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.

(Update: The Wall Street Journal referred to "a 1981 paper" where Summers wrote about "the increase in gross wages which results from the increased capital intensity arising from eliminating capital taxation." That's a different paper, published in the American Economic Review.  As shown from my link, I am referring to the Summers paper published in the 1981 Brooking papers)

No comments: