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Monday, June 18, 2018

Krugman: Tax Cuts And Leprechauns

New York Times op-ed:  Tax Cuts and Leprechauns (Wonkish), by Paul Krugman:

The political news seems even more horrible than usual today. So to get away from the headlines a bit, I’m going to commit some economics. Specifically, I want to pull together some thoughts — some inspired by Gabriel Zucman’s recent work [Tax Havens Blunt Impact Of Corporate Tax Cuts], some of my own — about the case or lack thereof for corporate tax cuts, the centerpiece of the only major legislation enacted under Trump. ...

There is no question that multinational corporations like low-tax countries like Ireland, and report earning a lot of their profits in those countries. But does this really reflect large-scale capital movements to those low-tax jurisdictions?

No, say Gabriel Zucman and co-authors. They produce strong evidence that most of what we see is basically a statistical illusion: corporations use transfer pricing, allocation of rents on intangible assets, etc. to make profits appear in low-tax countries; but there’s very little real production or employment behind those profits. As Figure 3 shows, tax-haven countries end up showing ridiculously high levels of profits relative to wages, basically because the profits aren’t being earned where they’re being reported.

Krugman

In short, the supposed rationale for big corporate tax cuts is based on a misinterpretation of the evidence. Multinational corporations move profits– as reported — around based on tax considerations; actual capital, and hence actual economic activity, not so much. ...

So, am I saying that the case for cutting corporate tax rates is unadulterated nonsense? No, it’s adulterated nonsense. There’s some reason to believe that lower tax rates will, other things equal, have some positive effect on capital formation. But the vision of a global market in which real capital moves a lot in response to tax rates is all wrong; most of what we see in response to tax rate differences is profit-shifting, not real investment. And there is no reason to believe that the kind of tax cut America just enacted will achieve much besides starving the government of revenue.

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Comments

most of what we see in response to tax rate differences is profit-shifting, not real investment

Correct. Krugman's economic analysis is solid, unlike his political analysis and market predictions.

Posted by: AMTbuff | Jun 18, 2018 11:29:39 AM

One: To individuals, the "centerpiece" of the tax legislation was to eliminate the (ahem) "tax" or "shared responsibility provision" of Obamacare.

Two: ...there is no reason to believe that the kind of tax cut America just enacted will achieve much besides starving the government of revenue. ... "Much?" That's a lot, and that's good!

Obviously, Krugman also believes that ending a premium tax on poor people will starve the government, too. Why does Krugman hate poor people?

Posted by: Woody | Jun 18, 2018 1:37:24 PM

So, this sounds like some of the justification for lowering the rate - draw back in capital that is left in foreign holdings is moot, but was there not some rumors that large organizations such as Apple would be repatriating capital based on the lower rates, or is that more pixie dust? Also, how much investment by domestic -only organizations will this cut foster and will it be a net positive regardless of the multi's lack of new investment?

Posted by: Ron | Jun 18, 2018 3:37:01 PM

Ron, the repatriation of profits is real. it will increase US tax revenue and give companies greater ability to invest that money within the US. Whether they will do so, as opposed to buying back shares or making other use of the money, is hard to predict.

Posted by: AMTbuff | Jun 19, 2018 2:25:15 PM