Sunday, October 22, 2017

What does Summers 1981 say about the long-run incidence of the corporate-income tax?

I already explained that in two different ways: cutting the tax increases wages more than it reduces tax revenue.

Contrary to Summer's claim, this result is not "unprecedented in analyses of tax incidence" rather it is one of the most ubiquitous results in analyses of tax incidence.

Notice that Summers' response this morning fails to claim that I am wrong about the LONG-RUN incidence in HIS MODEL (It should already be obvious that I am not wrong -- my early post already provided the algebraic analysis of, and precise citation to, the relevant equation from his paper).

Perhaps Summers really means that he thinks that the long-run incidence in HIS MODEL can be safely ignored. If that's what he means, he should say it directly and then I will respond.

Summers also either (i) fails to read what I wrote, or (ii) is lying. A cue: he fails to directly quote me. Specifically,

  1. He claims that "Mulligan also fails to recognize that a corporate rate cut benefits capital and hurts labor outside the corporate sector because it draws capital out of the noncorporate sector, raising its marginal productivity and reducing that of labor." [emphasis added]  But of course I did -- it is my item (C) -- and pointed readers to one of Summers supply-side-economics papers on that very subject.
  2. He claims that Greg and I overestimate the effect of Trump's plan on the incentive to invest (see his "a cut in the corporate tax rate from 35 to 20 percent in the presence of expensing of substantial or total investment has very little impact on the incentive to invest").  But Greg and I are looking at INFINITESIMAL changes -- it doesn't get any smaller than that!
(For your reference, my item (C) says "...labor likely benefits from corporate income tax cuts even without any increase in the aggregate capital stock because that capital would be better allocated to the corporate sector." [emphasis added])

Regarding Summers other points this morning, not specific to Summers 1981, I had already anticipated them.

Public Policy Suffers when Price Theory is Ignored

Jason Furman and Larry Summers weighed in this week about the quantitative amount that labor can benefit from a capital-income tax cut.

It soon became clear that they had failed to carefully use price theory in coming to their conclusions.

Furman and now Krugman (update: and now Summers) are admitting that simple supply and demand vividly contradicts what they said/say about taxes, but assert that the world is more complicated. I agree.

But they are dead wrong to further assert, without evidence (and I suspect without thinking), that adding complications will overturn the simple supply and demand conclusion or at least weaken the contradiction contained in their original proclamations.

(So far, Summers has wisely refrained from trying to defend his mistake.  Update: he replied 2 hours after I posted this -- see the update at the very end of this post.)

Supply and demand can do more than I have already shown.  Supply and demand also:

  1. can give quantitative answers.  Greg Mankiw writes "I must confess that I am amazed at how simply this [quantitative formula] turns out. In particular, I do not have much intuition for why, for example, the answer does not depend on the production function."  Supply and demand can answer his question, without any algebra.
  2. can deal with complexities, such as "imperfect competition."  The simple supply and demand model assumes perfect competition, but that assumption can be and has been modified.  Guess what?!  Making that modification shows that even the simply supply and demand model, let alone the proclamations of Furman-Summers-Krugman, understates the wage impact of capital-income taxation.
    [Hints: what new rectangles appear when the factor-renter is selling his product for more than marginal cost? What determines the equilibrium size of those rectangles?  Why should we use the corporate tax to rather than the DOJ to fight monopoly?]
  3. can deal with complexities, such as debt finance.  Having uneven taxation of different types of capital tends to reduce the denominator of the Furman ratio more than it reduces the numerator.  i.e., Furman still has it even more backwards than I thought (update: Summers too).
  4. explains why horizontal capital supply is not an "extreme" caseGary Becker and I explained why capital supply probably slopes down somewhat in the long run (thanks Kevin M. Murphy for reminding me about this -- not to mention for teaching so many of us about price theory!)
  5. shows you how to process the economic data.  Furman and Krugman make evidence-free proclamations about the elasticity of capital supply.  Supply and demand shows what economic data is needed to measure that elasticity (spoiler: it's not complicated, and shows a very high elasticity).

I will post on these individually next week (week of Oct 30). In the meantime, you may be interested in a previous instance when, with important public-policy issues at stake, Krugman failed to appreciate what supply and demand really says.

Update: 2 hours later Summers posted a reply that reiterates the "it's complicated," "monopoly profits," and "debt finance" excuses for ignoring what the simple model says.  See my points 2 and 3 above.

He also hopes that you forget that he referred to CEA's result -- which is generally in agreement with the simple supply and demand model -- as "unprecedented in analyses of tax incidence."

Regarding Summers' other replies, see here.

Wednesday, October 18, 2017

Furman and Summers revoke Summers' academic work on investment

Former CEA chair Jason Furman writes “The economic debate about the %age of the corporate tax paid by labor ranges from 0% to 100%. The new CEA study puts it at 250%.”

Larry Summers reiterates Furman’s argument, calling the CEA and its estimate “dishonest, incompetent and absurd.”

Furman’s first sentence has the economics of investment completely backwards.

I will point to academic papers in a minute, but they can be understood with capital supply and capital demand, as shown below.

The red area (R) is the revenue from a capital income tax.  The red and green areas (R + G) are the losses from that tax suffered by owners of the factors of production, combined for capital and all other factors.  The revenue is a LOWER BOUND on the factor owners' loss.

In the long run, all of the factor owners' loss from a capital income tax is a loss to labor (the area below the horizontal dashed line is negligible; see A below).  Therefore, in the long run, capital-income tax revenue is a LOWER BOUND on labor’s loss.  Furman and Summers have it backwards.

(A) Why would labor bear all of the burden in the long run?  Well, ask Larry Summers back when he used to be an academic studying these matters.  His 1981 Brookings paper, which even today is an article commonly used by me and others to teach this in graduate school, says so on page 81 equation (7).  The left-hand-side of that equation is a perfectly elastic long-run supply of capital: it says that the supply curve in my picture is, in the long run, properly drawn as horizontal.  See also Lucas (1990, p. 303, equation 4.3).

(B) OK, the long-run Furman ratio must be greater than 100%, but how big is it?  If we (i) begin, as is today’s reality, with a high tax rate, and (ii) conservatively assume that the only channel for benefits is a higher capital stock (more on that below), then 250% is about right for cuts to somewhat lower rates.

Using a Cobb-Douglas aggregate production function with labor share 0.7, and a 50% capital-income tax rate (combining corporate, property, and the capital components of the personal income tax), I get a Furman ratio of 350%.  With a 40% tax rate instead, the Furman ratio is 233% (algebra here; these refer to modest tax-rate reductions -- not going all of the way to zero).

If the current CEA said 250%, then it got Furman's ratio much closer than Furman did, who puts it less than 100%.

Note that Summers now calls the 250% "unprecedented in analyses of tax incidence," yet I am getting it from his own paper about how the corporate-income tax works (see esp. p. 95)!

(C) Are there labor benefits not shown in the picture?  Again, let’s go to the academic incarnation of Larry Summers.  He once made contributions to supply-side economics!  In his chapter in “The Supply-Side Effects of Economic Policy,” Summers wrote that labor likely benefits from corporate income tax cuts even WITHOUT ANY increase in the aggregate capital stock because that capital would be “better allocated to the corporate sector.”

Update on (C): Greg Mankiw points out still more labor benefits not shown in the picture.  His source -- you guessed it! -- Larry Summers.

To summarize, anyone using Larry Summers’ academic work for policy analysis, is, according to Larry Summers, “dishonest, incompetent and absurd.”

(update: Summers' reply now revokes academic work more generally.  He also wants you to forget that he said CEA's Furman-ratio result to be "unprecedented in analyses of tax incidence."

Moreover, he digs his hole deeper with his critiques of the simple model.  I.e., President Trump should be thanking Summers for unwittingly strengthening the case for corporate tax reform.

See my comments on Summers 1981 here.)

Sunday, October 8, 2017

How government employment can undermine democracy

Citizens in a democracy can criticize their government and its laws without government reprisal.  But what happens when your government is not only the enforcer of law, but also your boss?  Your boss, of course, is less willing to have you in his employ if you are speaking out against him.

I spoke to a young woman who was shortly due to sit examinations to become a judge. She thought there was a good chance that her role in assisting the local [Catalan] referendum process would destroy her chances of becoming a judge, and said that one of her fellow students was too scared to even vote for the same reason.

Of course a judge is an occupation naturally in the public sector, but the point is: the more occupations that are pushed from private to public sector (or any huge employer -- but what private organization employs as many as government?), the more people who are unwilling to speak out against harmful government policies.

Read here to feel the Joy of Voting

The economic analysis of voting primarily takes voting as instrumental: like a bank account, a vote is supposed to be nothing more than a means to an end. A few of us have argued against this: e.g., Geoffrey Brennan, Bryan Caplan, and recently Becker and Mulligan, but that is a small minority.

Another way to appreciate the same point is to see what actual Catalan voters had to say last weekend:

The polling station workers thought that if they had computers with older technology they may be able to connect to a wifi system [the Spanish government was blocking polling stations' internet access] ... we all started clapping – it had worked! They were connected. One man inside excitedly ran to inform the others... “I’m going to be the first to vote!” he yelled excitedly, to laughter. The two elderly women and a handful of others inside took up their ballot papers and voted.

Then the gates opened and the first round of people walked through. Everyone was cheering and applauding jubilantly ...the faces of those who came through were still calm and resolute but some became tearful after they voted. It was a really moving moment, and it’s hard to accurately put it in words. The best way I can describe it to say there was an overwhelming sense of dignity about both the moment and the people.

You can read the full account here.

That voting is to many people not merely a means to an end is better understood by Catalan separatists than the Spanish government.

Saturday, July 15, 2017

How many people get insurance through SHOP?

Pursuant to the Affordable Care Act, the SHOP Marketplace (Small Business Health Options Program) was created to provide qualified employers with lower costs on group plans and claim tax credits.

Four sources indicate the extent of enrollment in Small Business Health Options Program marketplaces. First, the Centers for Medicare and Medicaid Services blog has occasionally reported on enrollment through the portal, which applies to only some states and even in those state SHOP enrollment may occur outside More recently, it also offered a nationwide estimate (many hat tips to Mr. Gaba). Second, the March 2017 Mercatus-Mulligan survey of small businesses asked managers about their organization’s participation in SHOP. Third, the U.S. Government Accountability Office (GAO) has occasionally reported on participation in the Credit for Small Employer Health Insurance Premiums, which requires enrollment in qualified health plan offered through a SHOP Marketplace (there are transitional exceptions in Iowa and Wisconsin). Fourth, the Department of Treasury has reported the aggregate dollar amount of the tax credit as part of its annual tax expenditures report.

Table 1 summarizes the results. The top row is the most recent GAO report, showing 181,004 small businesses claiming the credit for tax year 2014. Assuming eight persons insured through SHOP for each small business participating, that is about 1.5 million people insured through SHOP, via a business receiving the tax credit. The GAO also reports an aggregate amount of the credit of $541 million for tax year 2014. The U.S. Treasury’s Tax Expenditure Report shows essentially the same dollar amount for fiscal year 2014, which is why the table’s second row shows essentially the same number of businesses receiving the tax credit.

Receiving the credit is not necessary for participating in SHOP, and credit receipts among SHOP participants may be less common over time because, beginning in tax year 2014, a business’ eligibility is limited to two years. In other words, tax year 2016 was the first year that a small business could find itself ineligible for the credit solely because of participation in prior years. Consistent with this, the Department of Treasury reports a similar dollar amount for fiscal year 2015 and then a sharply lower amount in fiscal year 2016. At the same dollars per business, the fiscal year 2016 dollar amount translates into only 53,532 businesses receiving the credit.

The recent Mercatus-Mulligan survey of small businesses, projected to nationwide totals, shows about 118,000 businesses participating in SHOP with about 53,000 of them receiving the tax credit. The 53,000 is remarkably close to what can be inferred from the Treasury reports. It is difficult to know total participation prior to 2016, except that it is bounded below by the number of businesses receiving the credit. In particular, we cannot assume that the ratio of credit-receiving businesses to total SHOP-participating businesses has been constant over time because of the new credit-eligibility criterion that began in 2016.

Overall, it appears from the first three sources that almost one million people were recently insured through SHOP, and more than one million were insured that way in 2014 and 2015.

However, Centers for Medicare and Medicaid Services tells a very different story. Its nationwide enrollment of persons and businesses is a factor of four less. Of course, CMS is not aware of the Mercatus-Mulligan survey but it would be nice if they would explain how to reconcile their enrollment reports with GAO’s and Treasury’s reports of small business health tax credit participation and dollar amounts.  Absent that reconciliation, my guess is that CMS -- both under Obama and Trump -- have drastically underestimated the importance of SHOP.

Sunday, April 16, 2017

Which people were rescued from Communism by military conflict?

Communism has done, and continues to do, a lot of harm to the people subject to it (North Korea is above that terrible average). But how many of those people were rescued from Communism by military conflict? To help with your answer, here is a list of Communist regimes lasting more than 5 years:

  • Soviet Bloc
  • Yugoslavia
  • Cuba
  • China
  • Cambodia
  • Vietnam
  • Laos
  • North Korea
  • Ethiopia
  • Afghanistan
  • Mozambique
  • Benin
  • Angola
  • Somalia
  • South Yemen
  • Congo
Perhaps you can make a case that the Soviet Bloc would have been larger if it weren't for Western European battles won by the Allies in WWII. The Korean War kept South Korea from Communism, but not North Korea.

Cambodia's first and worst Communist regime was ended by military attack and occupation by Vietnam and Laos, both of which were Communist.

But the far more typical rescues came from within -- internal government changes (essentially every other case above) and people running beyond their Communist country's borders (especially, Cuba).  

Saturday, April 1, 2017

Machine proves Paul Krugman wrong about the recession

Click for short video

Click for short video

For more on the two "sides" to this argument, see

See more examples of economics questions answered by machine.

Thursday, March 23, 2017

Puerto Rico - Cuba comparison

Puerto Rico and Cuba make an interesting comparison because both Caribbean islands were once Spanish colonies and then part of the United States after the Spanish-American War.  Cuba then went its own way, especially with the Castros and their communist system.

I have already compared the two on the basis of some national statistics, e.g., that; (i) Puerto Rican income per capita is now four times that in Cuba, when in 1950 they were essentially the same, (ii) Puerto Ricans are now more educated than Cubans, even though education is something that the Cuban government brags about.

My purpose here is to share some other impressions I had during recent visits to both places.

Cuban buildings are literally falling apart.  Puerto Rican buildings look essentially like buildings elsewhere in the United States.  Even the public housing in Puerto Rico looks much better than most Cuban buildings.  The Puerto Ricans also keep their yards looking nice (moreso than, say, Chicagoans).

There are abandoned structures in Puerto Rico.  I don’t remember seeing any in Cuba, except the (many) that were too unsafe to be habitable.

Satellite dishes for TV reception are very common in Puerto Rico, even in poor neighborhoods.  For the first fifty years after the Revolution, Cubans were prohibited from watching foreign TV (but with ingenuity and generous bribes, some Cubans broke this law).  I don’t remember seeing any residential satellite dishes in Cuba.

Although some Puerto Ricans told me that Cuba is less polluted, I got the opposite impression, especially the big smokestack in the middle of Havana.  Puerto Rico does have plenty of cars – supposedly more per square mile than any country in the world.  Few Cubans can afford a car.

I was amazed at the quality of the cars (and pickup trucks) even in the poorest Puerto Rican neighborhoods, both urban and rural.  Below is an example from the neighborhood known as La Perla.

[the video is not mine, but allows you to take your own La Perla tour]

Even at national franchises, food and services are often cheaper in Puerto Rico than in, say, Illinois.  But, in Cuba, restaurant meals, taxi rides, beverages, etc., have essentially the same dollar price as in Illinois even while Cuban incomes are an order of magnitude lower.  In other words, Cuba is terribly inefficient: even with cheap labor Cuba cannot manage to make things cheaply.

By all statistics, Puerto Rico is poorer than any U.S. state.  This was not obvious from walking around, but I admit that I have not seen, say, Mississippi in many years.  Also, there may be a lot of informal/underground-economy income in Puerto Rico, so that its official income statistics are not indicative of consumption.

I asked Puerto Ricans what they thought about Cuba, and typically they proclaimed that Cuba doesn’t have a public debt problem!  I presume, but did not confirm, that they are (i) not interested in trading their cars, nice houses and yards, internet, high-school diploma, cheap and available food, etc., for debt-free bragging rights and (ii) unaware that Castro’s Cuba was 30 years ahead of Puerto Rico when it came to defaulting on public debt.  Puerto Ricans do admit that people move from Cuba to Puerto Rico rather than vice versa.