Sunday, January 14, 2018

The 2017 Tax Reform

There may not be another area of public policy where the distinction is greater between how non-economists (the general public, politicians, journalists, and practitioners in the area (in this case tax lawyers and accountants)) and economists evaluate policy than exists in tax policy. Who should you pay attention to? I will let the rest of this post hint at my answer.

Here is a sampling for how economists look at taxes centering on the most recently enacted changes to the U.S. Federal Tax Code. I've indicated the major takeaways for each and tried to keep this as low wonk as possible. Trust me; it could have been a lot deeper in the weeds.

Scott Sumner notes that there is more good reform in the recent changes than what probably was expected, by no means is it all progress, and that three natural experiments come out of the package. He also has a post discussing misconceptions in tax policy where most people don't understand that to tax someone you must reduce that person's consumption. If you don't reduce it, you haven't taxed that person--period. He also points out that distortions are always an important part of evaluating tax policy.

Steve Landsburg echos Scott's take and adds his own points including how the recent reform is genuine improvement and still far, far from the ideal.

John Cochrane is always worth quoting on tax policy. I'll limit myself to a few. First, here is how he sees the public role for economists discussing tax policy. Here is a long, but very rewarding, analysis of how to craft a good tax regime and what makes it "good". He calls out a fellow economist, former colleague and friend Austan Goolsbee, for not thinking like an economist. And he reminds us that the distributional effects of tax changes are never what the public and media expect.

Rawls' Veil of Ignorance is a useful philosophical approach in many cases and a good tool for guiding tax policy. How tax changes happen to affect you should not guide what changes you support. Humility is another quality tax reform should respect. The risks of unintended consequences are orders of magnitude higher in tax policy than in other aspects of political economy.