Tuesday, January 07, 2014

Abolish the corporate income tax? Approach with skepticism

Paul Krugman was away, and his Op-Ed slot went to Leonard Kotlikoff, an economist at the American Enterprise Institute.  Kotlikoff made a case for abolishing the corporate income tax in the US, citing huge economic benefits, including to workers,  based on a computer model.
Fully eliminating the corporate income tax and replacing any loss in revenues with somewhat higher personal income tax rates leads to a huge short-run inflow of capital, raising the United States’ capital stock (machines and buildings) by 23 percent, output by 8 percent and the real wages of unskilled and skilled workers by 12 percent. Lowering the corporate rate tax to 9 percent while also closing loopholes is roughly revenue neutral and also produces very rapid increases in capital (by 17 percent), output (by 6 percent) and real wages (by 8 percent).
What comes to mind is Reinhart-Rogoff, whose findings that a country's economic growth falls off a cliff when its debt-to-GDP ratio approaches 90%, dominated the policy discussions for a few years after the recent financial collapse.     Their data was only in an Excel spreadsheet,  and used simple regression; nothing as complicated as a computer simulation. Yet they got it wrong.  Their errors included "data omissions, questionable methods of weighting, and elementary coding errors".

The errors were not caught earlier, in part, because the conclusions of Reinhart-Rogoff supported the policy direction that our economic overlords favored.

What is the track record of the American Enterprise Institute (AEI)?
(Wiki) Some AEI scholars are considered to be some of the leading architects of the second Bush administration's public policy. More than twenty AEI scholars and fellows served either in a Bush administration policy post or on one of the government's many panels and commissions.
The Bush decade is America's lost decade, economically speaking - the poorest performance of the American economy in six decades.  Of course, the past record is no guarantee of future performance; but one should hesitate before placing our collective future in these hands yet again.

Consider this: the American Enterprise Institute is funded by the interests who have the most direct benefit from an abolition of the corporate income tax.  There is a sufficiently high probability that Kotlikoff's results belong to the Journal of Irreproducible Results, just as Reinhart-Rogoff did, and until the results are confirmed independently, should be approached with a high degree of skepticism.

One contra-indication is very evident - corporate profits are at an all-time high, yet corporations apparently do not see sufficient profitable opportunities to invest in.  The level of American business investment is "pathetic".  Corporate income tax does not turn a profitable opportunity into unprofitable.

I can imagine, after abolition of corporate income taxes, when the alleged benefits do not accrue to the workers, the AEI quietly saying, "oops, we made a mistaken assumption in our computer model". Meanwhile, they go laughing to the bank,  overflowing with cash from grateful corporate donors.

PS: Bruce Bartlett from 2011.

And while it may be a good idea to reduce the corporate tax rate as part of a tax reform package, the idea that this will jump-start growth is nonsense.