TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Saturday, April 29, 2017

Kleinbard:  Trump's Candy Land School Of Tax Reform

CandylandLos Angeles Times op-ed: Trump's Candy Land School of Tax Reform, by Edward D. Kleinbard (USC):

The Republican Party is devoted to tax reform, by which it really means tax cuts, but underneath this apparent laser-like focus lie conflicting schools of thought. The one embraced by President Trump is the Candy Land School.

The Candy Land School argues that tax cuts are always good, and that resulting government deficits are inconsequential, ostensibly because those tax cuts will trigger unprecedented economic growth that in turn will yield even higher tax revenues. It promises gifts for all today, and assumes away tomorrow.

Empirical evidence from the last several decades points to the conclusion that changes in U.S. tax rates do not map neatly onto the path of economic growth. One important reason for this is that the United States already has some of the lowest tax rates in the world — as a percentage of national income (gross domestic product), the second lowest among all large economies. Americans already keep the lion’s share of their income, and so changes in tax rates do not radically alter economic incentives. Well-designed tax reform, particularly of the corporate tax, can improve growth prospects somewhat, and thereby mitigate the cost of reductions in rates. That is not the same as tax cuts paying for themselves.

Economic growth cannot magically be summoned through any simplistic incantation. Moreover, the U.S. today faces a fundamental demographic challenge to growth: The increasing portion of the population that is over 65. Within the next couple of decades, the number of Americans over 65 will increase by 50%, compared with adult Americans under that age. Of course, the elderly are expensive to maintain — they earn less and consume more social insurance than do younger and healthier adults. ...

Trump’s proposed Candy Land giveaways probably are not a serious legislative proposal at all, but simply a grandstanding play to his base. Republican leadership in Congress will give it the short shrift it deserves. But the underlying theme that what this country needs is a big tax cut is seductive, politically salient and profoundly wrong. It’s time for a more honest appraisal of how to go about financing the government we actually want.

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I personally fear anything embraced by Trump. And I'm in the UK!

Posted by: McManus Williams | Apr 29, 2017 10:25:47 AM

As usual, a judicious and insightful assessment by Prof. Kleinbard.

Posted by: Publius Novus | Apr 29, 2017 6:45:23 PM

"Economic growth cannot magically be summoned through any simplistic incantation."

That explains why the past 8 years, real GDP growth was the worst on record. You have to go back to Herbert Hoover's administration to find something comparable.

But that doesn't explain why the financial press loudly proclaimed the Obama economy "booming", because as measured by real GDP growth, it was most clearly the opposite.

Posted by: MM | Apr 30, 2017 8:51:05 AM

The line between tax cuts and tax reform has never been clear. This is politics.

Posted by: mike livingston | Apr 30, 2017 6:15:38 PM