Larry Summers, the former Treasury Secretary and director of the National Economic Council, took aim Tuesday at the Trump administration’s tax plan.
The target of Summers’ ire was a new paper from the White House’s Council of Economic Advisers, chaired by Kevin Hassett. The CEA released an analysis Monday that explored potential positive wage benefits of the tax-reform outline.
The paper said reducing the corporate tax rate to 20%, as the Trump proposal would, from the current 35% would increase the average American worker’s wages by $US4,000.
Summers said he disagreed.
“Kevin Hassett accuses me of an ad-hominem attack against his economic analysis of the Trump Administration’s tax plan,” Summers wrote on his personal blog. “I am proudly guilty of asserting that it is some combination of dishonest, incompetent, and absurd.”
Hassett has been vocal in recent days, attacking critics of the tax plan, including Summers and unfavorable analyses such as the one conducted by the Urban-Brookings Tax Policy Center. Summers did not take kindly to Hassett’s attacks on other economists, saying the attacks were part of the reason he was “speaking so strongly.”
As for the finding that the corporate tax cut would amount to a $US4,000 annual raise for workers, Summers charged it would be impossible due to the simple maths of the cut. From the post (emphasis added):
“The cut in corporate tax rates from 35 to 20 per cent will cost slightly less than $US200 billion a year. There is a legitimate debate among economists about how much the cut will benefit capital and how much it will benefit labour. Kevin’s ‘conservative’ claim that the cut will raise wages by $US4000 in an economy with 150 million workers is a claim that workers will benefit by $US600 billion or 300 per cent of the tax cut! To my knowledge, such a claim is unprecedented in analyses of tax incidence. Kevin though doubles down by holding out the further possibility that wages might rise by $US9000.”
Another key question is the degree to which a corporate tax cut would benefit labour or capital. A paper from economists at the Treasury Department, which was controversially buried by the department, found that workers bear the burden of 18% of the corporate tax rate, so they would receive roughly the same percentage of the benefit from a cut.
The Joint Committee on Taxation, a nonpartisan federal office, found that workers bore around 25% of the corporate tax rate.
The CEA paper, on the other hand, assumes that workers bear an average burden of 57% of the corporate tax.
While Summers said the issue is the source of “legitimate debate among economists,” he still said the paper overreaches.
Summers also pointed to issues with Hassett’s assumptions that the tax cut would lead to a substantial economic boost. The former Treasury Secretary noted the US is near full employment and the possible interest rate hike offset from the Federal Reserve as two reasons the tax cuts may not be a huge boon to the economy.
“Considering all this, if a Ph.D student submitted the CEA analysis as a term paper in public finance, I would be hard pressed to give it a passing grade,” Summers said in conclusion. “I predict that as debates on tax policy unfold there will be many serious Republican economists who endorse parts of the Trump plan. I doubt that any will associate themselves with the CEA analysis.”
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