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PREPARED REMARKS BY COUNCIL OF ECONOMIC ADVISERS CHAIRMAN KEVIN HASSETT

BEFORE THE TAX POLICY CENTER-TAX FOUNDATION

OCTOBER 5, 2017

Thank you, Mark, for that introduction and thanks to both the Tax Policy Center and the Tax Foundation

otherwise, neither of your organizations should exist.

In other words, taxes matter. They impact the economy. It is scientifically indefensible to say – as the

TPC report of last Friday does – that “the framework [would] have little macroeconomic feedback

effect.” It is simply inconsistent, with mountains of evidence that I am about to discuss, to have *no*

growth effects from tax changes this significant. It’s inaccurate. It’s fiction. As for the static analysis

released last week, to which I will return later, it, too, is based on many fictions. The Tax Foundation

behaved responsibly when they decided to wait for the final details to analyze the bill. I am sure many

people in these halls have been struck and perhaps even dismayed by the pushback from around

Washington regarding the TPC report. That’s what happens when you behave irresponsibly. That’s why

tax policy debate needs to account for the fact that redistribution is done with a leaky bucket. Art

would probably be surprised to find that TPC now claims the bucket has no leaks.

Bet let’s get back to tax reform and growth, as Art would want. Let me start with a little history. In the

U.S., federal income taxes were born in 1913, over 130 years after the founding of our nation. The top

marginal tax rate on individual income has fluctuated quite a bit from its original 7 percent. It peaked at

94 percent during World War II and ebbed to a post-war low of 28 percent towards the end of Reagan’s

presidency. Today, the top marginal rate is 39.6 percent, somewhere between its historical war-time

high and birthweight low.

and Republican, voted in favor of a bill that President Reagan then signed into law. The top marginal

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rate fell from 50 to 28, and both sides viewed the development with favor. Bipartisanship has been good

for tax reform. And tax reform, as we shall see, has been good for America.

Economists who have studied the effects of taxes over time have developed a consensus: lower

marginal tax rates and a broader base increase rates of economic growth and well-being. I have been in

this room often over the past 20 years, and have witnessed head-nodding that broadening the base and

lowering the rates, as President Trump’s plan aims to do, is a recipe for better tax policy. I can’t recall

ever seeing anyone in this room argue that narrowing the base and raising rates was a recipe for growth.

For years, TPC analyzed tax bills without providing dynamic scoring, but now provides a dynamic score,

downwards to its current 24 percent, about half of its 1989 level. The U.S. corporate tax rate, however,

is still stuck in the same place it was when the Wall crumbled, almost 20 years ago. We’ve seen the

results of that stasis, which has essentially incentivized American firms to offshore and kept foreign

investment away.

There is now a broad consensus in this country, on both sides of the aisle, that it is time to, shall we say,

“Tear down this rate.” Even President Barack Obama proposed lowering the Federal corporate rate to

28 percent. My guess is that President Obama did not make that proposal because he thought it would

have no effect. This bipartisan consensus within the United States echoes what policymakers around

the world have learned. In France, a country not exactly known for its long-standing devotion to supply-

Against this backdrop, let’s look at President Trump’s Unified Framework for Tax Reform. First, the

framework entails reforms to both the individual income tax system and the corporate tax system.

On the individual side, President Trump’s framework lowers the numbers of brackets to four rates: one

of 0, one a 12 percent, another at 25, one at 35, and leaves the door open for an additional fifth higher

marginal tax rate to ensure that the wealthy do not pay a lower share of taxes than they pay today. And

don’t forget more people are eligible for the zero rate under this plan.

President Trump’s plan retains incentives for home mortgage interest and charitable contributions, but

system that increases the base and lowers rates.

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The Unified Framework also brings reform on the business side. It lowers the statutory corporate tax

rate from 35 percent to 20 percent, below the average rate of the OECD. Firms will be able to

immediately write-off the full cost of new investment in depreciable assets (other than structures) for at

least five years. The R&D and low-income housing credits will remain. But most deductions for C-

corporations will be eliminated at the discretion of the tax-writing committees. And the deductibility of

net interest expenses will remain only in part for C-corps. The Unified Framework brings tax relief to the

small and family-owned businesses conducted as sole proprietorships, partnerships, and S-corporations:

their top marginal rate will be capped at 25 percent. Again, it increases the base and lowers rates –

So let’s put this in perspective given the bipartisan history I just discussed.

On the individual side, we are broadening the base and lowering rates, which is the approach that has

received so much praise in these halls over the years. Given the overall revenue targets, Chairmen

Brady and Hatch are working with the professional staff and the Members of their Committees to place

the brackets and other details at a fiscally responsible level. There are enough degrees of freedom that

outside bodies, like the TPC, can easily use this time to opine about where the brackets should be, and

whether an additional top rate is needed. It is hard to imagine a better set-up for bipartisanship. But it

would be better to opine making sure that growth effects are included, because as I mentioned at the

much it ultimately ends up hurting American workers and their families.

Perhaps the reason I hold these beliefs is that I started graduate school back in 1984, and was taking

Alan Auerbach’s public finance class when the 1986 Tax Act was enacted. At the time, I began working

on how the 1986 reforms would affect business capital spending. The literature surprisingly found little

effects of tax policy on the economy, often suggesting that tax and interest rate variables did not drive

capital spending. But Alan and I noticed something funny in the data. Politicians tended to pass

Investment Tax Credits in recessions, then let them expire when the recession was over. Thus it

appeared that the economy partly drove tax policy, even if to tax policy also affects the economy.

However, because recessions induced tax-cuts, any analysis of how tax cuts affected the economy would

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I don’t have time to go into the scientific methodology in great detail, but have done so in more detail in

a number of recent review articles. But for thinking about the broad-brush growth impact of the

President’s proposals, a number of recent papers published in top journals provide a guide to the

possible scale of the growth effects. Romer and Romer (2010), utilize narrative history to separate out

tax changes with motivations unlikely to be driven by the business cycle; they estimate that a 1

percentage point reduction in the total tax share of GDP increases GDP by 1 percent on impact, and by

between 2.5 and 3 percent over three years. Cloyne (2013) and Hayo and Uhl (2014) apply the same

approach using data from the United Kingdom and Germany, and obtain almost identical estimates.

Other authors, such as Mertens and Ravn (2013), have extended this work with more sophisticated

Applying these estimates to the proposed reduction in the statutory corporate income tax rate from 35

to 20 percent and the simultaneous introduction of full expensing requires calculating the effect these

changes would have on federal tax liabilities, which will depend on the bill’s final details. But just to

illustrate the scale of these effects, a rough preliminary estimate of the combined revenue effect of the

corporate tax proposal, combined with these macro elasticity estimates, implies that tax cuts of this

scale would lift GDP per capita by approximately 4 percent over the first year. Although there are a

number of reasons to expect that the actual impact of the reform would be much smaller than that,

including the fact that we are currently near full employment, the potential for a significant growth

effect is still very reasonable and empirically valid.

introducing full expensing, depends upon the values of the relevant parameters and the final details of

the bill. But a reasonable range implies an expected short-term, but sustained, boost to capital spending

and then GDP growth of much more than 1 percent.

So I’ll repeat it again: existing evidence clearly indicates taxes matter for the economy.

These estimates may seem implausibly large to some not familiar with the scientific literature. This is

particularly the case when compared to results typically predicted by so-called general equilibrium

models that make sure that the movements in one market do not violate the basic laws of economics in

another. But even these modelers are catching up. IMF economists Sandra Lizarazo, Adrian Peralta-

latest time series evidence should focus on those simulations. Simulations that assume that taxes will

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be raised in the future to offset cuts today, which significantly mutes their effects, are inconsistent with

the macroeconomic literature.

There is another important factor to consider when thinking about how these changes will affect the

economy. A recent NBER working paper (Guvenen, Mataloni, Raisser and Ruhl 2017) argues that profit-

shifting by large multinational firms causes part of their economic activity to be attributed to their

foreign affiliates, leading to an understatement of U.S. GDP. Moreover, this profit-shifting activity has

increased significantly since the mid-1990s, resulting in an understatement of measured U.S. aggregate

productivity growth.

Applying the formulary adjustment to all U.S. multinational firms and aggregating to the national level,

the authors calculate that in 2012, about $280 billion would be reattributed to the U.S. Given that the

trade deficit was equal to about $540 billion, this reattribution would have reduced the trade deficit by

over half in 2012.

Extrapolating the 2012 findings to subsequent years shows that transfer pricing continues to account for

at least half of the trade deficit over 2013-2016. Here is where it gets interesting. There is also a

literature that looks at the relationship between tax rates and transfer pricing. That literature implies

that a corporate tax cut to 20 percent would dramatically reduce the trade deficit and increase GDP

accordingly. Note that this effect happens totally within the current account (for those into NIPA

Going to the way-back machine, let’s look at the bipartisan President’s Advisory Panel for Tax Reform

convened by President George W. Bush. It looked at a plan very similar to President Trump’s Unified

Framework for Tax Reform, called the “Growth and Investment Plan.” On the business side, this plan

lowered corporate rates and allowed for the full expensing of new investments, and lowered the top

marginal rate on small business income below the top marginal rate on individual income. On the

individual side, the plan created three brackets at low rates and repealed the alternative minimum tax.

Sound familiar? The Treasury Department estimated that the plan would increase output by about 5

percent in the long-run. Such an effect would be consistent with the latest empirical evidence.

And looking beyond models and into the real world, the UK gives us a good recent example of a country

of our country. I am sure that there are some of you who believe the effects will be small, but even you

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have to admit that all of this evidence adds up to a chance of something much, much better than what

we have recently experienced.

Based on the scientific evidence, to me at least, it therefore seems prudent to adopt these reforms.

Over the course of the Obama administration, U.S. corporate profits rose by a healthy 11 percent per

year. But workers’ pay didn’t keep pace, and median wage growth was a paltry 0.6 percent per year.

This disconnect between profits and wages is a radical departure from previous economic norms.

Workers used to get a 1.1 percent raise for a 1 percent increase in corporate profits. Now the pass-

through to workers is closer to 0.4 percent. Why did it change so much? Because the profits are

the wages of workers over the long-run, through a combination of disincentives to bring profits home to

invest, and a reduced impetus for domestic investment in general. Those effects are felt across the

income distribution, resulting in lower wages for higher- and lower-skilled workers alike. For the median

household in the U.S., a top corporate marginal rate cut from 35 to 20 percent would boost wage

growth almost four-fold -- from the current 0.6 percent per year to as much as 2 percent, providing up

to $7000 of additional income. It’s time for a bipartisan consensus to use tax policy to fix wage growth.

I am all for having a robust debate, as you can see from the fact that I am standing here. So therefore I

would be remiss if I didn’t say a few more things about the report TPC put out last week.

Second, the report ignored things about the bill that are publicly known. For example, the reconciliation

instructions in the Senate that are under debate have made room for $1.5 trillion in statically scored

revenue cost. Yet the report makes assumptions that would deliver a score of $2.4 trillion. I frankly just

don't understand what the purpose of a document is that shows a score for one number when there is

agreement that the bill has to score to something else. And as my speech today shows, the TPC report

also ignored *any* growth effects from tax reform and suggested there would be none.

This is a historic opportunity for tax reform, and we cannot afford to squander it. It’s also an opportunity

to continue the historic tradition of working together in enabling tax-reform. My hope is that we all can