Guided by the principles of a simple and fair flat tax, I’ve been toiling for decades in the vineyard of tax reform. At the risk of mixing my metaphors, I usually feel like Don Quixote, engaged in a futile quest. Convincing politicians to reduce their power is not an easy task, after all.
But it is possible to make incremental progress. I’ve argued, ad nauseam, about the need to lower the corporate tax rate and the benefits of ending the state and local tax deduction, and we actually took big steps in the right direction last year.
But there’s no such thing as a permanent victory in Washington. The debate has now shifted from “is the tax plan a good idea?” to “is the tax plan working?” And that was the focus of my recent CNBC debate with Austan Goolsbee, the former Chairman of Obama’s Council of Economic Advisers.
Interestingly, Austan and I agreed on several issues.
- We both agreed that the short-run effects (bonuses and stock buybacks) are comparatively minor.
- We both agreed that the lower corporate tax will boost international competitiveness.
- We both agreed that the job market under Trump is doing reasonably well, but is not noticeably better than it was under Obama.
- We both agreed that the higher growth produced by the tax bill will mostly occur because of increased investment.
At the risk of digressing, I should have mentioned that Trump’s corporate rate cut, while a big step in the right direction, should be viewed as a first step. As illustrated by this chart, the overall US corporate rate is still higher than the average for other advanced nations.
Let’s now get back to the interview. Goolsbee and I didn’t agree on everything.
- Austan is fixated on class warfare, which I think is very bad economicsbecause it means high marginal tax rates and/or a heavier tax biasagainst saving and investment.
- He also frets about deficits, which is rather ironic since he didn’t seem to worry about red ink when Obama was pushing his failed stimulus scheme. In any event, I pointed out that there is no long-run tax cut.
Last but not least, here are some additional points from the interview
- I repeatedly expressed concern that good tax policy won’t be very sustainable unless politicians restrain the excessive growth of government spending, both in the short run and long run.
- I also pointed out that the restriction on the state and local tax deduction will help the national economy if it deters some big states from raising taxes (though that reform certainly isn’t slowing down the big spenders in New Jersey).
- Even small differences in economic growth, if sustained over time, can make a big difference in living standards.
- We should be worried that Trump will sabotage his tax cut with protectionism.
The bottom line is that last year’s tax plan resulted in a less-destructive tax code. That doesn’t guarantee fast growth since we also have to look at other policies, but it will help.