A Tax Cut Might Be Nice. But Remember the Deficit.
By N. Gregory Mankiw
The New York Times, June 2, 2017
In the debate about federal tax policy, one question looms large: Should we have a tax cut that increases the budget deficit?
President Trump says he wants “a massive tax cut … maybe the biggest tax cut we’ve ever had.” But the Senate majority leader, Mitch McConnell, who is clearly worried about the growing national debt, says tax reform “will have to be revenue-neutral.” The stage is set for another Republican showdown.
The Reagan and Bush tax cuts combined the logic of supply-side economics and of Keynesian stimulus. Supply-siders argue that lower marginal tax rates give people more incentive to work and invest. Keynesians argue that leaving more money in people’s pockets, rather than in government coffers, increases spending and that greater demand for goods and services expands employment. When the government enacts deficit-financed tax cuts, the two channels can work simultaneously.
Yet Mr. Trump faces a vastly different set of circumstances. The economy has not experienced a recent recession.
The main macroeconomic problem the nation faces is slow productivity growth, which in turn leads to slow growth in average incomes. Increased budget deficits would only make this problem worse. They would cause the Fed to raise interest rates even faster than otherwise. Higher interest rates would discourage capital investments, further depressing productivity.
In short, Mr. Trump finds himself not in the position of Ronald Reagan in 1981 or George W. Bush in 2001 but rather of Ronald Reagan in 1986. He should follow the Reagan of the later period and aim for revenue neutrality. He should broaden the tax base, lower rates and reform the tax code to promote saving, investment and growth.
A key question is how revenue neutrality is to be judged. Traditional analyses of the effects of tax proposals rely on what is known as static scoring, a method based on the simple but dubious assumption that changes in the tax code do not alter the path of national income. An alternative approach, called dynamic scoring, accounts for the possibility that lower tax rates will promote growth.
Dynamic scoring is potentially more accurate, but it is also more easily abused by those who want to promote their policies with an unhealthy dose of wishful thinking. Tax cuts rarely pay for themselves.
When judging revenue neutrality, policy makers will need to rely on a credible, impartial arbiter, like the Congressional Budget Office. In this era of alternative facts, it would be far too easy to pass irresponsible tax cuts and hand the bill to future generations.
NYT Reader Comment:
By Don McCanne, M.D.
Why do we limit ourselves to Econ 101 type of considerations, such as Mankiw’s Principles of Economics? The greatest economic problem we have faced in recent decades is the transfer of income and wealth to the top, leaving the rest of us struggling to achieve the American Dream.
Piketty, Saez, Zucman and others have provided us with the data that can lead to only one conclusion. We do not need to reduce taxes on income and eliminate the “death tax” to further benefit the wealthy. We need to increase taxes on high incomes, capital gains, financial transactions and on large estates.
The tax revenues could then be used for social programs such as health, education, better retirement benefits through Social Security, and to improve our infrastructure, thus benefiting all of us. And while we’re at it, let’s cut back on spending on our killing machines that are doing so much harm to people of other nations.
Perhaps the Econ 101 professors need to place a greater emphasis on normative economics.
Normative economics
Normative economics (as opposed to positive economics) is a part of economics that expresses value or normative judgments about economic fairness or what the outcome of the economy or goals of public policy ought to be. – Paul A. Samuelson and William D. Nordhaus (2004). Economics, 18th ed.
***
Must or Should?
Greg Mankiw’s Blog, December 9, 2007
One of the things we teach in introductory economics is the distinction between positive and normative statements. It is useful when reading (or writing) op-eds to keep the distinction in mind.
For example, in today’s NY Times, Cornell economics professor Robert Frank writes:
“Top earners have captured the big share of all income and wealth gains during the last three decades. They’re where the money is. If we’re to pay for public services they and others want, they must carry a disproportionate share of the tax burden.”
The first two sentences are correct statements of fact. The third sentence appears to draw a positive inference from them. Interpreted as such, the sentence is just wrong. Is there any reason to think it is impossible for the government to raise adequate revenue with a proportional tax? Not that I know of, and the article gives no indication of why Frank might think otherwise.
Maybe Frank meant to write “should” rather than “must.” In that case, the sentence would have conveyed a personal political opinion, rather than suggesting (incorrectly) a conclusion of economic science. It would have been more clearly labeled as a normative statement.
http://gregmankiw.blogspot.com…
***
Essays in Positive Economics
By Milton Friedman
University of Chicago Press (1953)
Confusion between positive and normative economics is to some extent inevitable. The subject matter of economics is regarded by almost everyone as vitally important to himself and within the range of his own experience and competence; it is the source of continuous and extensive controversy and the occasion for frequent legislation. Self-proclaimed “experts” speak with many voices and can hardly all be regarded as disinterested; in any event, on questions that matter so much, “expert” opinion could hardly be accepted solely on faith even if the “experts” were nearly unanimous and clearly disinterested. The conclusions of positive economics seem to be, and are, immediately relevant to important normative problems, to questions of what ought to be done and how any given goal can be attained. Laymen and experts alike are inevitably tempted to shape positive conclusions to fit strongly held normative preconceptions and to reject positive conclusions if their normative implications – or what are said to be their normative implications – are unpalatable.
Positive economics is in principle independent of any particular ethical position or normative judgments. As Keynes says, it deals with “what is,” not with “what ought to be.”
Normative economics and the art of economics, on the other hand, cannot be independent of positive economics. Any policy conclusion necessarily rests on a prediction about the consequences of doing one thing rather than another, a prediction that must be based – implicitly or explicitly – on positive economics. There is not, of course, a one-to-one relation between policy conclusions and the conclusions of positive economics; if there were, there would be no separate normative science. Two individuals may agree on the consequences of a particular piece of legislation. One may regard them as desirable on balance and so favor the legislation; the other, as undesirable and so oppose the legislation.
https://campus.fsu.edu…
***
California’s New Single-Payer Proposal Embraces Some Costly Old Ways
By Kaiser Health News
U.S. News & World Report, June 1, 2017
For years, U.S. officials have sought to move Medicare away from paying doctors and hospitals for each task they perform, a costly approach that rewards the quantity of care over quality. State Medicaid programs and private insurers are pursuing similar changes.
Yet the $400 billion single-payer proposal that’s advancing in the California legislature (SB 562) would restore fee-for-service to its once-dominant perch in California.
“Single-payer has its pros and cons, but if it’s built on the foundation of fee-for-service it will be a disaster,” said Stephen Shortell, dean emeritus of the School of Public Health at the University of California-Berkeley. “It would be a huge step backwards in delivering health care.”
Paul Ginsburg, a health economist and professor at the University of Southern California, agreed and said the legislation reads like something out of the 1960s in terms of how it wants to reimburse providers.
“There’s broad consensus we ought to go from volume to value. This bill ignores all the signs pointing to progress and advocates a system that failed,” he said.
***
Comment:
By Don McCanne, M.D.
Right now Congress is stumbling along in its efforts to reform health care while getting ready to move on to legislating tax cuts – all in the name of increasing freedom of our markets by reducing the role of government.
Perhaps not understanding it, the politicians are practicing what they would believe to be positive economics – that their policy recommendations define the “what must be.” Yet, in reality, they are supporting normative economics – that their policy recommendations define “what ought to be” from their own policy perspective.
Getting bogged down in the positive economics of markets versus the government leads to narrow, stilted thinking. What “must be” masks what “ought to be.”
In taxes, those with money “must” be allowed to feed their funds into the free market to enhance the economy to benefit all of us (or, actually, to benefit those with funds to invest). Thus the government ”must” not be allowed to confiscate those funds through the tax system.
In our arena – health care – consumer preferences “must” play out in the marketplace in order to enhance the services and products offered by the health care delivery system. The role of government in allocating tax funds “must” be diminished to take the shackles off of the marketplace. So economists would say that positive economics always applies – what must be must be – whereas normative economics is always secondary – merely an expression of what some believe ought to be.
Noted health policy experts Paul Ginsburg and Stephen Shortell provide us with an example in telling us that fee-for-service will be a disaster for single payer (Shortell) and that it has been a system that has failed (Ginsburg). These views are presented as if they were positive economics (must be true) whereas they actually represent normative views in that there are other policies inherent in a well designed single payer system that achieve, in a much more patient-friendly manner, the same goals of containing spending. Ginsburg and Shortell are expressing the view that moving from volume to value “must” include elimination of fee-for-service, when, in reality, they are saying it “ought to.”
What really ought to occur is that the system should be designed to place the patient first, as would be the case in a single payer system – a normative approach that does not violate bona fide positive economics (even though the policy and political communities might reclassify these to meet their own ideological preferences).
For the other issue – taxes – we need to apply normative economics as well, as I explain in the Reader Comments in response to Greg Mankiw’s New York Times article (above). The community at large ought to be placed first.
