April7 MFI

Tax policy that is anti talent development

Most of the analysis of the proposed sweeping changes to the nation’s tax system have focused on who wins and who loses. Companies vs. individuals. The rich vs. the middle class vs. low income households. This, of course, matters enormously.

But in this post I want to focus on a different set of winners and losers in the proposed  tax changes. The very different treatment of financial capital and human capital. In the midst of an analysis primarily about winners and losers, Thomas Edsall in a New York Times column includes this quote:

Alan Krueger, a professor of economics at Princeton who was the chairman of the Council of Economic Advisers from 2011 to 2013, put the case against the Republican tax bill succinctly in an email: Several components of the House bill favor physical and financial capital over labor and human capital — namely, the lower rate for passive pass through income, the repeal of the estate tax, the big cut in the corporate tax rate, the failure to end the carried interest loophole, etc. At the same time, the tax on university endowments and treatment of grad student fellowships will slow human capital investment. If enacted, these features of the proposal would also deepen and further entrench existing class divisions and reduce economic mobility.

Derek Thompson in an Atlantic article entitled The Republican War on College lays out the details. Thompson writes:

To pay for a permanent tax cut on corporations, the plan raises taxes on colleges and college students, which is part of a broader Republican war on higher education in the U.S. This is a big deal, because in the last half-century, the most important long-term driver of wage growth has arguably been college.

The House bill would reduce benefits for higher education by more than $60 billion in the coming decade. It would shock graduate students with sudden tax increases, punish student debtors, and force schools to raise tuition at a time when higher education already feels unaffordable for many students. On balance, the GOP plan would encourage large corporations to invest in new machines in the workplace, while discouraging American workers from investing in themselves.

Thompson concludes:

With a huge corporate tax cut that includes full expensing, “the GOP is encouraging companies to invest in machines and saying it will help labor, but there is not much evidence for this sort of trickle-down economics,” Rueben (Kim Rueben, a senior fellow at the Urban Institute) says. “But there is lots of evidence that investing in human capital through education is a sure way to increase wages.” Republican tax and budget policies could impoverish public colleges, punish low-income graduate students, and raise the effective price of student debt—all to make it cheaper for large businesses to invest in nonhuman technology.

A post-human workforce is not an inevitability. But in the future that the GOP is constructing, in which machines are cheap and higher education is expensive, companies will see it as an awfully tempting option.

To say the least, not smart! As always, the justification for big tax cuts for corporations and the rich is that it will boost the economy therefore benefiting all. The underlying assumption is that what matters most to economic growth and prosperity is the return on physical and financial capital.

How does this square with businesses telling us over and over again that what matters most to their future success is talent? Of course, it doesn’t. Governor Snyder got it right when he wrote in 2011: “In the 20th century, the most valuable assets to job creators were financial and material capital. In a changing global economy, that is no longer the case. Today, talent has surpassed other resources as the driver of economic growth.”

The problem is that when it comes to policy he and now national policymakers have done the exact opposite. Favored, in the Governor’s words, financial and material capital at the expense of human capital development.

Thompson lays out what a pro-human capital investment tax policy could look like:

For the multitrillion-dollar cost of reducing the corporate income tax from 35 percent to 20 percent, the U.S. could provide universal pre-K education and free tuition at public colleges for nonaffluent students. For far less, it could keep the tax code’s current higher-education benefits, which help millions to get a college degree and find a higher-paying job.

Not to mention the option of greatly expanding the Earned Income Tax Credit and/or a child allowance.

If the goal––as it should be––is to raise wages and to improve household income of all Americans the far better tax policy path is the one laid out by Thompson.

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Lou Glazer

Lou Glazer is President and co-founder of Michigan Future, Inc., a non-partisan, non-profit organization. Michigan Future’s mission is to be a source of new ideas on how Michigan can succeed as a world class community in a knowledge-driven economy. Its work is funded by Michigan foundations.

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