Saturday, October 28, 2017

Jason Smith — Corporate taxes and unscientific economists

Another takedown.
But let's take this result at face value. So now we have a largely model-independent finding that to first order the effect of corporate tax cuts is increased wages. The scientific thing to do is not to continue arguing about the model, but to in fact compare the result to data. What should we expect? We should a large change in aggregate wages when there are changes in corporate tax rates — in either direction. Therefore the corporate tax increases in the 1993 tax law should have lead to falling wages, and the big cut in corporate tax rates should have lead to even larger increase in wages. However, we see almost no sign of any big effects in the wage data...
Now you may say: Hey, there are lots of other factors at play so you might not see the effect in wage data. This is the classic "chameleon model" of Paul Pfliederer: we trust the model enough to say it leads to big wage increases, but when they don't appear in the data we turn around and say it's just a toy model....
And this is the problem with economics — because what if Mankiw's and Cochrane's derivations and definitions of "static" analysis were mathematically and semantically correct? Would they just say I guess you're right — corporate tax cuts do raise wages. Probably not. They'd probably argue some on some other tack, much like how Cochrane and Mankiw would argue on a different tack (in fact, probably every possible tack). This is what happens when models aren't compared to data and aren't rejected when the results are shown to be at best inconclusive....
Data is the great equalizer in science as far as models go.
Conventional economists remind of the well-known Texan putdown, "All hat and no cattle."

Information Transfer Economics
Corporate taxes and unscientific economists
Jason Smith

No comments: