The IMF is quite sure it knows who would gain from the US tax cuts that Donald Trump is intent on delivering. It has done the research and published its finding, of which it says:
First, although we find that tax cuts provide a one-time boost to GDP, consumption, and investment, these effects are never strong enough to prevent a loss of revenue. Thus, tax cuts would need to be financed either through increasing the public debt, cutting spending, or by raising revenues from other taxes. Since we aim at obtaining better distributional outcomes while still preserving some modest upside to growth, we focus on financing the cuts with a shift from personal income taxes to consumption taxes, combined with an expansion of the earned income tax credit to protect the poor.
Second, we find that personal income tax cuts can benefit lower income groups, even if those at the bottom of the earnings scale do not directly receive a tax cut. Our economic model predicts that when tax cuts are targeted at middle (or high) income groups, these groups will spend some of the tax savings on (non-tradable) services, which are typically provided by lower-income people. Wealthier groups, on average, dedicate a larger share of their consumption expenditures to services. Consequently, when wealthier people pay less in taxes, their spending on services increases, raising demand for–and the wages of–low-skilled labor.
Third, our analysis reveals a fundamental tradeoff between growth and income inequality, depending on who gets the tax cut. In our simulations, while tax cuts for higher income groups may generate greater gains in GDP through higher investment and labor supply, they also exacerbate income polarization and inequality, both already at historical highs. Even accounting for the fact that rich people might consume more goods and services produced by people in the lower part of the income distribution, and allowing for an increase in the earned income tax credit to protect the poor, the income gap would still widen substantially if taxes were cut for higher income groups. On the other hand, a tax cut targeted at middle-income groups would help reduce income disparity and polarization, but might provide smaller growth dividends.
So, let me summarise that. First, the tax cuts, however they happen, will cut US revenues. So, no Laffer effect then.
Second, the impact is not always just in tax paid: resulting changes in spending patterns do have to be taken into account as well when assessing winners and losers.
Third, even doing that these tax cuts (which are designed to mainly benefit the well off) would not generate nearly enough 'trickle down' to prevent substantial increases in already significant inequality.
In other words, what Trump is proposing fails to make any macroeconomic sense for the USA and only makes sense at a micro level for a tiny proprtion of US citizens. There is no surprise in that, but it's welcome that the IMF is willing to say it and in the process make clear that neither Laffer or trickle down work.
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You might disagree with this and I may be wrong but I would wager all the tax cuts trump has promised combined cost less than the much bloated and used for wicked purposes (in my view) the defence budget. Again in my view it is sad that even Bernie Sanders never as far as I know said slashing the defense budget should be a priority. It is is the same here though not as bad but has to be said which countries have among the worst foreign policies and which spend the among the most on defence? why the u.s and u.k. I have spoken to a number of conservative voters whom say if corbyn would cut their taxes via cutting the defence budget they would actually go out and vote for corbyn.
Hello Richard,
Just checking your blog entry from here in the USA and what the IMF appears to say is in no way inconsistent with Laffer. The famous curve is after all one that slopes up and then down, and the interesting effects that get all the publicity are when the inflexion point is crossed. If you’re staying entirely on one side of the inflexion then you get the effects the IMF describe.
But think about running the tax cuts in reverse. The corollary is that GDP would drop, consumption would drop, investment would drop, and people working in the service sector would get less pay. The upside is that tax revenue would increase. Do you really want the Trump administration to have more money to spend on silly walls?
With respect, what I said is entirely logical
And nothing you said bears any relationship to anything that is worth considering
The IMF needs to keep on saying it, as do the rest of us. Now we have 40 years of evidence that trickle down does not work which all sensible economists knew all along. It can be proved mathematically that unregulated capitalism is fundamentally trickle up and we need some negative feedback loop to prevent inequality rising inexorably. Trickle up may suit the elite in the short term but in the long run it ends badly for everyone.
Michael Meacher actually used to call “trickle up” by the FAR more accurate name of “cascade up”!
The IMF says that:
“Wealthier groups, on average, dedicate a larger share of their consumption expenditures to services.”
Yes, but wealthier groups dedicate a smaller share of their income to consumption. There are only so many services that one might require. Wealthier groups have a higher propensity to save.
As Keynes observed poorer people have a higher propensity to consume. An increase income for them is more likely to boost overall consumption & demand . Thus I am little puzzled by the IMF’s notion that: “a tax cut targeted at middle-income groups would help reduce income disparity and polarization, but might provide smaller growth dividends.”
“Smaller growth dividends”? Are they trying so say that the most of the stuff the ordinary folks buy is cheap imports, machine-made (or both)?
If not I am at a loss to explain their thinking. If so it might seem that globalisation, and automation are both effectively obsolete. They don’t help us anymore.
I think they may know what you are saying
So – it seems that Pence – ‘the Buchanan fan in Trump’s administration’ is having an effect after all? Just as the libertarian master plan demands of course.
In my view you can read the IMF’s attitude in one of two ways:
Firstly it is in the throes of cultural change and is at last questioning neo-lib orthodoxy or (2) it is being more anti-Trump than anti-bad economics. I hope it is the former. The world needs a change.
I sincerely hope it is the former
Slightly tangential to the above, dealing as it does with Trump’s perverse economic policies, but in an earlier thread, I was metaphorically “patted on the head” for raising the spectre of what was going on behind the scenes of the “Trump Reality Show”, aka the Trump Presidency
For I was fully assured of the real incompetence and ineffectuality of the Trump Administration, of which the behaviour of the “useful idiot” Trump, was only a symptom, and not the distraction I say it is.
Well, consider this from the noted American commentator, Bill Moyer’s:
http://billmoyers.com/story/what-trump-wrecked-so-far/
Were NOT seeing “dumb as symptom of dumber”, but clown as mask for venomous destructiveness. Trump’s economic policies will surely be more of the same.
Trickle down is part of the American Dream which sadly died many years ago.
Gareth,
I don’t think that FDR, Kennedy or Johnson saw it as part of the American dream not even Eisenhower, and its not distinctly American either -“their is no alternative” remember that woman?