Archives: 12/2017

Democratic Tax Rhetoric Countered by JCT Findings

Democrats have been relentlessly attacking the pro-growth elements of the GOP tax bills, such as the corporate tax rate cuts. They label efforts to improve incentives for working and investment as “trickle-down economics.”

Here are some recent examples:

  • Sen. Pat Leahy (here): “Even these huge corporate tax cuts are not structured in a way that would truly encourage investments here at home and boost workers’ wages.”
  • Sen. Kirsten Gillibrand (here): “After the tax plan was released, a lot of talking heads on TV dredged up the talking points about the virtues of “trickle-down economics”—the myth that if only corporations had more money, it would help everyday American families.”
  • Rep. Tim Ryan (here): “Instead of fixing our broken tax system, the so-called tax ‘reform’ legislation the Republican Majority just rushed through the House relies on the same supply-side, trickle-down economics that has failed in the past.”
  • Rep. Nancy Pelosi (here): “Their trickle-down economics has always been in their DNA. It has never created jobs…”

The House and Senate tax bills include numerous provisions that will not spur growth. But there are plenty of supply side elements as well, and they received support in yesterday’s Joint Committee on Taxation (JCT) dynamic modeling report.

Here are a few findings:

  • “Overall, the net effect of the changes to the individual income tax is to reduce average tax rates on wage income by about one percentage point, while reducing effective marginal tax rates on wages by about 2.4 percentage points.” The marginal rate cuts “provide strong incentives for an increase in labor supply.”
  • “The projected increase in GDP during the budget window results both from an increase in labor supply, in response to the reduction in effective marginal tax rates on wages, and from an increase in investment in response to the reduction in the after-tax cost of capital.”
  • “The macroeconomic estimate projects an increase in investment in the United States, both as a result of the proposals directly affecting taxation of foreign source income of U.S. multi-national corporations, and from the reduction in the after-tax cost of capital in the United States due to more general reductions in taxes on business income.”

So the JCT views GOP efforts to reduce marginal tax rates and improve investment incentives with favor. The problem is that many of the proposed tax changes would add to deficits and not spur growth, combined with the JCT’s off-base assumptions about “crowding out.” The JCT assumes large reductions in investment as deficits from tax cuts supposedly raise interest rates.

J.D. Foster challenges those assumptions here. He notes, “The national debt doubled, and then doubled again, under President’s George W. Bush and Barack Obama, respectively, while real interest rates remain astounding low.” Despite that, the JCT assumes that a modest increase in borrowing for tax cuts would raise interest rates so much that it would choke off investment.

That does not make sense. The solution is to combine tax cuts with spending cuts to limit deficits, and to focus more of the tax changes on pro-growth reforms.

The World of Financial Regulation Gets Weird…Again

There’s yet more strangeness afoot in the world of financial regulation.  No, it’s not the CFPB this time.  It’s the generally more staid Securities and Exchange Commission (SEC).  Earlier this week, the Department of Justice weighed in on Lucia v. SEC, a case challenging the constitutionality of the SEC’s in-house judges, known as Administrative Law Judges (ALJs).  What is strange is that the DOJ sided with Raymond Lucia and against the SEC.  Seemingly in response, the SEC took action and ratified the appointment of its ALJs, a move it had been resisting for some time. 

The case is currently with the Supreme Court where the Court is considering whether it will hear and decide the matter.  The question is whether ALJs are “mere employees” or are instead “inferior officers.”  If the latter, their appointment is subject to the appointments clause in the Constitution, which permits Congress to “vest the appointment of such inferior officers, as they think proper, in the President alone, in the courts of law, or in the heads of departments.”  Since the process for appointing ALJs has (until recently) not been done by any of these, if they are indeed inferior officers, their appointment would be unconstitutional. 

Cato has filed an amicus brief in support of Lucia.  Given the great discretion that ALJs wield – hearing and ruling on both the admissibility and credibility of evidence, presiding over hearings, and issuing opinions – it is strange to say they are not inferior officers.  Resting on the finality of the decisions alone seems insufficient.  And indeed in another case arguing the same issue, whether SEC ALJs are inferior officers, a federal appeals court in Colorado ruled that they are.  Since there is now a circuit split, with appeals courts in two circuits issuing opposite rulings, it seems likely the Supreme Court will hear the case to decide the issue.

The appeal to the Supreme Court is of a decision by the federal court of appeals in D.C., which ruled that, because ALJs’ opinions are not final and can be reviewed by the SEC commissioners, the ALJs are not in fact inferior officers.

The problem for the D.C. Circuit Court of Appeals is that it already ruled on this question.  In Landry v. FDIC, the D.C. Circuit found that ALJs at the FDIC are not inferior officers because their opinions are not final.  This is the case on which the D.C. Circuit relied in Lucia.  Landry was also appealed to the Supreme Court, but the Court did not take it up. 

Speaking of Landry. When Landry was pending before the Supreme Court, just as Lucia is now, the Department of Justice weighed in on that case, just as it did recently in Lucia.  But that time, the DOJ sided with the FDIC, arguing that the lack of finality in ALJ decisions makes them mere employees and not inferior officers.  Exactly the opposite of what DOJ is now arguing in Lucia.

Will We PROSPER with This Act?

This morning the House Committee on Education and the Workforce released its legislation to reauthorize the Higher Education Act, the source of most of what the federal government does in higher ed, especially provide hundreds-of-billions of dollars in student aid. The new legislation is called the Promoting Real Opportunity, Success and Prosperity through Education Reform—or PROSPER—Act. (Oh, these names!) It will take a while to comb through in detail—it’s 542 pages long—but here is a quick reaction to some core parts from a rapid skimming of the bill (and some reporting on a leaked draft):

  • What needs to happen, ultimately, is for federal student aid to be phased out. It fuels tuition inflation, credential inflation, and noncompletion, and students with a demonstrated ability to do legitimate college-level work in in-demand fields would almost certainly be able to find private loans; both borrower and lender would likely profit. This bill, not surprisingly, does not phase aid out. It does, though, consolidate aid programs, and takes some small steps forward, capping total amounts students and their families can borrow from Washington, and letting schools say they won’t let students borrow a lot if the program doesn’t seem to justify it. The federal loan limits aren’t low—from a cap for undergraduate dependent students of $39,000, to a grand possible limit for certain borrowers of $235,500—but just saying there should be caps below the “cost of attendance”—basically, whatever colleges charge plus other expenses—is a start.
  • Other efforts to curb prices and noncompletion include making schools responsible for paying back some of the debt of students who are struggling to repay, and conditioning some funds for minority-serving institutions on at least 25 percent of students completing their programs or successfully transferring to other institutions. Both of these changes appear to put blame on institutions while ignoring the root problem—the federal government gives people money to pay for college without any meaningful assessment of their ability to do college-level work—but it might have some positive effects on prices and completion.
  • The law would end “gainful employment” regulations targeting for-profit colleges, and would also end a requirement that for a school to be accessible online in a state, it must be approved by that state even if its physical home is somewhere else. These things would free the system up a bit, but how much is unclear.

There is a lot else in there—provisions on TRIO programs, accreditation, a data “dashboard” on school and program outcomes, and more—and I’ll really have to scrutinize the thing to make sure I have all the details right. But from a quick look, this bill would generally move in the right direction, though with many miles to go to reach good higher education policy.

Revenue Effects of Senate Tax Bill

Republicans are scrambling to adjust their tax bill to satisfy concerns of lawmakers worried about budget deficits. The Joint Committee on Taxation (JCT) released a report yesterday finding that the government would lose $1 trillion over a decade in revenue even including the dynamic growth effects. Numerous economists (e.g. here and here) have criticized the JCT’s modeling for undercounting the growth benefits.

Still, the JCT’s $1 trillion figure is within the $1.5 trillion that Republicans allotted themselves for the tax bill. So it is surprising that some senators are moving the goalposts and demanding more revenue. But adding triggers or tax increases makes little sense because rising deficits in coming years will be mainly driven by rising spending, not revenue shortfalls—with or without a tax bill.

The chart below shows CBO’s baseline projections of spending and revenues as a share of gross domestic product (GDP). Revenues (red line) are set to rise from 17.7 percent of GDP this year to 18.4 percent by 2027, while outlays (blue line) will jump from 20.5 percent to 23.6 percent. Revenues creep upwards partly because of “real bracket creep” as people move into higher tax brackets. The chart clearly shows that deficits will rise because of rapid spending growth.

The green line shows revenues including the JCT’s projected effects of the Senate tax bill. Revenues fall in the short run, then rise as a result of numerous tax breaks expiring, and as the economy expands modestly per the JCT estimate. The Senate bill would add debt in the near term, but by year 10 would begin reducing deficits.

Even with the JCT’s lowballed growth estimates, projections show that spending restraint is the key to deficit reduction. Rather than adding tax increases, deficit worriers in the Senate should work to replace no-growth provisions in the tax bill, such as child credits, with pro-growth provisions, such as further rate cuts. And rather than holding up the tax bill, they should redouble their efforts in the new year to cut discretionary spending and reform entitlement programs.

 

Note: the green line is rough estimate as the JCT does not breakout dynamic revenue effects from its estimate of spending increases due to a rising interest rate.

How Tom Cotton Will Undermine U.S. Foreign Policy

It is no secret that Secretary of State Rex Tillerson and President Trump haven’t been getting along. According to the New York Times, the administration has developed a plan to replace Tillerson with current CIA director Mike Pompeo. If ousted, Tillerson would have one of the shortest stints as secretary of state in U.S. history—not the worst consequence of that position, though an embarrassing one for Tillerson, and perhaps the administration. But the most troubling consequence of Tillerson’s departure would be to replace Pompeo with Senator Tom Cotton as CIA director.

To begin with, it’s difficult to believe Cotton is being considered for the position because of his qualifications. Cotton is a freshman senator with no experience in intelligence. Instead, it seems he is being considered for the prestigious role as director because of his “easy” relationship with President Trump. His support for Trump has indeed been unfaltering: he consistently endorses the president’s incoherent foreign policy, and exhibits what seems like blind loyalty rather than objective analysis. For example, on October 9, on The Global Politico podcast, when speaking about Iran, Cotton seemed to indicate that Tillerson and Defense Secretary Mattis should resign if they are unwilling to execute the president’s policies. Trump’s promotion of Cotton also highlights the president’s own desire to surround himself with yes-men who will tell him what he wants to hear.

Second, he supports torture and other extreme interrogation techniques, like waterboarding, and voted against anti-torture safeguards. Cotton has gone as far as to say that waterboarding, currently illegal, is not torture. If Cotton becomes CIA director, he may push to end restrictions around it, which would contradict the assessments of experienced intelligence professionals.