Six on "our" Economy: One last time on who benefits from corporate tax cuts; Digital Capitalism and Global Police State
philip panaritis
"First, a cut in the corporate tax rate from 35 to 20 percent in the presence of expensing of substantial or total investment has very little impact on the incentive to invest. Imagine the case of full expensing. If a company is permitted to deduct all of its investment costs and then is taxed on all of its investment profits, the tax rate has no impact at all on the investment incentive. If investments are financed in part with deductible interest, as would be true even under the Trump plan (where expensing would be total), a reduction in the corporate tax rate could easily reduce the incentive to invest. Mankiw assumes implicitly that capital lasts forever and companies take no depreciation and engage in no debt finance. This is not the world we live in.
Second, neither the Ramsey model nor the small open economy model is a reasonable approximation for the world we live in. In the Ramsey model, savings are infinitely elastic, so the real interest rate always returns to some fixed level. In fact, real interest rates vary vastly through space and time, and generations of economic research show that the savings rate rather than being infinitely sensitive to the interest rate is almost entirely insensitive to the interest rate.
The United States is not a small open economy. If it were, the effect of an effective investment incentive would be a major increase in the trade deficit as capital inflows forced an excess of imports over exports. I imagine that President Trump at least feels that a greatly augmented trade deficit is not good for American workers.
Third, a big cut in the corporate rate does not happen in isolation as a break for new investment. Mankiw’s model does not recognize the possibility of monopoly profits or returns to intellectual capital or other ways in which a corporate tax cut benefits shareholders without encouraging investment. It means either increases in other taxes or enlarged deficits, both of which have adverse effects on households. It also means that capital moves out of the noncorporate sector into the corporate sector, tending to hurt workers in the noncorporate sector."
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