Ep. 84 Tax Cuts, Shmax Cuts: They’re Overrated, Says Krugman

1 May 2017     |     Tom Woods     |     12

Krugman can’t believe people still think tax cuts (particularly on “the rich,” who of course pay most of the taxes) might have good and substantial effects on the economy, or that they could believe that the ensuing economic growth could make up some of the lost revenue. We look at the facts of the matter.

Krugman Column

Zombies of Voodoo Economics” (April 24, 2017)

Related Articles

Tax Cuts in Camelot?,” by David Greenberg
Summary of the Latest Federal Income Tax Data, 2015 Update,” by Scott Greenberg

Related Episode

Ep. 3 Trump Is Right About Economics, Says Krugman

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  • Amplikov

    Krugman’s got a lot of nerve calling people “zombies.”

  • http://klout.com/#/ilovegrover Thane_Eichenauer

    I wonder how I could get Paul Krugman to talk about “The Mobilization for Incremental Tax Exemption”.

  • http://www.economicmanblog.com Roger Barris

    I used to see Danny DeVito all the time when I was living in NYC. I always screamed “Louie, Louie.” He always scuttled away, nervously. Surprised he didn’t get an injunction against me.

    On a more serious note:

    1. Yes, Tom, you have characterized the alternative minimum tax correctly. This was designed to catch wealthy people who were using too many tax breaks (eg., tax-exempt bond income, itemization, other deductions, etc.) It is therefore totally logical that, if Trump’s plan is to eliminate almost all these breaks, then it makes sense to eliminate the AMT.
    2. In Bob’s analysis of the libertarian reaction to Trump’s plan, the problem is that Trump has refused to touch entitlements, which is why his tax plan must blow up deficits. Tom is right that Cruz would have been more aggressive and realistic on this point, as he said in the debates (along with almost all of the other Republican candidates except Trump and Huckabee (aka, the Candidate of the AARP)). (See also Martin Feldstein’s recent WSJ piece pointing out that by just gradually raising the retirement age on SS to reflect some of the recent increase in longevity, you can cut expenses by enough to pay for the tax plan: https://www.wsj.com/articles/balancing-lost-tax-revenue-the-reagan-way-1493245888).
    3. You didn’t mention Trump’s plan to cut the rate on pass-through (LP, LLC, S Corp) income to 15%. This is a REALLY BAD IDEA that will massively promote tax avoidance manipulations. The combination of corporate tax and the personal tax on dividends and capital gains should be set to more or less equal the tax on pass-through income to avoid distortions.

    • Stephen

      I’ve always referred to AMT as Additional Marxist Tax.

      • http://www.economicmanblog.com Roger Barris

        We can probably come up with even worse, and more appropriate, acronyms.

    • mary

      The ATM was supposed to be aimed at something like 5 people. It was not indexed to inflation and began to effect 10s of millions in the middle class. It hasn’t been a rich man’s tax for many years. Hits hardest those who live in high real estate tax states.

      Btw, do you really think the pass through tax rate change would increase tax avoidance manipulation? Maybe, but people already use pass throughs to drop their taxes. That’s the whole point of the s election–the benefit of s corps over c corps.

      • http://www.economicmanblog.com Roger Barris

        Hi Mary:

        Yes, ATM has become a much bigger problem because of “bracket creep” which is making it become a middle-class tax. The interesting political point is that, when it was exclusively a high-income tax, no one really cared. Just goes to prove that the common narrative about the rich having the political clout to avoid taxes is largely nonsense.

        On the tax manipulation question, a C-corp is taxed at two levels. Using the maximum tax rates (and leaving aside state taxes), which are unlikely to apply to small businesses, this produces a total tax rate of 1-[(1-35%)X(1-20%)], or a combined tax rate of 48%. For an S-corp at the highest rate, the tax rate is the highest personal tax rate, or 39.6%. So, the incentive is about 8%. Under the Trump plan, the highest personal rate would be 35% versus a 15% tax on pass-through income, so the incentive would more than double. I think that this would have a big impact.

        But the other point is, Trump’s proposal is completely unnecessary. Just leave S-corps the way they are and let the income flow through and be taxed at the personal rates.

    • KH

      In regards to 3) I do not understand why you suggest a 15% flat rate on pass-through income is a bad idea.

      Sure, it would cause entity shifts away from C-corps to pass-through entities to harness the 15% rate but how would that be a bad thing?

      I don’t see there being any substantial economic effect between the C and S corp entity distinction other than tax treatment of income and dividends/distributions.

  • Stephen

    No awkward pause? You guys are slipping!

  • Stephen

    Krugman does his typical bait-and-switch when comparing W and Obama:

    Then George W. Bush cut taxes again, with the usual suspects predicting a “Bush boom”; what we actually got was lackluster growth followed by a severe financial crisis. Barack Obama reversed many of the Bush tax cuts and added new taxes to pay for Obamacare — and oversaw a far better jobs record, at least in the private sector, than his predecessor.

    The measure for Bush is growth (presumably GDP), but for Obama it’s jobs. Whichever statistic helps to make Krugman’s point. How dishonest!

  • davegrille

    The Laffer Curve does work in the real world.

  • Roland

    I’m with Bob on the public marriage proposal thing. What a horrible thing to do to the woman you love.
    I remember one time when a guy tried this on TV, and the woman said, “Uhh – I’ll have to think about it.” The look on his face was priceless. Served him right.