Paul L. Caron

Tuesday, October 20, 2020

The Economic Impact Of Biden's Tax Policy

Hoover Institution Study:  An Analysis of Vice President Biden’s Economic Agenda: The Long Run Impacts of Its Regulation, Taxes, and Spending, by Timothy Fitzgerald (Texas Tech), Kevin Hassett (Hoover Institution), Cody Kallen (Wisconsin) & Casey Mulligan (Chicago):

HooverStanfordWe estimate possible effects of Joe Biden’s tax and regulatory agenda. We find that transportation and electricity will require more inputs to produce the same outputs due to ambitious plans to further cut the nation’s carbon emissions, resulting in one or two percent less total factor productivity nationally. Second, we find that proposed changes to regulation as well as to the ACA increase labor wedges. Third, Biden’s agenda increases average marginal tax rates on capital income. Assuming that the supply of capital is elastic in the long run to its after-tax return and that the substitution effect of wages on labor supply is nontrivial, we conclude that, in the long run, Biden’s full agenda reduces fulltime equivalent employment per person by about 3 percent, the capital stock per person by about 15 percent, real GDP per capita by more than 8 percent, and real consumption per household by about 7 percent.

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I wish I could trust analyses by the Hoover Institution. My experience, however, is that they base their studies on contested assumptions, which then predictably result in outcomes favorable to their political priors. This is not science. It's rhetoric, and should be treated as such.

My reaction to the results posted here are simple: (1) If saving the planet will cost only 1% or 2% in total factor productivity, the price is well worth it. (2) Their second conclusion is phrased in economic double-speak ("increase labor wedges") to make it sound bad. In English, the Institution concludes that Biden's regulatory agenda will increase wages for ordinary Americans. Whether this is an economic evil depends on one's perspective. (3) The most bizarre conclusion is the third: that increasing tax rates on capital income will permanently and profoundly depress economic growth. We are swimming in low-cost capital and have been for a long time. Basic economics tells us that supply far exceeds demand. Yes, one can reach the Institution's conclusions if one is determined to do so, but one really has to try.

Posted by: Ted Seto | Oct 20, 2020 7:33:23 AM

Ted: "My experience, however, is that they base their studies on contested assumptions."

I also don't trust assumptions about future events that haven't happened. However, Biden was part of an administration that pitched the ACA on promises that, other than one, never came true, and in some cases were lies to begin with.

So consider the person making the proposal, if you really think they're being honest with the public.

Posted by: MM Classic | Oct 27, 2020 8:14:37 PM