. Which meant his economic team was busy putting out fires.
President OBAMA: The American Recovery and Reinvestment Act that I will sign today is the most sweeping economic recovery package in our history.
GOOLSBEE: If you go back and look at the stimulus: it’s really basically about one-third short-run stuff, that was about traditional stimulus. It was about one-third longer-run-oriented things, like infrastructure and the stuff that would take a while to come out the door. And it was about one-third tax cuts. The centerpiece of that he had called for early in his campaign, and that ended up being the biggest middle-class tax cut for workers ever in American history.
OBAMA: We’ve passed a broad and sweeping tax cut for 95 percent of American workers.
GOOLSBEE: It was called the Making Work Pay tax credit — it was basically giving you an income tax cut, crediting you for how much you’re having to pay in payroll taxes.
OBAMA: Make no mistake. This tax cut will reach 120 million families and put $120 billion directly into their pockets. And it includes the most American workers ever to get a tax cut.
GOOLSBEE: And I think that kind of puts the cherry on the sundae, if you want to think of it that way, when thinking about this tax bill that President Trump passed. Their argument essentially was, “Well, the middle class has been squeezed. Therefore, we need a tax cut.” And arguing that will help the middle class through a kind of a trickle-down mechanism. The overwhelming evidence is that the trickle-down, magic-beanstalk beans argument, that this will lead to — what did President Trump, say, four and a half percent growth, and that’s conservative — that’s just nonsense, that’s nonsense. We’ve done this before, it didn’t work.
DUBNER: So as Kevin Hassett, was giving his talk at the American Economic Association conference, he was offering evidence, empirical evidence, for why the Trump tax cuts will produce the desired effect of a more stimulated economy, rising wages especially, and so on. You, meanwhile, sat on the stage close to him, and you looked like you just wanted to vomit. And just about every slide he showed, everything he’d say, you would either verbally or with your eyes, roll them, and make clear that you felt the empiricism that was being offered in defense of the policy was just not worthwhile empiricism. So give me, if you would, maybe the most grotesque example, in your view, of an empirical argument being put forth by the Republicans that you think is either nebulous or outright wrong.
GOOLSBEE: Well, if I rolled my eyes I shouldn’t have, and I apologize for doing that, because that’s disrespectful and I don’t usually — it’d be better if we had more civility in our discourse. Now, I will say that in this presentation, I felt that it was heavily shading factual information to be cherry-picked to make it seem like something had something to do with Donald Trump, or the tax code, when it was rather obvious that it didn’t. Putting up numbers that span the Great Recession and say, “Well, look, from 2007 to 2016, wages were really bad, and then starting in 2017, wages start going up.” Now, obviously, there was a tremendous drop in the beginning of the 2007–2010 period. But if you just go get the data of the last four or five years, there has started to be progress of middle-class wages, and the Trump argument that through 2016, the real unemployment rate, he claimed, was over 50 percent, and almost literally overnight, January 20th, he began bragging that unemployment is at the lowest rate it’s ever been. And yeah, unemployment is down two-tenths of a point since Donald Trump took office. He inherited the lowest unemployment rate of any new president in a half-century. You know, if they put up a graph, check the dates, just look at it.
And what about the argument behind the central piece of the Trump plan, the corporate tax cuts, and the claim that firms will be freed up to invest in more equipment and technology, making workers more productive and thereby raising wages?
GOOLSBEE: Look, there’s some element of truth to that. Now, you should know, there are also economists who’ve been arguing literally the opposite, saying that the reason that the wage share has been going down as a share of the total economy is that we’ve made capital so cheap that companies are replacing people with machines, so replacing people with machines would kind of, in the spirit, be going the other way. But his argument goes back to this stuff we were talking about, how much do you think that’s going to trickle down to workers? And they made the argument that the majority of the money would end up going to the workers, and that average wages would go up $5,000. And they take evidence like the announcement that Apple made, they were going to give some bonuses and bring back this money, as evidence that that’s the beginning of their process.
The money Goolsbee’s talking about here are the billions of dollars that Apple is repatriating now that the new tax rules are in place.
GOOLSBEE: Apple’s going to clear, after tax, they’re going to clear probably $225 billion. And the question is, what’s going to happen to the $225 billion? As a side note, confusingly, for a lot of this, quote unquote, “offshore money,” it’s actually been in the United States in U.S. financial institutions, it’s just classified as not-U.S. profits, so it hasn’t been paying taxes.
FURMAN: One thing that’s really important to understand — most of that money is here in the United States already. It is labeled as an accounting matter as on the balance sheet of an Apple subsidiary, but that Apple subsidiary happens to have already held the money in the United States, so it’s not really a lot of money moving except in an accounting sense.
DUBNER: O.K., so as I understand it, Apple — in announcing that it’s repatriating or relabeling, maybe, this huge pile of cash — they are taking advantage of, as I understand, a one-year amnesty that allows them to pay 15-and-a-half percent on cash holdings and 8 percent on non-liquid, is that right?
FURMAN: It’s not a one-year amnesty. It’s actually required.
DUBNER: Oh, it is.
FURMAN: You don’t actually have to bring it back, but you get taxed whether or not you bring it back, and then you can bring it back anytime you want to, at the rates you said.
DUBNER: So that’s happening. And then additionally, Apple says that they’ll be investing a huge amount in labor and facilities in the U.S. So, with something like that — I’m guessing you dealt with Apple a lot while you were with the C.E.A. in the Obama White House — how are we to think of that kind of announcement and those kind of moves? How legitimate, how substantial is it, versus window dressing and public relations?
FURMAN: I think it’s 100 percent window dressing, and a top executive at Apple admitted that to me when I was in the Obama Administration. He was talking about repatriation. I said, “Simple question, if you have great investments that you could make in the United States, what’s holding you back?” They already had a lot of cash in the United States, and they could borrow in the bond market. And he said, “Well, it’s not really — we can invest all we want, but then maybe there’s some other companies that this would help.” So I mean, you’d have to be pretty dumb if you weren’t making an investment last year that would have been profitable just because the money was on a different balance sheet. Apple had a lot of different ways to get money. So I don’t think the repatriation is the right way to go. I do think though it’s a better tax system that lets you move your money back and forth freely whenever you want. I think that is a bit more efficient. I think the bill is right about that. The bill is right to do a one-time charge on the money that you have overseas. The problem is that going forward, it still makes it too easy to pretend that your money was made in Ireland or the Cayman Islands and thus to avoid paying taxes on it anywhere.
GOOLSBEE: The only thing I’d observe is: Apple’s going to clear $225 billion. And they pledged something like one-tenth of one percent of that in the form of higher wages. So I think you could have gotten all the benefits of the investment side of the tax bill for far less money, and with far less windfall, giveaway rewards to high-income people, if you had wanted to. But clearly they did not want to, and that’s why they passed the bill they did.
HUBBARD: The way I think about it is: the corporate tax had discouraged investment in the United States, both incremental investment by American companies, but also by both American and foreign firms deciding where to locate plants and jobs.
That, again, is Glenn Hubbard, who chaired the C.E.A. under George W. Bush.
HUBBARD: So that was really the big deal. The chain goes something like this: the larger investment leads to more capital, which leads to higher productivity because workers now have more capital to work with. And in a competitive market, that means higher wages. That is going to pay very large dividends to the American economy. I think it was very brave to seek such a large rate cut. I’m glad it’s there. But to say it’s a disaster seems over the top. I mean, after all, President Obama wanted to cut the corporate rate to 28 percent. I assume he didn’t want to do that randomly.
Not randomly but, as Goolsbee and Furman point out, Obama proposed to offset the corporate-rate cut, so that it would pay for itself. So that it wouldn’t add to the deficit — which the Trump cuts likely will. To the tune of roughly $1.5 trillion.
FURMAN: There’s a tax law not that far away from the one that passed that I think would have been great. But in another sense it’s a trillion and a half dollars away from the one that passed.
* * *
The Congressional Budget Office recently projected that, even with the economy growing, the national debt is expected to climb over the next ten years from $21 trillion to $33 trillion. This is in large part due to the huge tax cuts and recent Republican commitments to boost military and domestic spending. Which is not the sort of fiscal conservatism Republicans like to say they’re known for. The Democratic-aligned economist Austan Goolsbee says there’s a wrinkle in the new tax package that might make those numbers even worse: the individual tax cuts are set to expire after several years, and along with other tax changes, could mean higher taxes down the road for many lower- and middle-income people.
GOOLSBEE: And the Republicans are responding by saying, “No, no, but we’ll never let that happen, we’ll just extend all of those things when they’re about to expire.” Okay. But then it doesn’t cost $1.5 trillion, it costs more like $3.5 trillion. And if you’re going to give up three-plus trillion dollars of revenue, it’s perfectly appropriate — there’s nothing inappropriate — about asking how much bang for the buck are we getting for $3 trillion. I mean, $3 trillion is a lot of money. The entire stimulus that some people criticized at that time and said, “Oh, this is unbelievably large, and how can we do something that would increase the deficit by $780 billion” — I mean, come on. This is four times bigger than that!
DUBNER: So how worried are you about increasing the deficit?
GOOLSBEE: I do not think that the U.S. is in a situation in which we’re right on the cusp of some fiscal base crisis, that the markets are going to say, “Oh, now maybe they’re Greece,” and the interest rate is going to shoot through the roof. What I say is, the problem of deficits is not that they’re going to drive up the interest rate. The problem of the deficits is you have to pay back the money. So to go to the age-old — not battle — but the age-old discussion that the economists have been having over, we know the population is aging, we know we have a long-run fiscal imbalance, we know we’ve got to think about Social Security and Medicare, and discretionary spending and defense, and how are we going to do that? And the argument, well, we could try to cut entitlements, or we could try to raise taxes, or we could do some combination. That’s kind of a sober debate about the details. That’s not what they did here. If this is a once-in-a-generation opportunity to change the tax code, all we did is just go pile on to a problem that we already knew existed, to multiple problems we already knew existed. One, let’s just go cut taxes for high-income people, and make the income distribution more unequal, when we know that’s been trending the bad way for quite a while. And then let’s just pile on, during a boom, and start running huge deficits during a boom.
HUBBARD: Well, I think if you use the Joint Committee on Taxation estimates, the one-and-a-half trillion dollar so-called static revenue loss became a trillion-dollar revenue loss.
Glenn Hubbard again, the Republican economist.
HUBBARD: My own calculations would suggest about half of it. That is to say 750 would be a true revenue loss. So, no matter how you slice it, it’s going to be difficult not to lose revenue. The only hope would be that for some other reason, the economy grows faster. But this tax cut definitely increased the deficit.
So even Hubbard does not dispute that there’s a huge cost burden to the new tax package. On the other hand, the individual cuts that Hubbard helped shepherd through under President Bush, and the individual cuts that Goolsbee helped shepherd through under President Obama — they didn’t do much to address the bigger, longer-term trend of wage stagnation. And that, as current C.E.A. chairman Kevin Hassett reminds us, was why the current Republicans felt compelled to make such a big play:
HASSETT: So we had really kind of like a raging problem that required antibiotics of a tax reform.
The cost of the tax package, while massive, is hardly the only objection the Democratic economists have. Here’s something else Donald Trump promised, after he was elected, about his tax plan:
TRUMP: Tax reform will protect low-income and middle-income households. Not the wealthy and well-connected.
TRUMP: The rich will not be gaining at all with this plan. We’re looking for the middle class and we’re looking for jobs.
GOOLSBEE: And their first reaction was, “Let’s cut the estate tax for people who have more than $20 million estates.”
FURMAN: Cutting the estate tax was not something that we need to do for growth in this country.
GOOLSBEE: “And let’s cut it on a high-income pass-throughs.”
The “high-income pass-throughs” he’s talking about include certain L.L.C.’s and even sole proprietorships that, under the new tax law, will be able to write off 20 percent of their qualified business income.
FURMAN: The tax cut for pass-throughs is complicated, distortionary. I don’t know any economists on the left or the right that particularly like that provision.
DUBNER: I believe it was Glenn Hubbard who said he did not like that change, even though he’s on the Republican side, because it would lead to a lot of people spending a lot of time setting themselves up to be tax-advantageous, which is kind of the wrong way to be spending your time generally.
FURMAN: Yeah, exactly. The tax code should tax similar activities at similar tax rates. And now all of a sudden, you can make an arbitrary label change, and save 20 percent off your taxes. That’s going to lead to a lot of distortions. A lot of extra effort. They put rules in place to prevent abuse, but there’ll be an awful lot of creativity to figure out how to get around those rules.
How about another promise President Trump made about the tax plan?
TRUMP: Tax simplification will be a major feature of the plan.
The Republicans followed through on this, at least to some degree. By nearly doubling the standard deduction, they gave a lot of taxpayers a good reason to not itemize their deductions.
FURMAN: For some people, it will be simpler. People who are itemizing today will be able to take the standard deduction. There’s about 25 million of them and that’s not trivial. That’s real simplification. But there’s a lot of new complications.
Complications and costs and, as Furman argues, a lack of transparency.
FURMAN: The Trump administration’s selling of this has been abysmal. Starting from the premise that the United States has really high taxes when in fact the United States has really low taxes. That this legislation would pay for itself and cut the deficit, when this legislation would actually cost a lot of money and raise the deficit. To its claims originally that no high-income households would benefit, which is patently untrue. So the core arguments the administration made over and over again were completely false.
Jason Furman and Austan Goolsbee see way too much in the tax package that benefits the wealthy and will exacerbate income inequality. Several nonpartisan analyses back them up. But Glenn Hubbard says it isn’t quite so black-and-white.
HUBBARD: Most Americans will get a tax cut, and not all high-income people are treated very well. I happen to be a high-income person who lives in New York City. I’m not going to get a tax cut.
DUBNER: Quite the opposite.
HUBBARD: Quite the opposite.
DUBNER: New York City is pretty bad but anywhere in New York state is pretty bad. This is one the many interesting wrinkles of this tax act, is the end of the SALT deduction — or, not the end but the minimization. So it used to be you could deduct, I guess, an infinite amount of state and local taxes from your federal return, correct?
HUBBARD: Right. Whatever yours — Yeah, whatever you pay.
DUBNER: Yeah. And now that limit is $10,000. A lot of people point to that as a punishment against blue states that did not vote for Trump. So let me hear your take on that. From the tax perspective but also from the political perspective.
HUBBARD: Well, I mean let’s start with some simple math. If you want to cut marginal rates the way the tax bill proponents wanted to do, you have to pay for that. One might have been ending the home-mortgage interest deduction. Good luck with that.
DUBNER: You say good luck with that because…
HUBBARD: Very politically difficult to do. And then if you were to limit the health exclusion, that too is politically difficult and also you need it as part of health policy. So the other one that was left that was large was state and local. I don’t think it’s as much about politics as it is about math and economics. The math point I just made. The economics point is you should pay the marginal cost of something you buy. So if I’m in New York I ought to be facing the full cost of living here and supporting New York spending, and if I don’t like it, I can go move somewhere else. There’s no reason that somebody in Florida ought to be subsidizing me.
So Hubbard sees a lot more sound thinking in the tax plan than the Democratic economists do. I asked him what he considers the worst thing about it.
HUBBARD: The worst thing is something that isn’t in it. This was the time to do work supports, to expand the Earned Income Tax Credit or have some form of wage subsidies. That’s a point of view that had been taken everywhere from Barack Obama to Paul Ryan. So hardly partisan on one side or the other. That missing was the worst part.
DUBNER: I’m curious if whether you think another missing component or missed opportunity here would have been to somehow integrate this discussion of tax cuts with health care reform.
HUBBARD: I do think that. You can’t really talk about health policy without tax policy because so much of the way we finance health care has to do with the tax code. So for example, right now I don’t pay income taxes on the health insurance benefit that I get from my employer, Columbia University. Same is true of other people who work for an employer. That tax treatment, plus the way we tax and subsidize benefits for lower income people is important and we should have discussed it.
The new tax bill did not, however, completely ignore healthcare. In a move that infuriated Congressional Democrats, it eliminated the Affordable Care Act’s individual mandate, which imposed a penalty on people who did not buy health insurance. Here’s Jason Furman:
FURMAN: The repeal of the individual mandate in this bill I think is really unfortunate. Millions more people will lose their health insurance. Premiums will go up. And that was a policy that originally was actually a conservative idea and a way of solving what would otherwise be a market failure in the health insurance market.
The Affordable Care Act, among the signature achievements of the Obama Administration, and the Tax Cuts and Jobs Act, almost certainly the signature achievement to date of the Trump Administration, wouldn’t seem to have much in common. But, as Furman points out, they do:
FURMAN: There’s not political buy-in to this. A little bit like there wasn’t political buy-in for the Affordable Care Act.
In years past, it was a different story. A lot of landmark legislation in the United States had huge bipartisan participation. The 1935 act that created Social Security was supported by 90 percent of Democrats in Congress and 75 percent of Republicans. The Civil Rights Act, in 1964? Sixty percent support from Democrats, and 76 percent from Republicans. The 1965 act that created Medicare: 81 percent of Democrats, 50 percent of Republicans. Now how about the Affordable Care Act? Zero percent of Congressional Republicans voted for it. And the tax bill we’ve been discussing today? Zero Democratic support.
FURMAN: And that will guarantee prolonged fighting over these tax cuts for years to come.
Well, that’s something to look forward to, isn’t it? This kind of hardcore party tribalism, which used to be a bug in our political system, is now a feature. We will be exploring that idea in a future episode of Freakonomics Radio, which will offer a new twist on the old view of Washington.
Katherine GEHL: Most people have heard Washington is broken. And yet the core idea here is that Washington isn’t broken. In fact, Washington is doing exactly what it’s designed to do.
And what is Washington — at least modern Washington — designed to do?
GEHL: The U.S. political system is a full-fledged industry. It’s thriving even as the customers of that industry are actually enormously dissatisfied.
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Freakonomics Radio is produced by WNYC Studios and Dubner Productions. This episode was produced by Greg Rosalsky. Our staff also includes Alison Hockenberry, Merritt Jacob, Stephanie Tam, Max Miller, Harry Huggins, and Andy Meisenheimer. The music you hear throughout the episode was composed by Luis Guerra. You can subscribe to Freakonomics Radio on Apple Podcasts, or wherever you get your podcasts.
- Kevin Hassett, 29th Chairman of the President’s Council of Economic Advisers
- Glenn Hubbard, dean of Columbia Business School and former chair of the C.E.A.
- Austan Goolsbee, professor of economics at the University of Chicago and former chair of the C.E.A.
- Jason Furman, professor of the practice of economic policy at the Harvard Kennedy School and former chair of the C.E.A.
- Economic Report of the President Together with The Annual Report of the Council of Economic Advisors, (February 2018).
- Remarks by President Trump at Tax Reform Event, (September 27, 2017).
- The President’s Framework for Business Tax Reform, A Joint Report by the White House and the Department of the Treasury (February 2012).
- The President’s Framework for Business Tax Reform: An Update, A Joint Report by the White House and the Department of the Treasury (April 2016).
- The Budget and Economic Outlook: 2018 to 2028, Congressional Budget Office (April 2018)
- “Who wins and who loses from the tax bill?” by Louis Jacobsen (Politifact, December 19, 2017).
- “Distributional Analysis of the Conference Agreement for the Tax Cuts and Jobs Act,” TPC Staff (Tax Policy Center, December 18, 2017).