WASHINGTON, October 29, 2017 – In a recent New York Times column, Nobel Prize-winning economist Paul Krugman said that President Trump’s proposed tax cut is “gift to rich foreigners.” Maybe Krugman doesn’t understand the effects that broad-based tax cuts have on the economy and on the middle class.
Usually, if Krugman can be objective, he is an extremely intelligent economist with a deep understanding of economic principles. He can write columns and even textbooks which are very well thought-out and well presented. I have even used his textbooks in courses I have taught.
On the other hand, when Krugman’s objectivity becomes clouded by his desire to cure perceived social injustices, his columns become delusional. Such was the case with last week’s column.
The primary purpose of an across-the-board tax cut is to stimulate non-inflationary growth. President Trump’s proposal, similar to the Reagan tax cuts in the 1980s and the Kennedy/Johnson tax cut in the 1960s, will cut taxes for all Americans.
The tax cut for the middle class will increase overall demand, while the tax cut for the upper class will create new capital that increases supply. As history clearly shows, this will lead to high growth and low inflation. This was clearly the result of tax cuts enacted in the 1960s and the 1980s.
The creation of new capital is so important to economic growth that President Clinton and Congress reduced the capital gains tax rate from 28% to 20% in 1997. After many years of 3% growth, the result of this legislation was that economic growth averaged 4.5% annually for the next four years. An added plus: the Federal government budget actually ended up with a surplus. That’s right: The government budget had a surplus.
What does Krugman say about Trump’s tax cut?
With the purpose of curing a perceived social injustice, Krugman claims Trump believes that “cutting corporate taxes would bring foreign capital into the United States, which would raise investment, which would increase productivity … then get reflected in higher wages.”
That is not what Trump believes, and therein lies the root of Krugman’s delusion.
Trump believes that lower corporate taxes will result in more after-tax profit for corporations to invest in growth. The lower tax rate would also mean that projects viewed as only marginally profitable and not worthy of investing suddenly acquire greater profit potential. Armed with new capital and now profitable investment opportunities, Trump believes that corporations will increase investments and grow the economy.
This, in turn, would increase the demand for labor, which would mean more job opportunities for working Americans. The increased demand would also result in wage increases. In addition, workers would become more productive as corporations provide more capital goods for the workers.
Is Krugman delusional?
Krugman’s most delusional statement is “There are many reasons not to believe much of this (Trump’s) account, ranging from the fact that a lot of corporate income we tax represents monopoly profit.”
In other words, Krugman believes that many large corporations have a monopoly and therefore earn excess profit due to the lack of competition. His argument is pure nonsense, and comes from an individual who seems intimidated by the size of such enterprises and the number of dollars of income they earn.
There are no industries or markets in the U.S. that are genuine monopolies, except where the government has created one, as with the U.S. Postal Service. Every large auto, oil and technology company or retail organization faces tough competition every day. Not even the biggest of those corporations has monopoly power today.
The final delusion in Krugman’s column notes that “around 35% of US equities are now owned by foreigners. (The real number is probably closer to 20%.)
Yet, persisting in his delusion, Krugman claims that $700 billion over the next decade wouldn’t even go to Americans. Instead, it would be a windfall to wealthy foreigners. That could be partially true. But then what would those foreigners do with the $700 billion? Krugman fails to account for this possibility.
More than likely, these foreign investors would reinvest their profits in a place that had the best opportunity for safe, long-term growth and where corporate taxes were low. In other words, they would likely invest it back in the U.S. where they earned it to begin with.
What Krugman deliberately fails to understand
President Trump’s tax cut is geared to accelerate economic growth of at least 4% to 4 ½% annually without causing inflation. If Paul Krugman actually looked at the tax cut objectively instead of concerning himself with curing perceived social injustice, he too would reach the conclusion that President Trump’s tax cut is good for America.
If enacted, Trump’s tax cut proposals will indeed make America great again.