WASHINGTON, November 10, 2017 ⏤ In his November 9 New York Times column, economist Paul Krugman misrepresents the intentions of the GOP tax plan, as he has in at least four prior columns. His view is almost willfully incorrect.
Krugman says GOP tax plan favors the rich, but then says …
Krugman claims that the tax cuts in the plan “systematically favor” the wealthy over the “little people⏤that is the poor slubs who actually work for a living.” He cites four examples.
Before discussing his examples, let’s look at the GOP’s goals for the tax cuts. While there is some disagreement between the House version and the Senate version, the goals are similar: to increase economic growth. It is critically important that the plan is designed to push economic growth to more than 4 percent annually, at least for the short term.
Annual economic growth has been less than 3 percent since 2005 and has averaged about 2 percent for the last eight years. That is the longest period of economic stagnation in modern American history. Average growth prior to 2005 was about 3.5 percent annually. The slow growth reduced opportunities for the middle class, depressing middle-class incomes.
The tax cut is intended to increase demand and increase supply.
The GOP tax plan was supposed to cut taxes for all taxpayers. Cutting taxes for the middle class would increase demand. Cutting them for higher income earners, corporations and small business owners would create the capital necessary to increase supply.
Because of pressure from Democrats, the tax cut for highest income earners has been dropped. Since their tax rate will likely stay the same at 39.6 percent and since some deductions will be lost, the highest income earners will actually see a tax increase.
This is bad for the economy; it reduces the creation of sorely needed capital. Businesses need capital in order to expand and grow the economy. The lower corporate tax rate will create some new capital, but more capital from higher income earners would lead to more growth.
Krugman says out that the average family of four making the median income of $60,000 will actually see a tax increase 10 years from now, since some tax credits may expire. The reality is that this family will have a permanent larger standard deduction and a lower permanent tax rate, so their tax cuts extend indefinitely regardless of expiring tax credits.
Krugman then says high-income earners will not get a tax cut.
Krugman correctly notes in his second point that the highest income earners will not get a tax cut. Indeed, he says, high-income earners “almost certainly end up facing a tax hike, not a cut.” This contradicts his initial statement that the tax cut favors the wealthy.
Krugman says that the boost for small businesses is really no help at all. Under the current system, a business owner who has organized as an LLC pays no tax on the business’s income. The income is passed through to the owner, who pays tax at the personal tax rate, which could be as high as 39.6 percent. The GOP tax plan would limit the rate on passed through income to 25 percent, creating more capital for expansion.
The GOP tax plan includes some restrictions to limit potential abuse. Krugman says that the limits end up costing small business owners more in taxes not less. That is not the case. And if his assertions were true, it would mean that higher income earners would not get a tax cut, again contradicting his initial claims.
How about the death tax?
Last, Krugman attacks the elimination of the inheritance tax. It is true that this will benefit only the wealthiest families, but it allows capital to remain intact. The current system destroys capital when those who inherit property are forced to sell assets to pay the tax. This tax cut may benefit the rich, but the point is to preserve capital.
Some readers will point out that Paul Krugman received the Nobel Prize in economics, and that my credentials ar no match for Krugman’s. But the logic and Krugman’s errors are clear, and he is well-known as an extreme political partisan. This tax cut will promote economic growth, a view supported by evidence from the Kennedy/Johnson tax cut in 1964, the Reagan tax cut in 1981, and the Clinton capital gains tax cut in 1996. All three of those included tax cuts for the highest income earners which led to rapid growth.
In 1984, after Reagan’s tax cut, GDP grew at a 7.5 percent rate. Annual growth in the four years after Clinton’s tax cut averaged 4.5 percent. In the four years after the Kennedy/Johnson tax cut, growth averaged about 6 percent.
Krugman believes the goal of the tax code should be to cure social injustice. If he changed the goal to stimulating economic growth and looked at the plan objectively, he would conclude that the GOP tax plan is a good start for America.