The Limits of Expertise

with Larry Kotlikoff

Economic policy is often sold to the public in hopelessly, deceptively simplistic terms. You want to fund a new social program? Simply tax more money away from those who have the most to spare: large corporations and rich individuals. That sounds like a fine idea, until you remember that those corporations and individuals will take action to avoid having their money taken. Thus a policy designed, essentially, to transfer wealth from large corporations to the working class can end up harming the working class when that corporation decides to defray the cost of the tax by moving its operations overseas, laying off American workers in the process. You can say the corporation is “evil” for doing so, but it’s only applying basic economic logic to protect its stockholders’ investments.

Figuring out how to effectively redistribute wealth in order to help those who truly need it without impeding economic growth turns out to be a more subtle business than it initially appears. My friend Larry Kotlikoff has some interesting ideas on this front, like eliminating corporate and federal income taxes and replacing them with, among other things, a tax on expenditures. Likewise, he suggests replacing food stamps with free food and meals distributed in low-income neighborhoods where the wealthy are unlikely to venture.

Those are a couple of the ideas he put forth in his platform when he ran for president. As interesting as I think it is, I’m skeptical that it would have resonated with the American public. Because it’s one thing to come up with a theoretical solution to an economic problem and another thing entirely to persuade voters they should take a chance on you. Unfortunately, “Trust Me, I’m an Economist” doesn’t have the ring as “Tax the Rich” or “Yes We Can” or even “Make America Great Again.” It’s Larry’s skill and creativity as an economist that make him—with apologies—ill-suited to the campaign trail. I’d say the same thing about most experts, including myself. The president ought to represent the nation’s interests in more than just the economic sense. For that, we need someone who can lead where there are no equations to serve as guides. Let’s hope that’s what we end up getting.

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GLENN LOURY: What about billionaires and corporations? I listened to the rhetoric at the Democratic National Convention, and they want to go after the billionaires. The millionaires and billionaires, the rich people who are not paying their fair share. Do you know what Warren Buffett's secretary pays, do you know, et cetera, et cetera.

What about the fallacy of that? So we're going to tax rich corporations in order to get them to pay their fair share, when in fact the incidence of the corporate income tax is a very complicated product and you live in an international, a global, an economic system, etc. What about that?

LARRY KOTLIKOFF: Okay, so let me break this into two pieces. First of all, on the billionaires, the way the tax system is set up, billionaires can pay essentially zero. All they have to do is have assets which they have in basically stocks or other securities that are not paying out income, and they just let those assets appreciate. And since they're not realizing any capital gains, they're not paying any taxes on it. Meanwhile, they're borrowing money for all their consumption and they're borrowing at a low rate. So, through time, they're paying no taxes, basically.

I think we need to be changing the entire tax structure. Think about this. Suppose we move to a progressive cash flow consumption tax, where we tax everybody's consumption, including billionaires' consumption, on a global basis. We would impute the consumption value of your yacht, your Learjet.

Excuse me for interrupting, but I just want to understand. What do you mean tax on the global basis? You mean the countries coordinate their taxes?

No, we would have people report their consumption and their assets. If they have a yacht parked in New York, okay, they would have to report it. We would impute a rent, a consumption value to it. That would be part of the tax base for determining their consumption tax. So we're getting rid of the income tax system and the corporate income tax.

Because the corporate income tax, to get back to that, it's surely a tax on workers. When the Democrats claim that corporations need to be taxed more, what they're talking about is taxing American workers at a higher rate.

Now, it seems if you tax corporations, you're taxing the owners of corporations. But those corporations can get up and move their capital abroad. And what they do is they leave behind their workers and their workers have less capital to work with and therefore their wages fall. So the ultimate burden is falling on the workers.

Most economists believe this is the case, that the corporate tax is actually a hidden tax on workers. And I'm not a Republican or a Democrat. I ran against both of those parties twice, at great personal ... not great personal financial expense, but some expense in terms of my family and friends thinking I was a lunatic, crazy. Now many of them are saying, “I wish you were running today.” I have a lot of people saying that these days.

Yeah, but you weren't going to win. That was my previous point about expertise is not what's driving the show here, but go ahead. I want to hear about the incidence of corporate income tax.

I do think we should get rid of it. Or at least we should just set it at the minimum level that Treasury Secretary Yellen has set, which is 15%.

I just want to emphasize, because the speeches that were given was that the Trump tax reforms, which lowered the rate on corporations from whatever it was—28 to 21 or whatever—were a bad thing and they wanted to go in the other direction. But you're saying that's a harebrained scheme.

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That itself is harebrained. But what I'm talking about is getting rid of the corporate tax, the federal income tax, and replacing it and making the FICA tax more progressive, and then having a highly progressive personal consumption tax that ensures that the billionaires pay taxes on their consumption, which is what we really care about.

We don't really want to be taxing Warren Buffett because he's rich. We want to tax Warren Buffett if he's spending a lot of his money. Because if he's not, he's leaving it to somebody. He's going to actually leave his money to his five kids.

I thought he said he was going to put it in a foundation, didn't he?

He decided not to give it to the Gates Foundation.

But the understanding is the kids would create some other kind of philanthropy.

Their own funds, which they're going to give to the public. So I think if the kids spend the money on themselves, hey, it should be taxed. But if they're spending it on you and poor people and healthcare or helping people in Africa drill wells or get mosquito nets, God bless them. They're probably doing a bunch of things.

One of the things about a consumption tax is it's going to encourage savings, isn't it?

Yeah, and our country is saving 3 percent of national income. In the '50s, in the '60s, we were saving 13 percent of national income. If you look at the data, which I've been calculating for decades now, the national saving rate has gone from there down. It had a few wiggles, but basically it's a straight line down the hill. The domestic investment rate has gone from about 3 percent to 3.5 percent. The same: 13, 14 percent down to about 4 percent of national income.

What's happening is exactly what economic theory says should happen. If you run the policies we've been running, and part of those policies is taking from young savers and giving to old spenders, that's one of the major reasons we're saving so little. Also, incentives to save are important here, too. And the main thing is the redistribution through a whole lot of different programs for decades. We've changed the tax structure to put more of the burden on young people.

We've expanded these these important social insurance programs. But we've done it in a way where, in the process, we've taken from the young and given to the old. We've financed them as Ponzi schemes. We've set up program after program to help the poor, and each one of them is helping to lock the poor into poverty.

So we need to rethink our entire welfare system in a way that doesn't disincentivize people to work. Here's an example. Suppose you think about food stamps. If you earn an extra dollar of food stamps, you lose, I think, 20 cents on the dollar. You work and earn an extra thousand bucks, you're gonna lose 200 bucks in food stamps, is my understanding.

Now, what if we did it differently? What if we say we're gonna have the federal government distribute food and give food in schools in low-income neighborhoods, There'll be distribution of food in low income neighborhoods, and there'll be free breakfast, lunch, and dinner in schools and also on weekends for the residents of low-income neighborhoods.

Now, do you think a rich person from, let's say, the Back Bay in Boston is going to go to Roxbury to get a free meal? They're not. So it's not going to disincentivize work.

I like the idea. I mean, it's really very clever. And I just want to highlight something. You're leveraging the shame. The thing is, there's this incentive problem. If you want to have a benefit or a tax, you're going to distort and that's going to have a deadweight loss associated with it. It's going to have an incentive cost to it. And you want to minimize that. So you want to target it. You want to target the food aid, and rather than having it be a grant to people based on their income, you have it be an in-kind provision and you don't worry about the exploitation of the in-kind by the people who don't need it because you have the shame.

You have the shame cost going with it, which is a very clever way of taking a social thing—just let me make the point, Larry. Because we're economists talking about incentives and margins and prices, but we're using society. We're using judgment of other people about who's a good person and whatnot to accomplish our economic goal.

And I think there's a lot of stuff like that. For example, suppose we were talking about unwed pregnancies. Suppose we're talking about early, childhood pregnancy. The shame of being a person with a baby born out of wedlock might be a useful instrument in discouraging the behavior.

What about criminal behavior? What about youth detention centers and things of this kind? I just want to make the point that there's something interesting here for a socioeconomic analysis.

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