332. Why the Trump Tax Cuts Are Terrible/Awesome (Part 2)

Three former White House economists weigh in on the new tax bill. A sample: "The overwhelming evidence is that the trickle-down, magic-beanstalk beans argument — that's just nonsense."

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Stephen J. Dubner?

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• 0:48Stephen J. Dubner?

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• 1:21Stephen J. Dubner?

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• 2:11Stephen J. Dubner?

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• 2:49Stephen J. Dubner?

  Last time on Freakonomics Radio, we spoke with one of the chief architects of the controversial new Republican tax package.

• 2:56Speaker 01

  I'm Kevin Hassett. I'm the 29th chairman of the President's Council of Economic Advisers.

• 3:02Stephen J. Dubner?

  Hassett discussed the theory behind cutting the corporate tax rate from 35% to 21%.

• 3:08Speaker 01

  There's this thing called the capital deepening contribution to productivity growth.

• 3:12Stephen J. Dubner?

  And he defended the plan against its critics.

• 3:15Speaker 01

  You know, we're hoping to prove them wrong, and I think that the data so far are doing that.

• 3:22Stephen J. Dubner?

  If you're an economist with a background in academic and policy research, which Kevin Hassett is, then becoming chair of the Council of Economic Advisers is pretty much a dream job. Here's how three former CEA chairs describe it.

• 3:37Speaker 02

  Well, the job of the CEA chair is interesting because you really have one client, and it's the president.

• 3:43Speaker 03

  An old friend of mine gave me the advice when I took the job. He said, "A good CEA chair, like a good gardener, is 90% pulling weeds and 10% planting seeds."

• 3:55Speaker 01

  Well, partly it was about helping to develop economic policies, but we also spent time helping to market and sell those policies we agreed with, which in my case was about 90% of the administration's policies.

• 4:10Stephen J. Dubner?

  You might think that economists pledging allegiance, as they do, to empiricism and hard data would be fairly unified as to what constitutes something like good tax policy.

• 4:22Stephen J. Dubner?

  You might also think that there wouldn't really be such a thing as a Democratic economist or a Republican economist, right?

• 4:29Speaker 03

  But that's totally wrong. That's totally not true.

• 4:33Stephen J. Dubner?

  Today on Freakonomics Radio, the Democratic economist's response to the Republican tax package.

• 4:40Speaker 04

  The core arguments the administration made over and over again were completely false.

• 4:47Speaker 03

  The overwhelming evidence is that the trickle-down magic beanstalk beans argument is just nonsense.

• 4:55Stephen J. Dubner?

  And a fellow Republican's defense. To say it's a disaster seems over the top. The Tax Cuts and Jobs Act of 2017, what's in it, what's not in it, and why even if you love the tax cuts, you might still be really worried.

• 5:11Speaker 03

  I mean, $3 trillion is a lot of money.

• 5:25Speaker 05

  From WNYC Studios, this is Freakonomics Radio, the podcast that explores the hidden side of everything. Here's your host, Stephen Dubner.

• 5:41Stephen J. Dubner?

  We've already met Kevin Hassett, chairman of President Trump's Council of Economic Advisors. Time now to meet our three former CEA chairs. First, Glenn Hubbard.

• 5:50Speaker 02

  I am dean of Columbia Business School, where I'm also a professor of finance and economics. In the early 2000s, I was chairman of the Council of Economic Advisers in the White House.

• 6:01Stephen J. Dubner?

  We've also got Austin Goolsbee.

• 6:02Speaker 03

  I'm a professor of economics at the University of Chicago's Booth School of Business. I'm the former chairman of the Council of Economic Advisers under President Obama.

• 6:12Stephen J. Dubner?

  And Jason Furman.

• 6:14Speaker 04

  I'm a professor of practice at the Harvard Kennedy School and was chairman of the Council of Economic Advisers from 2013 through 2017.

• 6:23Stephen J. Dubner?

  But we should say that your government service and quasi-governmental service is even more substantial than that, right? Can you talk about your other posts with CEA and NEC and World Bank?

• 6:32Speaker 04

  Sure. I was at the Council of Economic Advisers and the National Economic Council during the Clinton administration. In between those, I spent a bit of time at the World Bank. And then I was in the White House for all eight years of the Obama administration.

• 6:48Stephen J. Dubner?

  Gotcha. Okay, so when Donald Trump talks about the swamp, you are the swamp, Jason.

• 6:53Speaker 04

  I would like to think I've spent more time on tax policy than any other policy topic.

• 7:04Stephen J. Dubner?

  For economists, tax policy is an inherently complex topic. There are a lot of variables to consider, a lot of competing interests, and, oh yeah, a lot of politics. Kevin Hassett, who also spent years researching tax policy, was tapped by President Trump to carry out the political promises that Trump made, both on the campaign trail...

• 7:25Speaker 06

  It begins with bold, new tax reform.

• 7:33Speaker 06

  Don't worry, they're going down, not up. They're going down.

• 7:37Stephen J. Dubner?

  And, once he was elected.

• 7:38Speaker 06

  Tax reform will protect low-income and middle-income households, not the wealthy and well-connected.

• 7:45Stephen J. Dubner?

  Some people wondered whether or why radical tax reform was necessary. The economy seemed to be doing pretty well, at least for some people. Here's why Kevin Hassett saw the need for reform.

• 7:57Speaker 01

  We've had this unprecedented slow wage growth and slow economic growth. So we had really kind of like a raging problem that required antibiotics of a tax reform.

• 8:08Stephen J. Dubner?

  Hasset discussed the new tax plan in detail back in January during a panel discussion at the American Economic Association Annual Conference. Among the other panelists that day were Jason Furman, Austin Goolsbee, and Glenn Hubbard, which is why we've reassembled them for this episode, to hear what they like and dislike about the new tax package, what they would have done differently, and how it compares to the tax moves they made while in office. And there's a lot to discuss. In addition to the corporate rate cut, there are cuts for most individuals and for pass-through businesses like limited liability companies or LLCs. There are increases to the standard deduction and child credit, changes in the deductibility

• 8:51Stephen J. Dubner?

  of mortgage payments, and state and local taxes, and quite a bit more. Okay, let's start with Glenn Hubbard. Keep in mind, we were speaking before all the tariff turmoil that's been happening, so the conversation stuck to the new tax plan. Now, you were chairman of the CEA under President George W. Bush, and you were, as I understand it and as I've read, the chief architect of his tax cuts.

• 9:19Speaker 07

  I believe in the energy and innovative spirit of America's workers, entrepreneurs, farmers, and ranchers, so we unleash that energy with the largest tax relief in a generation.

• 9:34Stephen J. Dubner?

  Which lowered the highest personal income tax rate, reduced the rate on capital gains and dividends. Now, Democrats especially, but a lot of Republicans in hindsight, say that these cuts, that tax plan, did not accomplish the job and wage growth that you and President Bush promised.

• 9:52Speaker 07

  Because we acted, our economy is growing again and creating jobs, and nothing will hold us back.

• 10:03Stephen J. Dubner?

  I'm just curious to know in hindsight how you would assess that tax policy of yours.

• 10:07Speaker 02

  Well, it's a great question. The decade that followed the original 2001 tax plan, you mentioned acts that were both 2001 and 2002 and 2003 in your question. That decade had a lot going on, including 9/11, including recessions. It's very hard to parse things out. I think cuts in marginal rates that President Bush advocated were definitely the right policy. There were things in the 2001, 2003 tax acts that I thought were actually quite expensive and probably contributed a little to economic growth. But I think on balance, it was still the right policy.

• 10:43Stephen J. Dubner?

  It's also, I mean, a big variable in there is a couple of very expensive wars, yes? Was that part of the original projection?

• 10:50Speaker 02

  Definitely. Well, no, of course it wasn't in the original projection. Interestingly, when Bush campaigned in 2000, the prospect of good times ahead was clearly there.

• 11:00Stephen J. Dubner?

  Yeah, we were in the great moderation for a while there, weren't we?

• 11:04Speaker 02

  Absolutely.

• 11:05Stephen J. Dubner?

  More recently, you worked on Mitt Romney's economic plan when he ran for president in 2012. Then during the 2016 election, when you were asked if Donald Trump had sought your economic advice, you said, "He has not. It's hard for me to believe any economist is advising and giving the crazy economic policies he's espousing." So Glenn, now more than a year into the Trump administration, how crazy are overall, would you say, his economic policies? In other words, what you were hearing during the campaign, does the reality seem a lot more sensible or no?

• 11:41Speaker 02

  I think I'd answer it on two levels. The reality seems much more sensible at a low-frequency level, meaning if you just focus on the big ideas. So the tax bill that the administration just got through Congress, I thought was largely very positive for the economy. The trend in regulation that President Trump has championed on cost-benefit analysis and a sounder approach to regulation makes a lot of sense. The appointment of Jay Powell, the Fed, that's all good. The noise, the tweets, the stepping on your own lead with comments, that's unfortunate. But if you focus on the few big things, I think they're awfully good.

• 12:22Stephen J. Dubner?

  Okay, so let's talk about the tax reform and the new set of tax laws now. Let me ask- Firstly, why did we need tax reform now? So, a layperson like me might say, "Well, you know, employment is high. Stock markets are at record highs. Corporate profits are very strong." What problems was this tax act trying to solve?

• 12:42Speaker 02

  Well, it's a great question. I always say to people in public policy, "It's a Jeopardy test. If the act is the answer, you have to guess the question." And here, I think I would start with the corporate piece of the tax reform. That's what this was all about in terms of economics. The US had become very uncompetitive in the location of businesses. And it was a millstone we were carrying around our neck. And it wasn't just about corporations. It was about investment in the United States and wages. In the US, because a lot of businesses are not corporations, any tax reform has to open them up, too. And I think that's why the bill became very, very large and very, very complicated.

• 13:25Speaker 02

  But I think at its root, it was about corporate taxation, business taxation, and it was aimed at the long run. So it wasn't trying to be stimulus. It was trying to build capital and productivity for the long run.

• 13:43Speaker 04

  The United States really does have a problem, that it's had too little business investment, too little innovation. And part of that, I think, is because our business tax code has been broken for some time.

• 13:58Stephen J. Dubner?

  Jason Furman again.

• 13:59Speaker 04

  But at the end of the day, the question is, is this legislation well-designed or not? I think it's not well-designed.

• 14:06Stephen J. Dubner?

  So if you wanted to design it better, to produce, let's say your number-one priority was wage growth, what would you add or subtract?

• 14:13Speaker 04

  I would, first of all, pay for it. Second of all, make all of it stable, so you have permanent provisions that are predictable. Third, I'd have more incentives for R&D going forward. And finally, some things in the bill that I think were quite good, letting businesses write off their equipment investment, I would have made sure that those were permanent and not something that was phased out after five years.

• 14:39Stephen J. Dubner?

  So how involved then is a given CEA chair in, let's say, creating new tax legislation of the sort that we're here to talk about today?

• 14:50Speaker 04

  Well, I personally was very involved. President Obama put out a framework for business tax reform at the beginning of 2012. And I was at the NEC at the time, and my job was overseeing and running the process that developed that plan. And I continued to be one of the main people in the administration, probably the Treasury Secretary and myself, who would go out, engage on the plan, talk to people about it, refine it.

• 15:22Stephen J. Dubner?

  So pardon my ignorance, I don't follow Washington very closely, but I have not heard of the framework for business tax reform. Does that mean it wasn't a thing, that it never, that the reform never happened?

• 15:33Speaker 04

  We tried really hard to reform the business tax code. We put out a plan for it in 2012.

• 15:40Speaker 08

  Our tax code is so riddled with loopholes and special interest tax breaks that a lot of companies who are doing the right thing and investing in America pay 35% in their taxes.

• 15:54Speaker 04

  We got some Republican interest and some Republican convergence around the ideas.

• 16:00Speaker 08

  Corporations who've got fancy accountants and stash their money overseas, they pay little or nothing in taxes. That's not fair. That's not good for the economy here.

• 16:12Speaker 04

  But never got all the way there. And I think that was partly because we had this quaint idea that the whole thing should be paid for. And it turns out, that's a lot more difficult politically.

• 16:22Speaker 03

  In the end, it always comes back to politics, you know? Because it turns out, politics is very political.

• 16:33Stephen J. Dubner?

  Austin Goolsbee again.

• 16:34Speaker 03

  I was a big advocate, as you know, or you can go back and look at my public record, that we ought to be thinking through how to be able to reduce the corporate tax rate on the books. It was always my desire to do it 1986 style where we paid for it. But, but I don't object in spirit to cutting the rate.

• 16:58Stephen J. Dubner?

  Obama called for lowering the corporate rate to 28%. Trump initially called for cutting it all the way to 15%, but settled on 21%. And with a Republican majority in both houses, Trump did get it all the way there. So, how do Democrats like Goolsbee feel now?

• 17:17Speaker 03

  I would have liked to seen it done at least with some awareness of this issue of not just wanting to have windfall gains, that you're just handing large amounts of money to people for things that they already did, because that has a low bang for the buck. I think you're going to, over the next two to four years, see a whole lot of discussion by corporations themselves, probably different ones than the ones who got the benefits, who say, wait, hold on, now we're, we're phasing out the R and D tax credit? What, why do we do that?

• 17:52Stephen J. Dubner?

  We should point out that Goolsbee, by the time he became CEA chairman, had known Barack Obama for years.

• 17:58Speaker 03

  Well, I've been at the University of Chicago for 23 years. President Obama was, he was a professor over at the law school. We had a bunch of common friends. People forget, Michelle was more famous than he was. So, when he first started running for the US Senate in 2003 or 2004, his policy person called me and said, you know, could I help? And I was like, wait, Michelle Obama's husband? Yeah, I'll help. That guy from the birthday parties? You know, he lived, he was my state senator. And so I started pitching in back then. And one thing came to another, and the guy that was my neighbor ended up running

• 18:41Speaker 03

  for president and, and winning. So, there was a lot of randomness, but I went back a fair ways with him.

• 18:51Stephen J. Dubner?

  The first Obama term coincided with the onset of a deep recession caused by a financial meltdown, which meant that his economic team was busy putting out fires.

• 19:01Speaker 08

  The American Recovery and Reinvestment Act that I will sign today is the most sweeping economic recovery package in our history.

• 19:10Speaker 03

  If you go back and look at the stimulus, it's really basically about one-third short-run stuff that was about traditional stimulus. It was about one-third longer-run oriented things like infrastructure and stuff that would take a while to come out the door, and it was about one-third tax cuts. The centerpiece of that, he had called for early in his campaign, and that ended up being the biggest middle-class tax cut for workers ever in American history.

• 19:45Speaker 08

  We've passed a broad and sweeping tax cut for 95% of American workers.

• 19:51Speaker 03

  It was called the Making Work Pay Tax Credit. It was basically giving you an income tax cut, crediting you for how much you're having to pay in payroll taxes.

• 20:00Speaker 08

  Make no mistake, this tax cut will reach 120 million families and put $120 billion directly into their pockets, and it includes the most American workers ever to get a tax cut.

• 20:15Speaker 03

  And I think that kind of puts the cherry on the sundae, if you want to think of it that way. When thinking about this tax bill that President Trump passed, their argument essentially was, well, the middle class has been squeezed, therefore, we need a tax cut, and arguing that will help the middle class through a trickle-down mechanism.

• 20:46Speaker 03

  The overwhelming evidence is that the trickle down magic beanstalk beans argument that this will lead to, what did President Trump say, four and a half percent growth and that's conservative, is just nonsense. That's nonsense. We've done this before. It didn't work.

• 21:06Stephen J. Dubner?

  So as Kevin Hassett was giving his talk at the American Economic Association conference, he was offering evidence, empirical evidence, for why the Trump tax cuts will produce the desired effect of a more stimulated economy, rising wages especially and so on. You meanwhile, sat on the stage, close to him, and you looked like you just wanted to vomit. And just about every slide he showed or everything he'd say, you would either verbally or with your eyes kind of roll them and make clear that you felt the empiricism that was being offered in defense of the policy was just not worthwhile empiricism. So give me, if you would, maybe

• 21:51Stephen J. Dubner?

  the most grotesque example in your view of an empirical argument being put forth by the Republicans that you think is either nebulous or outright wrong.

• 22:02Speaker 03

  Well, if I rolled my eyes, I shouldn't have, and I apologize for doing that because that's disrespectful and I don't usually, it'd be better if we had more civility in our discourse. Now, I will say that in this presentation, I felt that it was heavily shading factual information to be cherry picked to make it seem like something had something to do with Donald Trump or the tax code when it was rather obvious that it didn't. Putting

• 22:36Speaker 03

  up numbers that span the Great Recession and say, well, look, from 2007 to 2016, wages were really bad. And then, starting in 2017, wages start going up. Now, obviously, there was a tremendous drop in the beginning of the 2007 to 2010 period, but if you just go get the data, the last four or five years, there has started to be progress in middle class wages.

• 23:15Speaker 03

  The kind of the Trump argument that through 2016, the real unemployment rate he claimed was over 50%. And almost literally overnight, January 20th, he began bragging that unemployment's at the lowest rate it's ever been. And yeah, unemployment is down two tenths of a point since Donald Trump took office. He inherited the lowest unemployment rate of any new president in a half century. You know, if they put up a graph, check the dates, just, just, just look at it.

• 23:52Stephen J. Dubner?

  And what about the argument behind the central piece of the Trump plan, the corporate tax cuts, and the claim that firms will be freed up to invest in more equipment and technology, making workers more productive and thereby raising wages?

• 24:11Speaker 03

  Look, there's some element of truth to that. Now, you should know, there are also economists who've been arguing literally the opposite, saying that the reason that the wage share has been going down as a, as a share of the total economy is that we've made capital so cheap that companies are replacing people with machines. So, replacing people with machines would kind of in the spirit be going the other way. But his argument goes back to this stuff we were talking about. How much do you think that's going to trickle down to workers? And they made the argument that the majority of the money would end up going to the workers

• 24:56Speaker 03

  and that average wages will go up $5,000. And they take evidence like the announcement that Apple made, that they were going to give some bonuses and bring back this money, as evidence that that's the beginning of their process.

• 25:13Stephen J. Dubner?

  The money Goolsbee is talking about here are the billions of dollars that Apple is repatriating now that the new tax rules are in place.

• 25:21Speaker 03

  Apple's gonna clear, after tax, they're gonna clear probably $225 billion.

• 25:29Speaker 03

  And the question is, what's going to happen to $225 billion? Now, as a side note, confusingly, for a lot of this quote-unquote offshore money, it's actually been in the United States in US financial institutions. It's just classified as not US profit, so it hasn't been paying taxes.

• 25:48Speaker 04

  One thing that's really important to understand, most of that money is here in the United States already. It is labeled as an accounting matter as on the balance sheet of an Apple subsidiary. But that Apple subsidiary happens to have already held the money in the United States. So there's not really a lot of money moving, except in an accounting sense.

• 26:09Stephen J. Dubner?

  Okay, so as I understand it, Apple, in announcing that it's repatriating or relabeling, maybe, this huge pile of cash, they are taking advantage of, as I understand it, a one-year amnesty that allows them to pay 15.5% on cash holdings and 8% on non-liquid. Is that right?

• 26:26Speaker 04

  It's not a one-year amnesty. It's actually required that-

• 26:29Stephen J. Dubner?

  Oh, it is.

• 26:30Speaker 04

  You don't actually have to bring it back, but you get taxed whether or not you bring it back. And then you can bring it back anytime you want to, at the rates you said.

• 26:39Stephen J. Dubner?

  So that's happening. And then additionally, Apple says that they'll be investing a huge amount in labor and facilities in the US. So with something like that, and I'm guessing you dealt with Apple a lot while you were with the CEA in the Obama White House, how are we to think of that kind of announcement and those kind of moves? How legitimate, how substantial is it versus window dressing and public relations?

• 27:05Speaker 04

  I think it's 100% window dressing. And a top executive at Apple admitted that to me when I was in the Obama administration. He was talking at repatriation, and I said, "Simple question. If you have great investments that you could make in the United States, what's holding you back?" They already had a lot of cash in the United States, and they could borrow in the bond market. And he said, "Well, it's not really, we can invest all we want, but then maybe there's some other companies that this would help." I mean, you'd have to be pretty dumb if you weren't making an investment last year that would have been profitable just because the money was on a different balance sheet. Apple had a lot of different ways to get money.

• 27:49Speaker 04

  So I don't think the repatriation is the right way to go. You know, I do think, though, it's a better tax system that lets you move your money back and forth freely whenever you want. I think that is a bit more efficient. I think the bill is right about that. The bill is right to do a one-time charge on the money that you have overseas. The problem is that going forward, it still makes it too easy to pretend that your money was made in Ireland or the Cayman Islands and thus to avoid paying taxes on it really anywhere.

• 28:26Speaker 03

  The only thing I'd observe is Apple's gonna clear $225 billion and they pledged something like 1/10 of 1% of that in the form of higher wages. So I think you could have gotten all the benefits of the investment side of the tax bill for far less money and with far less windfall giveaway rewards to high-income people if you had wanted to. But clearly, they did not want to, and that's why they passed the bill they did.

• 29:04Speaker 02

  The way I think about it is the corporate tax had discouraged investment in the United States, both incremental investment by American companies, but also by both American and foreign firms deciding where to locate plants and jobs.

• 29:21Stephen J. Dubner?

  That, again, is Glenn Hubbard, who chaired the CEA under George W. Bush.

• 29:26Speaker 02

  So that was really the big deal. The chain goes something like this: the larger investment leads to more capital, which leads to higher productivity because workers now have more capital to work with. And in a competitive market, that means higher wages. That is going to pay very large dividends to the American economy. I think it was very brave to seek such a large rate cut. I'm glad it's there. But to say it's a disaster seems over the top. I mean, after all, President Obama wanted to cut the corporate rate to 28%. I assume he didn't want to do that randomly.

• 30:02Stephen J. Dubner?

  Not randomly, but as Goolsbee and Furman point out, Obama proposed to offset the corporate rate cut so that it would pay for itself, so that it wouldn't add to the deficit, which the Trump cuts likely will, to the tune of roughly $1.5 trillion.

• 30:20Speaker 04

  There's a tax law not that far away from the one that passed that I think would have been great, but, you know, in another sense, it's a trillion and a half dollars away from the one that passed.

• 30:36Stephen J. Dubner?

  Coming up after the break, what's the problem with the deficit? The problem of the deficits is you have to pay back the money. Also, what's the worst thing about the new tax package? The worst thing is something that isn't in it. And what else do the Democrats hate?

• 30:54Speaker 04

  The repeal of the individual mandate, I think, is really unfortunate.

• 30:59Stephen J. Dubner?

  That's coming up right after this.

• 31:19Stephen J. Dubner?

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• 31:50Stephen J. Dubner?

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• 32:37Stephen J. Dubner?

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• 33:14Stephen J. Dubner?

  The Congressional Budget Office recently projected that even with the economy growing, the national debt is expected to climb over the next 10 years from $21 trillion to $33 trillion. This is in large part due to the huge tax cuts and recent Republican commitments to boost military and domestic spending, which is not the sort of fiscal conservatism that Republicans like to say they're known for. The Democratic-aligned economist Austin Goolsbee says there's a wrinkle in the new tax package that might make those numbers even worse. The individual tax cuts are set to expire after several years and, along with other tax changes, could mean higher taxes down the road for many lower and middle-income people.

• 34:01Speaker 03

  And the Republicans are responding by saying, no, no, but we'll never let that happen. We'll just extend all of those things when they're about to expire. Okay, but then it doesn't cost $1.5 trillion. It costs more, like $3.5 trillion. And if you're going to give up $3-plus trillion of revenue, it's perfectly appropriate. There's nothing inappropriate about asking, how much bang for the buck are we getting for $3 trillion? I mean, $3 trillion is a lot of money. The entire stimulus that...

• 34:39Speaker 03

  Some people criticized at that time and said, oh, this is unbelievably large. And how can we do something that would increase the deficit by $780 billion? I mean, come on, this is four times bigger than that. So how worried are you about increasing the deficit? I do not think that the US is in a situation in which we're right on the cusp of some fiscal base crisis that the markets are going to say, oh, now maybe they're Greece and the interest rate is going to shoot through the roof. What I say is, the problem of deficits is not that they're going to drive up the interest rate. The problem of the deficits is you have to pay back the money.

• 35:20Speaker 03

  So to go to the age-old, not battle, but the age-old discussion that the economists have been having over, we know the population is aging, we know we have a long-run fiscal imbalance, we know we got to think about social security and Medicare and discretionary spending and defense, and how are we going to do that? And the argument, well, we could try to cut entitlements, or we could try to raise taxes, or we could do some combination, that's a kind of a sober debate about the details. That's not what they did here. That's not what we took.

• 36:00Speaker 03

  If this is a once-in-a-generation opportunity to change the tax code, all we did is just go pile on to a problem that we already knew existed, to multiple problems we already knew existed. One, let's just go cut taxes for high-income people and make the income distribution more unequal, when we know that that's been trending the bad way for quite a while. And then let's just pile on during a boom and start running huge deficits during a boom.

• 36:37Speaker 02

  Well, I think if you use the Joint Committee on Taxation estimates, the $1.5 trillion so-called static revenue loss became a trillion-dollar revenue loss.

• 36:48Stephen J. Dubner?

  Glenn Hubbard again, the Republican economist.

• 36:51Speaker 02

  My own calculations would suggest about half of it. That is, say, 750 would be a true revenue loss. So no matter how you slice it, it's going to be difficult not to lose revenue. The only hope would be that for some other reason, the economy grows faster. But this tax cut definitely increased the deficit.

• 37:15Stephen J. Dubner?

  So even Hubbard does not dispute that there's a huge cost burden to the new tax package. On the other hand, the individual cuts that Hubbard helped shepherd through under President Bush and the individual cuts that Goolsbee helped shepherd through under President Obama, they didn't do much to address the bigger, longer-term trend of wage stagnation. And that, as current CEA Chairman Kevin Hassett reminds us, was why the current Republicans felt compelled to make such a big play.

• 37:45Speaker 01

  So we had really kind of like a raging problem that required antibiotics of a tax reform.

• 37:51Stephen J. Dubner?

  The cost of the tax package, while massive, is hardly the only objection the Democratic economists have. Here's something else Donald Trump promised after he was elected about his tax plan.

• 38:04Speaker 06

  Tax reform will protect low-income and middle-income households, not the wealthy and well-connected.

• 38:10Stephen J. Dubner?

  And this.

• 38:12Speaker 06

  The rich will not be gaining at all with this plan. We're not looking for the middle class, and we're looking for jobs.

• 38:19Speaker 03

  And their first reaction was, let's cut the estate tax for people who have more than $20 million estates.

• 38:27Speaker 04

  Cutting the estate tax was not something that we need to do for growth in this country.

• 38:32Speaker 03

  Let's cut it on high-income pass-throughs.

• 38:35Stephen J. Dubner?

  The high-income pass-throughs he's talking about include certain LLCs and even sole proprietorships that, under the new tax law, will be able to write off 20% of their qualified business income.

• 38:47Speaker 04

  The tax cut for pass-throughs is complicated, distortionary. I don't know any economists on the left or the right that particularly like that provision.

• 38:59Stephen J. Dubner?

  I believe it was Glenn Hubbard who said he did not like that change, even though he's on the Republican side, because it would lead to a lot of people spending a lot of time setting themselves up to be tax advantageous, which is kind of the wrong way to be spending your time, generally.

• 39:16Speaker 04

  Yeah, exactly. The tax code should tax similar activities at similar tax rates. And now, all of a sudden, you can make an arbitrary label change and save 20% off your taxes. That's going to lead to a lot of distortions, a lot of extra effort. They put rules in place to prevent abuse, but there'll be an awful lot of creativity to figure out how to get around those rules.

• 39:45Stephen J. Dubner?

  How about another promise that President Trump made about the tax plan?

• 39:49Speaker 06

  Tax simplification will be a major feature of the plan.

• 39:56Stephen J. Dubner?

  The Republicans followed through on this, at least to some degree. By nearly doubling the standard deduction, they gave a lot of taxpayers a good reason to not itemize their deductions.

• 40:06Speaker 04

  For some people, it will be simpler. People who are itemizing today will be able to take the standard deduction. There's about 25 million of them, and that's not trivial. That's real simplification. But there's a lot of new complications.

• 40:20Stephen J. Dubner?

  Complications and costs and, as Furman argues, a lack of transparency.

• 40:27Speaker 04

  The Trump administration's selling this has been abysmal, starting from the premise that the United States has really high taxes, when in fact, the United States has really low taxes, that this legislation would pay for itself and cut the deficit, when this legislation would actually cost a lot of money and raise the deficit, to its claims originally that no high-income households would benefit, which is patently untrue. So the core arguments the administration made over and over again were completely false.

• 41:03Stephen J. Dubner?

  Jason Furman and Austin Goolsbee see way too much in the tax package that benefits the wealthy and will exacerbate income inequality. Several nonpartisan analyses back them up, but Glenn Hubbard says it isn't quite so black and white.

• 41:18Speaker 02

  Most Americans will get a tax cut, and not all high-income people are treated very well. I happen to be a high-income person who lives in New York City. I'm not going to get a tax cut.

• 41:29Stephen J. Dubner?

  Quite the opposite.

• 41:29Speaker 02

  Quite the opposite.

• 41:30Stephen J. Dubner?

  New York City is pretty bad, but anywhere in New York State is pretty bad. This is one of the many interesting wrinkles of this tax act is the end of the SALT deduction, not the end, but the minimization. So it used to be you could deduct, I guess, an infinite amount of state and local taxes from your federal return, correct?

• 41:48Speaker 02

  Right, whatever yours, whatever you paid.

• 41:51Stephen J. Dubner?

  Yep. And now that limit is $10,000. A lot of people point to that as a punishment against blue states that did not vote for Trump. So let me hear your take on that from the tax perspective, but also from the political perspective.

• 42:04Speaker 02

  Well, I mean, let's start with some simple math. If you want to cut marginal rates the way the tax bill proponents wanted to do, you have to pay for that. One might have been ending the home mortgage interest deduction. Good luck with that.

• 42:17Stephen J. Dubner?

  And you say, "Good luck with that because..."

• 42:20Speaker 02

  Very politically difficult to do. And then if you were to limit the health exclusion, that too is politically difficult. And also, you need it as part of health policy. So the other one that was left that was large was state and local. I don't think it's as much about politics as it is about math and economics. The math point I just made, the economics point is, you should pay the marginal cost of something you buy. So if I'm in New York, I ought to be facing the full cost of living here and supporting New York spending. And if I don't like it, I can go move somewhere else. There's no reason that somebody in Florida ought to be subsidizing me.

• 43:05Stephen J. Dubner?

  So Hubbard sees a lot more sound thinking in the tax plan than the Democratic economists do. I asked him what he considers the worst thing about it.

• 43:13Speaker 02

  The worst thing is something that isn't in it. This was the time to do work supports, to expand the earned income tax credit, or have some form of wage subsidies. That's a point of view that had been taken everywhere from Barack Obama to Paul Ryan, so hardly partisan on one side or the other. That missing was the worst part.

• 43:36Stephen J. Dubner?

  I'm curious if whether you think another missing component or missed opportunity here would have been to somehow integrate this discussion of tax cuts with healthcare reform?

• 43:46Speaker 02

  I do think that. You can't really talk about health policy without tax policy because so much of the way we finance healthcare has to do with the tax code. So for example, right now, I don't pay income taxes on the health insurance benefit that I get from my employer, Columbia University. Same is true of other people who work for an employer. That tax treatment, plus the way we tax and subsidize benefits for lower-income people, is important, and we should have discussed it.

• 44:24Stephen J. Dubner?

  The new tax bill did not, however, completely ignore healthcare. In a move that infuriated congressional Democrats, it eliminated the Affordable Care Act's individual mandate, which imposed a penalty on people who did not buy health insurance. Here's Jason Furman.

• 44:41Speaker 04

  The repeal of the individual mandate in this bill, I think, is really unfortunate. Millions more people will lose their health insurance, premiums will go up, and that was a policy that originally was actually a conservative idea and a way of solving what would otherwise be a market failure in the health insurance market.

• 45:02Stephen J. Dubner?

  The Affordable Care Act, among the signature achievements of the Obama administration, and the Tax Cuts and Jobs Act, almost certainly the signature achievement to date of the Trump administration, wouldn't seem to have much in common. But, as Furman points out, they do.

• 45:19Speaker 04

  There's not political buy-in to this, a little bit like there wasn't political buy-in for the Affordable Care Act.

• 45:27Stephen J. Dubner?

  In years past, it was a different story. A lot of landmark legislation in the United States had huge bipartisan participation. The 1935 Act that created Social Security was supported by 90% of Democrats in Congress and 75% of Republicans. The Civil Rights Act in 1964, 60% support from Democrats and 76% from Republicans. The 1965 Act that created Medicare, 81% of Democrats, 50% of Republicans. Now, how about the Affordable Care Act? 0% of congressional Republicans voted for it. And the tax bill we've been discussing today?

• 46:12Stephen J. Dubner?

  Zero Democratic support.

• 46:14Speaker 04

  And that will guarantee prolonged fighting over these tax cuts for years to come.

• 46:21Stephen J. Dubner?

  Well, that's something to look forward to, isn't it? This kind of hardcore party tribalism, which used to be a bug in our political system, is now a feature. We will be exploring that idea in a future episode of Freakonomics Radio, which will offer a new twist on the old view of Washington.

• 46:43Speaker 09

  Most people have heard Washington is broken. And yet, the core idea here is that Washington isn't broken. In fact, Washington is doing exactly what it's designed to do.

• 46:57Stephen J. Dubner?

  And what is Washington, at least modern Washington, designed to do?

• 47:01Speaker 09

  The US political system is a full-fledged industry. It's thriving, even as the customers of that industry are actually enormously dissatisfied.

• 47:13Stephen J. Dubner?

  That's an episode you'll hear not too long from now. Meanwhile, coming up next time on Freakonomics Radio, we speak with a man who makes medicine look really easy.

• 47:27Speaker 10

  Often, they're very simple, cheap systems, like a checklist, that can get really great results.

• 47:36Stephen J. Dubner?

  Of course, it's not always so simple.

• 47:37Speaker 10

  In healthcare, for your 13 organ systems, we have 60,000 different diagnoses, 60,000 different ways your body can fail. And we have generated 6,000 drugs, 4,000 medical and surgical techniques and procedures, plus an uncounted number of ways To prevent those conditions. And we're trying to deploy that capability town by town to every person alive, regardless of their ability to pay.

• 48:07Stephen J. Dubner?

  A conversation with Atul Gawande, surgeon, author, and public health crusader. We talk about what's working in healthcare and what's not.

• 48:15Speaker 10

  So our systems are incredibly optimized for sending bills. I can send a bill in like, three keystrokes. But recording an allergy can be four different screens.

• 48:31Stephen J. Dubner?

  Atul Gawande, that's next time on Freakonomics Radio.

• 48:37Stephen J. Dubner?

  Freakonomics Radio is produced by WNYC Studios and Dubner Productions. This episode was produced by Greg Rosowski. Our staff also includes Alison Hockenberry, Merritt Jacob, Stephanie Tam, Max Miller, Harry Huggins, and Andy Meisenheimer. The music you hear throughout the episode was composed by Luis Guerra. You can subscribe to Freakonomics Radio on Apple Podcasts or wherever you get your podcasts. You should also check out our archive at Freakonomics.com, where you can also find the books, the blog, and much more. You can also stream or download every episode we've ever made of this podcast. You can also find the transcripts and links to the underlying research. We can be found on Twitter, Facebook, LinkedIn, or via email at [email protected]. Let us know how we're doing.

• 49:22Stephen J. Dubner?

  Thanks for listening.

• 49:37Stephen J. Dubner?

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• 50:10Stephen J. Dubner?

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• 50:54Stephen J. Dubner?

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• 51:18Speaker 11

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