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Krugman: Why was Trump’s corporate tax cut such a flop?

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  1. skybrian
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    Looks like the New York Times convinced Krugman to give up on the substack he started as a way to get back into blogging, so it's posted here instead. Some quotes:

    Looks like the New York Times convinced Krugman to give up on the substack he started as a way to get back into blogging, so it's posted here instead. Some quotes:

    A tax on profits isn’t a tax on capital

    [...] Imagine a company considering whether to borrow money to invest in some new project. If there were no profits tax, it would proceed if and only if it expected the rate of return on the project to exceed the interest rate on the loan. Now suppose that there is, say, a 35 percent tax on profits. How does this change the company’s decision? It doesn’t.

    Why? Because interest on the loan is tax-deductible. If investment is financed with debt, profit taxes only fall on returns over and above the interest rate, which means that they shouldn’t affect investment choices. [...]

    Business investment isn’t that sensitive to the cost of capital, anyway

    [...] most business assets are fairly short-lived. Equipment and software aren’t like houses, which have a useful life measured in decades if not generations. They’re more like cars, which generally get replaced after a few years — in fact, most business investment is even less durable than cars, generally wearing out or becoming obsolete quite fast.

    And demand for short-lived assets isn’t very sensitive to the cost of capital. The demand for houses depends hugely on the interest rate borrowers have to pay; the demand for cars only depends a bit on the interest rate charged on car loans. That’s why monetary policy mainly works through housing, not consumer durables or business investment. And the short lives of business assets dilute the already weak effect of taxes on investment decisions.

    Monopoly

    [...] taxes on monopoly profits are as close as you can get to revenue-raising without side effects. They certainly don’t deter investment, because monopoly profits aren’t a return on capital.

    And the profit tax is at this point largely a tax on monopoly or quasi-monopoly profits. Officials I’ve spoken to cite estimates that around 75 percent of the tax base consists of “excess” returns, over and above the normal return on capital, and that this percentage has been rising over time. [...]

    1 vote