1/17
In this very interesting paper @Furno_Francesco compares the Kennedy corporate tax cuts in the early 1960s with the recent Trump corporate tax cuts, and finds that the former stimulated output roughly four times more than the latter.
ffurno.github.io/JMP_Corporate_…
In this very interesting paper @Furno_Francesco compares the Kennedy corporate tax cuts in the early 1960s with the recent Trump corporate tax cuts, and finds that the former stimulated output roughly four times more than the latter.
ffurno.github.io/JMP_Corporate_…
2/17
Put differently, the Kennedy tax cuts seem to have increased business investment while the Trump tax cuts were mostly passed on to shareholders which, as Atif Mian, Ludwig Straub and Amir Sufi have explained elsewhere, was likely in turn to lead to higher household debt.
Put differently, the Kennedy tax cuts seem to have increased business investment while the Trump tax cuts were mostly passed on to shareholders which, as Atif Mian, Ludwig Straub and Amir Sufi have explained elsewhere, was likely in turn to lead to higher household debt.
3/17
Furno explains that “A large part of this difference can be attributed to differences in pre-reform tax depreciation policy.”
scholar.harvard.edu/files/straub/f…
Furno explains that “A large part of this difference can be attributed to differences in pre-reform tax depreciation policy.”
scholar.harvard.edu/files/straub/f…
4/17
As I argued in my book and elsewhere, I think the reasons the Kennedy tax cuts flowed into investment and Trump tax cuts into savings had to do with the very different relationship between savings and investment at the time of the tax cuts.
As I argued in my book and elsewhere, I think the reasons the Kennedy tax cuts flowed into investment and Trump tax cuts into savings had to do with the very different relationship between savings and investment at the time of the tax cuts.
5/17
From a macro point of view corporate tax cuts increase business profits, which raise corporate savings. Whether these are used to fund investment or are passed on to shareholders depends on whether the main constraint on business investment is scarce savings or weak demand.
From a macro point of view corporate tax cuts increase business profits, which raise corporate savings. Whether these are used to fund investment or are passed on to shareholders depends on whether the main constraint on business investment is scarce savings or weak demand.
6/17
In the former case, higher business profits can lead fairly automatically to higher business investment. If savings are abundant and the cost of capital low, however, the constraint is likely to be weak demand.
carnegieendowment.org/chinafinancial…
In the former case, higher business profits can lead fairly automatically to higher business investment. If savings are abundant and the cost of capital low, however, the constraint is likely to be weak demand.
carnegieendowment.org/chinafinancial…
7/17
In that case businesses will have little incentive to increase investment, and a cut in their taxes simply increases the after-tax profits they pass on to shareholders or use to acquire other companies.
In that case businesses will have little incentive to increase investment, and a cut in their taxes simply increases the after-tax profits they pass on to shareholders or use to acquire other companies.
8/17
In the early 1960s, much of the world was still in the process of rebuilding itself after the ravages of two world wars. With high global investment needs and low global savings (the war caused income to plummet and, with it, savings), the main economic constraint was...
In the early 1960s, much of the world was still in the process of rebuilding itself after the ravages of two world wars. With high global investment needs and low global savings (the war caused income to plummet and, with it, savings), the main economic constraint was...
9/17
a scarcity of savings needed to fund investment. This was a time when the US was exporting so much of its domestic savings to the rest of the world that capital controls were imposed to restrict the outflow of dollars.
a scarcity of savings needed to fund investment. This was a time when the US was exporting so much of its domestic savings to the rest of the world that capital controls were imposed to restrict the outflow of dollars.
10/17
Under these conditions it is not surprising that any policy that generated an increase in savings was likely – in classic supply-side fashion – to lead to an increase in business investment.
Under these conditions it is not surprising that any policy that generated an increase in savings was likely – in classic supply-side fashion – to lead to an increase in business investment.
11/17
In recent decades, however, conditions were dramatically different. The world has become awash in ex ante savings, and the US has become the dumping ground for nearly half of the world’s excess savings.
In recent decades, however, conditions were dramatically different. The world has become awash in ex ante savings, and the US has become the dumping ground for nearly half of the world’s excess savings.
12/17
What is more, US businesses are sitting on huge piles of cash and can only use them to buy back shares or purchase other companies. It is weak demand, in other words, and not scarce savings, that has limited business investment.
What is more, US businesses are sitting on huge piles of cash and can only use them to buy back shares or purchase other companies. It is weak demand, in other words, and not scarce savings, that has limited business investment.
13/17
In that case policies that increase in savings have little to no impact on business investment, and in fact could actually reduce business investment if the increase in business savings were balanced by a reduction in household income (and, with it, consumption).
In that case policies that increase in savings have little to no impact on business investment, and in fact could actually reduce business investment if the increase in business savings were balanced by a reduction in household income (and, with it, consumption).
14/17
To me this is the key difference between the Kennedy and Trump tax cuts. The former provided more savings at a time when American businesses wanted to invest more, but were unable to do so in part because of the fierce global competition for US savings.
To me this is the key difference between the Kennedy and Trump tax cuts. The former provided more savings at a time when American businesses wanted to invest more, but were unable to do so in part because of the fierce global competition for US savings.
15/17
The latter provided more savings at a time when the world was awash in excess savings and American businesses wouldn’t invest until they saw a rise in demand.
The latter provided more savings at a time when the world was awash in excess savings and American businesses wouldn’t invest until they saw a rise in demand.
16/17
As an aside, I am re-reading Charles Arthur Conant’s 1900 book, and it is amazing how similar the problem of excess savings the global economy faced in the 1880s-90s. At one point he proposes establishing a state pension system...
As an aside, I am re-reading Charles Arthur Conant’s 1900 book, and it is amazing how similar the problem of excess savings the global economy faced in the 1880s-90s. At one point he proposes establishing a state pension system...
17/17
to help generate the demand needed to absorb excess global savings. This is because “experience has shown that when saved capital accumulates rapidly, the groping after new uses for it causes waste and disaster”.
carnegieendowment.org/chinafinancial…
to help generate the demand needed to absorb excess global savings. This is because “experience has shown that when saved capital accumulates rapidly, the groping after new uses for it causes waste and disaster”.
carnegieendowment.org/chinafinancial…
1/2
Here is an example of economists arguing that the tax cut that "worked" under one set of conditions must also work in the same way even under opposite conditions. This is ideology, not economics. It should be obvious that policies that boost...
heritage.org/taxes/commenta…
Here is an example of economists arguing that the tax cut that "worked" under one set of conditions must also work in the same way even under opposite conditions. This is ideology, not economics. It should be obvious that policies that boost...
heritage.org/taxes/commenta…
2/2
savings when savings are insufficient to meet investment needs will have very different consequences from the same policies implemented when ex ante savings exceed desired investment. The US and the world needed more savings in 1964. They need more demand today.
savings when savings are insufficient to meet investment needs will have very different consequences from the same policies implemented when ex ante savings exceed desired investment. The US and the world needed more savings in 1964. They need more demand today.
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