A long-time critic of Republican fiscal policies, economist Paul Krugman takes on the GOP tax overhaul in Friday’s New York Times, asking, “Why Was Trump’s Tax Cut a Fizzle?” Krugman notes that the tax cuts failed to provide a political boost for Republicans in the midterm elections and appear to be failing to provide the long-term investment boom that was promised by President Trump’s economic advisors. The reason, Krugman argues, is that “business decisions are a lot less sensitive to financial incentives — including tax rates — than conservatives claim.” Here’s how Krugman sees the underlying economic dynamics:
“It’s a dirty little secret of monetary analysis that changes in interest rates affect the economy mainly through their effect on the housing market and the international value of the dollar (which in turn affects the competitiveness of U.S. goods on world markets). Any direct effect on business investment is so small that it’s hard even to see it in the data. What drives such investment is, instead, perceptions about market demand.”
The other part of the GOP tax plan – the big jump in growth to be delivered by the repatriation of billions in corporate profits held overseas – fares no better in Krugman’s analysis. As many critics have argued, Krugman says that repatriation is largely a matter of accounting transfers that have little effect on real investment:
“[T]he money U.S. companies reported moving home after taxes were cut hasn’t shown up in jobs, wages and investment: Nothing really moved. Overseas subsidiaries transferred some assets back to their parent companies, but this was just an accounting maneuver, with almost no impact on anything real.”
The failure of the tax cuts to produce the promised results is nothing less than an indictment of Republican economic doctrine, Krugman says:
“[T]his doctrine keeps failing in practice. President George W. Bush’s tax cuts didn’t produce a boom; President Barack Obama’s tax hike didn’t cause a depression. Tax cuts in Kansas didn’t jump-start the state’s economy; tax hikes in California didn’t slow growth. And with the Trump tax cut, the doctrine has failed again.”
