Tax Debate Spurs Battle Over Fundamentals of Economics

Daily Report for Executives provides in-depth coverage of unfolding legislative, regulatory, and judicial news from the nation’s capital, the states, and around the world. This daily news service...

By Jonathan Nicholson

Esoteric questions about how much global capital is available and how many details have to be settled to score a tax proposal have become the battleground in an unusually frank debate among Washington economists over revamping the tax system.

The dispute has led to unusually bare-knuckle rhetorical sparring—at least by academic and public policy economists’ standards—and dragged in two of the capital’s most visible tax-related think tanks, the Urban-Brookings Tax Policy Center and the Tax Foundation. And with the rollout of the House version of a tax overhaul, the debate is likely to get more heated.

While the recently adopted congressional budget resolution (H. Con. Res. 71) allows for a tax system reboot to add up to $1.5 trillion to the national debt over 10 years, Republicans have been skeptical the final cost will actually be that high because they say the tax revamp will speed up the economy’s growth rate.

They’ve also questioned estimates of the tax plan’s costs, which have ranged from $2.4 trillion to $2.2 trillion over 10 years, saying the basis of the estimates, a Republican “framework” document, was too vague to support those numbers.

‘Scientifically Indefensible’

Kevin Hassett, the chairman of the White House Council of Economic Advisers and thus regarded as the administration’s top economist, pulled no punches when he appeared at an Urban-Brookings Tax Policy Center event Oct. 5. The TPC days earlier had estimated the tax plan to fall $2.4 trillion short of deficit-neutral.

“It’s I think scientifically indefensible, as the Tax Policy Center report does last Friday, to say that the framework, the tax framework that we’re here to talk about, would have little macroeconomic feedback effect,” Hassett said. “It’s inaccurate. I think it’s fiction.”

Hassett’s attack drew a drew a defense of TPC from Larry Summers, a Clinton-era Treasury secretary and one-time winner of the John Bates Clark medal given to the most promising U.S. economist under 40.

In a series of tweets, Summers said, “I no longer take CEA Chair Kevin Hassett seriously as an economic thinker after his absurd attacks on the Tax Policy Center” and “Have disagreed often w CEA chairs of both parties. Never till now thought one ignored professional consensus to be politically expedient.”

“If Hassett keeps distorting what economists generally think, I doubt he will be able to get a non-hack economist job when he leaves CEA,” Summers tweeted.

‘Shocked’

Len Burman, a co-founder of the Tax Policy Center, said the TPC estimate included some assumptions but those were laid out extensively and drew from statements made by Republicans that implied those assumptions. “If they want us to analyze a more complete plan, then put out more details,” Burman said.

Hassett went on to praise the Tax Foundation, which didn’t make an estimate based on the framework. The think tank has long been praised by Republicans, who often tout its estimates of tax bills. That the Tax Foundation is seen by Republicans as an ideologically friendly think tank was on display Oct. 5 after House Speaker Paul Ryan (R-Wis.) was asked about its study that warned temporary expensing for equipment would sharply limit the potential economic boost from a tax plan.

“That would surprise me. Their model is very pro-expensing,” Ryan said at press conference held at a mechanical valve manufacturer in Chestertown, Md. “I haven’t read that study, but I’d be kind of shocked if the Tax Foundation said that.”

Instead, Ryan said the study must have come from the Tax Policy Center.

“You may be saying TPC would be my guess. You’re probably saying TPC,” he said. “I think TPC has shown their ideological and partisan colors with the fact that they put out an estimate on a mythical tax plan that hasn’t been written, that doesn’t exist, that they just made up a bunch of assumptions.”

Crowd-Out Effect?

Ryan elaborated during his weekly press conference Oct. 26, saying his disagreement was with the TPC’s model of the U.S. economy. “Without going deep into modeling, I think having a closed economy model that disrespects or disregards mobile capital flows doesn’t make a whole lot of sense. So I think there are some model flaws,” he said.

Ryan’s comments capture much of the disagreement between Republicans and the Tax Foundation on one side and tax plan critics and the Tax Policy Center on the other: How much would increased debt issuance by the government “crowd out” money available to finance private sector investment? The TPC, as well as the nonpartisan Congressional Budget Office and most economists, say there is at least some crowding out that in turn slows growth. The Tax Foundation disagrees, saying overseas capital would rush in to offset any loss in the availability of domestic capital used to buy additional government debt.

Scott Greenberg, senior analyst with the Tax Foundation, said the amount of U.S. capital compared to the amount of global capital is relatively small and noted former Federal Reserve Chairman Ben Bernanke used to talk about a worldwide “savings glut.” In addition, he said U.S. interest rates have remained steady even in the face of higher deficits over the past decade, casting doubt on the more-federal-debt-means-higher-interest-rates idea.

“There are reasons to doubt this story,” Greenberg said.

CBO: 33 Cents

A 2014 CBO working paper said there was a “high degree of uncertainty” about the size of the crowd-out effect, but it did exist. “On the basis of results published in the empirical literature, CBO concludes that for each dollar’s increase in the federal deficit, the effect on investment ranges from a decrease of 15 cents to a decrease of 50 cents, with a central estimate of a decrease of 33 cents,” the paper said.

The Penn-Wharton budget model the TPC uses has a higher number, 60 cents. Burman noted the model was created by Kent Smetters, a deputy assistant secretary for economic policy in the George W. Bush Treasury Department.

Representatives of both TPC and the Tax Foundation say they are only following the data, but the debate has underscored the divide between their intellectual stances. The TPC’s parent organizations, the Urban Institute and the Brookings Institution are widely seen as centrist to center-left ideologically, while the Tax Foundation is often described as conservative or libertarian-leaning.

The Tax Foundation’s Greenberg said his group has “particular principles” about what the tax code should look like. But he said he did not think the Tax Policy Center was biased.

“We have no beef with the TPC,” he said.

Burman said the Tax Foundation has different priorities than his organization.

“Tax Foundation’s mission is to cut taxes. Ours is to inform the public,” he said.

To contact the reporter on this story: Jonathan Nicholson in Washington at jnicholson@bna.com

To contact the editor responsible for this story: Paul Hendrie at pHendrie@bna.com

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

Try Daily Report for Executives