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Kleinbard Pans CEA’s Role in Tax Reform ‘Publicity Campaign’

Posted on October 27, 2017 by Wesley Elmore

The Council of Economic Advisers’ claim that American workers would see a $4,000 wage boost resulting from a reduction of the corporate tax rate to 20 percent is part of the Trump administration’s tax reform “publicity campaign” and is not based in reality, according to Edward D. Kleinbard, former chief of staff of the Joint Committee on Taxation.

Kleinbard, now at the University of Southern California Gould School of Law, said October 25 that the CEA’s October report signals “a lack of intellectual rigor,” in part because it’s looking at the average worker’s wage rather than the median wage.

“If what you really want to do is to be fair to the evidence, you would not look to the average worker’s wages, because if the most affluent Americans today triple their wages — from tens of millions to hundreds of millions — that pulls up the average,” Kleinbard said at a forum at the USC law school in Los Angeles sponsored by Tax Analysts and the American Bar Foundation.

Kleinbard argued that the model used by the CEA to translate the effect of corporate rate reductions on worker wages does not take into account the complexity of the U.S. economy and assumes one after-tax, marginal rate of return for the world while ignoring U.S. companies like Apple and Nike that earn “super-sized returns.” Those returns are bigger than the rate of return necessary to induce capital to be put to work and, therefore, do not lead to more employment, he said.

The model also does not take into account the disparity in productivity growth and wage growth that began around 1980, but assumes that productivity will increase in parallel with wages, Kleinbard said. And it doesn’t reflect that the U.S. is already “drowning in capital” because many marginal investments today face a tax rate of zero or lower thanks to incentives such as expensing, accelerated depreciation, and interest deductibility, he argued.

Kleinbard concluded that the CEA’s “story” for how corporate tax cuts will help workers “is a highly implausible one,” and he questioned whether workers would receive any benefit at all from a lower corporate tax rate.

CEA Chair Kevin Hassett has defended the report’s findings, most recently at an October 25 Joint Economic Committee hearing, where he attributed any criticisms to basic economic errors. “You should ask the people if they feel they have a grasp of the literature and then check that against the facts,” Hassett told reporters after the hearing.

Overall, Kleinbard was skeptical about the prospects for tax reform, as well as the impetus for it.

“This is, and has been, the number one deliverable of the Republican Party because it is what their donor class demands. And the donor class wants more for themselves,” he said. “As a reform gesture, this is a bad joke. As a payback for the donor class, well, it kind of makes sense.”

Among the reasons Kleinbard thinks the tax reform effort will fail in 2017 are the limits imposed by the reconciliation process, which requires that legislation passed under those rules be revenue neutral or revenue positive outside the 10-year budget window. He also pointed to a full congressional schedule over the next two months that includes continuing government funding, addressing the debt ceiling, potential further action on healthcare, and other pressing items.

Following House approval of the Senate’s fiscal 2018 budget resolution on October 26, House Ways and Means Committee Chair Kevin Brady, R-Texas, said he intends to release a tax reform bill November 1, followed by a committee markup beginning November 6. The budget resolution includes reconciliation instructions providing for $1.5 trillion in tax cuts as part of tax reform.