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Why tax cuts for the rich solve nothing

Walmart knows this – and won’t let it happen.

Other corporate tax reforms might make sense; but they, too, imply winners and losers.

 And so long as the losers are numerous and organized enough, they are likely to have the power to stop the reform.

A politically astute president who understood deeply the economics and politics of corporate tax reform could conceivably muscle Congress toward a reform package that made sense.

Trump is not that leader.

 If corporate tax reform happens at all, it will be a hodge-podge brokered behind closed doors.

More likely is a token across-the-board tax cut: the losers will be future generations, out-lobbied by today’s avaricious moguls, the greediest of whom include those who owe their fortunes to scummy activities, like gambling.

The sordidness of all of this will be sugarcoated with the hoary claim that lower tax rates will spur growth.

There is simply no theoretical or empirical basis for this, especially in countries like the US, where most investment (at the margin) is financed by debt and interest is tax deductible.

The marginal return and marginal cost are reduced proportionately, leaving investment largely unchanged.

In fact, a closer look, taking into account accelerated depreciation and the effects on risk sharing, shows that lowering the tax rate likely reduces investment.

Small countries are the sole exception, because they can pursue beggar-thy-neighbor policies aimed at poaching corporations from their neighbors.

But global growth is largely unchanged – the distributive effects actually impede it slightly – as one gains at the expense of the other. (And this assumes that the other does not respond and fuel a race to the bottom.)

In a country with so many problems – especially inequality – tax cuts for rich corporations will not solve any of them.

This is a lesson for all countries contemplating corporate tax breaks – even those without the misfortune of being led by a callow, craven plutocrat.

 

By Joseph E. Stiglitz. This article was first published by Project Syndicate

 

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