NYTimes Packs Five Ungrounded Economic Opinions in Two Sentences

Some misconceptions about tax incidence have been getting a lot of press, but Paul Krugman's column from last week is particularly efficient at perpetuating them:

"How much of a trickle-down effect depends on a bunch of technical factors: what share of corporate profits represents monopoly rents rather than returns to capital, how responsive inflows of foreign capital are to the U.S. rate of return.  Enthusiasts claim that the tax cut will eventually go 100% to workers; most serious modelers think the number is more like 20 or 25 percent."

Of course I am not a "serious modeler", but let's break this down:

1. "Enthusiasts claim that the tax cut will eventually go 100% to workers"

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Actually, the White House Council of Economic Advisers, I, and anyone else using the standard supply and demand model claims that MORE THAN 100% of the tax cut will eventually go to workers. The analysis is in pdf here and executable Mathematica notebook here.

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2. "what share of the capital stock is even affected by the corporate tax rate"

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This extension of the supply and demand model only strengthens the conclusion, because now workers not only have to pay for the revenue received by the treasury and for the productivity lost due to less aggregate capital, but also the productivity lost due to the misallocation of capital between activities covered by the statutory corporate rate and activities not covered. The analysis is here. Perhaps the proponents of this argument are thinking that the tax does less damage when it covers less capital. Maybe, but for sure it brings in less revenue too, and Krugman is referring to damage as a percentage of revenue.

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3. "what share of corporate profits represents monopoly rents rather than returns to capital"

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Krugman and the others do not give any citation to "serious modeling" of monopoly rents (monopoly rents = free lunch is not a serious model by any definition). But it looks to me that adding monopoly rents to the model also strengthens the conclusion, because now workers not only have to pay for the revenue received by the treasury, the productivity lost due to less aggregate capital, the productivity lost due to the misallocation of capital, but also exacerbation of the productivity lost due to monopoly. The analysis is here and in the links therein.

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4. "how responsive inflows of foreign capital are to the U.S. rate of return"

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This is a red herring. All of the models that I have cited make the assumption most charitable to Krugman's conclusions: namely that foreign capital inflows are completely unresponsive (they are closed-economy models!). Nevertheless, they conclude that labor pays more than 100 percent of the corporate-income tax.

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These counterintuitive results, and many more, are treated in the forthcoming Chicago Price Theory textbook by Sonia Jaffe, Robert Minton, Casey B. Mulligan, and Kevin M. Murphy.