Trump Could Have Tax Bill On His Desk Before Holiday Break
ROBERT SIEGEL, HOST:
At the moment, it appears that President Trump will get his Christmas wish to have tax overhaul legislation on his desk ready for his signature before the holiday break. Liberal economists have been scathing about the plan, which came together at high speed. Former Treasury Secretary Lawrence Summers has called it a serious policy error that will make middle-class Americans poorer. New York Times columnist and Nobel laureate Paul Krugman has written often of what he calls the terrible, no good, very bad tax legislation that Republicans have approved. But we thought we would ask a conservative economist about this bill.
And professor Gregory Mankiw of Harvard chaired President George W. Bush's Council of Economic Advisers and joins us. Welcome to the program.
GREGORY MANKIW: Nice to be with you.
SIEGEL: What's something good about this tax plan?
MANKIW: Well, the main thing the tax plan is doing is reforming our taxation of corporations. And I think that's the best part of the tax plan as we have lower corporate tax rates, which is what the rest of the world has been doing. There's been a trend downward in many European countries toward lower tax rates, where we haven't done that. And I think to remain competitive we need to sort of lower the corporate tax rate. And then there's also a basic restructuring of the corporate system. We're moving towards a system that's much more common in the rest of the world, which is a territorial system that is taxing only activity that takes place inside our country and not trying to tax global income of U.S. multinationals. And those are two, I think, very important and positive reforms.
SIEGEL: Turning to individual income taxes, there's a provision that curtails the mortgage interest deduction. That's a controversial move, but it's one you support. Why is that a good idea?
MANKIW: Well, a lot of economists have suggested that over the years, that the tax code gives too favorable treatment to housing versus other forms of investment. And so what that means is that more of the country's wealth gets invested in residential housing and too little gets invested in business capital, where it can help create jobs, raise worker productivity and raise wages. So by lowering the mortgage interest deduction as they're doing, it's sort of moving capital away from the residential sector in the long run towards the business sector in what I think lead to a more efficient allocation of the economy's resources.
SIEGEL: You have also been vocal in saying that you would have wanted to see a tax plan that did not add to the debt. The congressional Joint Committee on Taxation projects this plan will add a trillion dollars to the debt over a decade. Is it worth it?
MANKIW: Well, that's a good question. This is a - this tax bill, in my view, is a mixed bag. It's got some good things that I've just talked about, but also has some bad things. And on the top of the list of the bad things is it does add a lot to the deficit. That's not a good thing. And on my ledger of sort of pluses and minuses there's no question that's a minus. Now, some people in the Trump administration have said this is going to create so much growth that it'll end up being revenue neutral. I don't think many economists believe that's the case. It'll ultimately generate some more growth and that'll help pay for some of the sticker price of the tax cut, but the discount is not going to be a hundred percent.
SIEGEL: I think the joint committee's number reflected that idea that it wouldn't be 1 and a half trillion, it would be 1 trillion instead that it would add to the...
MANKIW: That's right. In fact, the rule of thumb that I have used is that for typical tax cuts, something like a third of the initial revenue loss is recouped through more rapid economic growth. And that's consistent - what the joint committee staff suggested as well.
SIEGEL: So right now economic growth is good. Unemployment is down. The stock market is up. Why do we need a tax cut that adds a trillion dollars to the debt?
MANKIW: Well, presumably, some of the increase in the stock market is due to anticipation of this tax cut. The stock market is supposed to be forward-looking. This tax plan has been talked about for the past year. So it's hard to calibrate this, but some of the - this is probably baked into the stock market already. I think the idea is that we need to have a tax system that's going to make America competitive in the world economy. And there's a wide agreement that some sort of reform of corporate tax system is necessary.
SIEGEL: So let's say you're the staffer or the expert to whom a particular senator turns for guidance and the question is, what do I do? I mean, the bill's on the table that could be a big Republican win. Do I vote for it? Or given the things that are wrong with this, let's wait and let's work on it some more? Being both economist and somebody who knows how Washington operates politically, what do you say realistically?
MANKIW: Well, that's a very hard question. I think in some ways this is a missed opportunity. I think it's very easy to imagine a better tax bill than this one. And I think if - especially if they had sat down in a bipartisan way and tried to do it, I could imagine something much, much better than this one. The Republicans are in a tough position right now because they need a win. They feel like they have something on the table and they feel like it's better than nothing. And maybe it is better than nothing, but it's certainly not as good as it could have been.
SIEGEL: Gregory Mankiw, who was an economic adviser to President George W. Bush, now professor of economics at Harvard. Thanks for talking with us today about the tax bill.
MANKIW: My pleasure.
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