We can perhaps amend an old Ethiopian saying to read “absolutes are for infants and kings”. It is catechism worth remembering when arguing with liberal economists. For theirs is not a just sport. In fact, one should never mix sport with justice. As Berlin said long ago (1958):
Everything is what it is: liberty is liberty, not equality or fairness or justice or culture, or human happiness or a quiet conscience.
Much of the mainstream of the profession has dedicated its intellectual muscular skeletal movements to verifying the proposition that, through one theoretical contortion or the when policy makers leave capital (individuals in their parlance) to make their own decisions those of us who lack capital will be better off along with our betters.
What so bothers me is when the arguments have been made and the policy has been tried and failed that those who advocated the failed policy pretend as though they never endorsed it; nor, indeed, any of their peers. In a rather bizarre exchange on twitter last evening the president of the Newfoundland and Labrador Federation of Labour made the rather innocuous observation that:
Cash hoarders [are] also getting billions in corporate tax breaks.
The response by professor Moffatt was:
[The] two issues have nothing to do with each other.
What then are the two issues? Professor Moffat seems to be convinced that the argument in favour of corporate income tax cuts has nothing to do with the cash on hand of enterprises and their propensity to invest. How odd. Professor Moffatt then went to the extreme and said that the NFLFL president’s remark that:
The Harper govt argument for corp tax cuts (among other policy decisions) was they were needed so corps would spend.
Was an indication that politicians were stupid:
If that was their argument, it’s [an] unbelievably stupid one.
To which professor Moffatt added:
Lower corp tax rates about reducing tax wedges, not about ‘cash in pocket’ arguments.
Oh my, we are in perilous territory now. To which the Pres responded:
Govt argued needed to give tax cuts to the job creators. The spenders, investors, etc.
To which the professor said:
Then it’s a dumb argument. Wouldn’t be the first time a government made a bad argument for a good policy.
And what makes it a good policy? Well because it reduces the tax wedge. What the hell is the tax wedge you might reasonably ask.? It is the difference between what you pay to hire workers and capital and what they receive in their pockets. It is a very pocket centred argument. Investment is a deduction from gross profits (or before tax income). To the extent that high taxes are applied after investment high taxes may encourage investment so long as the income earned off those investments meets or exceeds the after tax going rate of return. The wrinkle is that in a globalised world of investment opportunities it is the global after tax rate of return that the domestic wedge has to be calculated (good luck with that). The case for corporate tax cuts was that they would lower the dead weight loss and thereby improve efficiency leading to higher output / consumption / investment and or employment.
Martin Feldstein, the George F. Baker Professor of Economics at Harvard University and President and CEO of the National Bureau of Economic Research, from 1982 through 1984, former Chairman of the Council of Economic Advisers and President Reagan’s chief economic adviser, and also served as President of the American Economic Association in 2004 wrote a succinct summary of the mainstream case for lowering taxes on capital.
That conservative and centrist politicians have chosen to highlight the supposed potential employment and investment gains to be had from eliminating the supposed dead weight loss created by the tax system does not make them dumb or their arguments dumb it just means they followed the advice given to them by a profession more less dedicated to the liberty of capital. But beyond this it is simply false that it is only politicians that tied the argument for corporate tax cuts to productivity and jobs growth. Economists such as Greg Mankiw, Robert Barro, through to economists working at the Department of Finance have all explicitly linked corporate tax cuts to employment growth.
It is a little disingenuous for liberal economists to disavow these arguments when it turns out investment is down, employment is slack, wage growth is impish and corporations are sitting on mountains of cash. Why bother eliminating the tax wedge and the associated dead weight loss if it is not making us better-off in some direct and measurable way?
As an aside, I don’t recall any liberal economist making the argument that reduced corporate tax cuts would lead corporations to sit on mountains of, in Carney’s phrase, dead money. The policy was simply never sold to the public on those grounds. To be fair several non-liberal economists such as myself among many others worried that just that might happen.
*Liberal is not being used in the pejorative sense. Rather it is being used to identify liberalism as an ideological orientation rooted in the ideas Locke, Smith, Mill and its various apologetic formulations.