Treasury’s Missing Corporate Tax Incidence Report

Jonathan Curry is a reporter with Tax Notes Today and has looked into this story. Jonathan, welcome to the podcast.

Jonathan Curry: Thanks, Dave.

David Stewart: Set the scene for us. Where does this mystery begin?

Jonathan Curry: So this starts, if you were to go to the Treasury Department's website and click through to the Office of Tax Analysis, which is known as OTA, and then click on the page titled, "Technical Papers numbers 1-6", things look pretty normal for a government website. There's lots of information, nothing's too flashy, but then you might notice something kind of odd, especially for a department keen on math. If you count up the technical papers, which are labelled one through six, there's one conspicuously missing: Technical Paper 5.

Now, once upon a time, Technical Paper 5 was just another paper in the OTA's long list of research papers. But a couple of weeks ago, there was a big stir about why exactly this paper had vanished. We don't know precisely when, but at some point over the past few months, that paper disappeared from the department's website.

David Stewart: Do we know what this paper was about?

Jonathan Curry: We do, thanks to Tax Analysts’ extensive database of documents that dates back decades. Technical Paper 5 explained OTA's assumptions about how the tax burden of the corporate income tax is distributed, for a term called corporate tax incidence. And that's just a fancy way of saying who ultimately pays more of the corporate income tax. Is it workers, or is it owners of capital?

David Stewart: Now, as we record this, it's November 15, and we're in the middle of a fairly high-stakes debate on the corporate tax rate, so this would seem to be an important bit of research. What did the OTA find?

Jonathan Curry: Well, they found that workers pay 18 percent and owners of capital pay 82 percent of the corporate tax.

David Stewart: Okay, that seems pretty straightforward. What's the problem with that?

Jonathan Curry: To put it simply, President Trump's administration doesn't agree. Treasury Secretary Steven Mnuchin has been saying ever since he was confirmed that he and the rest of the administration don't agree that owners of capital bear the biggest brunt of the corporate tax. In fact, he's been on record saying it's the opposite. And in an early September interview on Fox News, Mnuchin even referred to Technical Paper 5 and said of its assumptions, “I don't believe in that.”

David Stewart: Alright, the treasury secretary doesn't agree, but what about other economists?

Jonathan Curry: Well, it was roughly in line with the formula used by other many tax modeling groups, most notably the nonpartisan Joint Committee on Taxation. And they are the ones that traditionally do all the estimates of tax legislation for the House and the Senate. The joint committee pegs the incidence ratio at 25/75, as does the Congressional Budget Office, as well as some other organizations like the Urban-Brookings Tax Policy Center.

David Stewart: So is this a settled debate?

Jonathan Curry: Not necessarily. Economists at conservative-leaning organizations, like the Tax Foundation or the American Enterprise Institute, they’ve said that they believe workers' share of the corporate tax burden is probably higher than the OTA assumes. And in fact, the OTA's corporate tax incidence ratio has itself changed fairly recently. Technical Paper 5 was first published in 2012, but prior to that, the office assumed that owners of capital bore 100 percent of the burden. So the needle has shifted before.

Now, that being said, what surprised me about this issue isn't that there's some disagreement around the edges, but rather, that so many in the Trump administration are insisting that OTA and the joint committee, as well as others like them, aren't just a little bit off in their assumptions — they’ve got it completely backwards.

David Stewart: What did the Treasury Department have to say about removing the study?

Jonathan Curry: Well, I asked and they answered. A spokeswoman told me that it was a “dated staff analysis from the previous administration” and that it “does not represent our current thinking and analysis.”

And more recently, Secretary Mnuchin echoed that point, saying that the paper was completely inconsistent with what they're saying now. And that's true. I mean, it's a little bit embarrassing, and it's come up at least once where Secretary Mnuchin has made this claim about workers bearing 70 percent or more of the corporate tax burden, and he's been asked how he can say that when his own tax department says the opposite.

David Stewart: Where is Mnuchin getting his number?

Jonathan Curry: Well, they're not pulling it out of nowhere. It's floated around in some conservative economic circles but it's not totally in the mainstream. And the debate is ongoing.

David Stewart: Okay, now the information was not consistent with the line that they wanted to promote — why is it such a big deal that they pulled down the study?

Jonathan Curry: So the big concern here is that this is pretty unprecedented and that it infringes on the nonpartisan nature of the OTA staff. The overall Treasury Department is led by an assortment of political appointees that shuffle between one presidential administration and the next, but the OTA is staffed by career staff, many of whom have worked there for years. Their research is supposed to be free from partisan interference, and many observers saw this move by Treasury as crossing that line. A big reason that Treasury posts these technical papers online in the first place is that they wanted to be transparent about their methodology for modeling and doing tax analysis. They have 40 years’ worth of technical and working papers, but this appears to be the only one that was removed rather than simply updated. But I think the fact that it was removed altogether rather than updated to reflect new thinking is what sparked a lot of criticism.

David Stewart: So what were the critics saying?

Jonathan Curry: Well, two weeks after the story first broke, a little more than a dozen groups sent a letter to Secretary Mnuchin in which they expressed concern about the way this was being handled. And, in particular, they said that it breaks with the precedent of keeping a record of transparency in methodology, noting that OTA's website currently lists Technical Paper 4, dated August 2011, along with a separate, more recently updated version of that same paper. And I think it's also important to note that, as far as we know, the Treasury Department hasn't instructed staff at the Office of Tax Analysis to change their assumptions for modeling corporate tax incidence. They've simply removed the explainer of how they do it.

David Stewart: Now, beyond this being a government transparency issue, is there something else at stake here?

Jonathan Curry: Yeah, certainly much more than that. It can make a pretty dramatic difference in how the overall tax reform debate is framed. If you, for example, assume that workers are the ones bearing the majority of the cost of the corporate tax burden, then you can say, truthfully, that a corporate tax rate cut is a middle-income tax cut.

David Stewart: Is that what they're doing now with the current tax bills?

Jonathan Curry: Yes. Their talking points on tax reform basically boil down to two things: make the tax code more competitive for businesses, and deliver a middle-income tax cut. And we know now, after seeing both the House and Senate tax reform bills, that the majority of the Republicans' tax cuts are on the business side, and a smaller — although still substantial — share is devoted to reducing individuals' income taxes. The centerpiece of both of these bills is the big corporate tax rate cut, which would drop the rate from 35 percent to 20 percent. Now, critics of the bill say that these are regressive, meaning that the biggest percentage of the tax cuts goes to the wealthiest Americans. And that's probably to be expected if you have a corporate incidence ratio that says cutting the corporate tax mainly benefits wealthier owners of capital. But, if they were to apply the ratio the Trump administration prefers, then all of a sudden . . .

David Stewart: So, as if by magic, what had been a corporate tax cut becomes a middle-class tax cut.

Jonathan Curry: Exactly right.

David Stewart: Interesting. Is that the case that they're trying to make right now?

Jonathan Curry: Yeah, and in addition to Secretary Mnuchin, one of the Trump administration's biggest salesmen of this idea is Kevin Hassett. He is the Chair of the White House Council of Economic Advisers. Now Hassett is a conservative economist, and he is held in high regard by his peers. His nomination to the post earlier this year won nearly unanimous praise from across the economic spectrum. And he's been the one leading the charge to convince skeptics that corporate rate cuts will do a lot — and I mean a lot — to boost the middle class.

The Council of Economic Advisers came out with a report a few weeks ago claiming that cutting the corporate income tax rate to 20 percent just by itself would raise the average household income by at least $4,000 annually, although Hassett said that that number could be more like $9,000. And that $4,000 figure has been used by people like President Trump as evidence that their plan is going to help the middle class.

David Stewart: Those estimates seem fairly optimistic. How have Hassett's findings gone over with other economists?

Jonathan Curry: Well, as you might expect, they caused quite a stir, to put it mildly. A couple economists I talked to said that the CEA report's conclusions were implausible and unrealistic. And even one economist I talked to, who has collaborated with Hassett on economic research in the past, said that the CEA report offered rosy estimates based on narrow economic parameters.

David Stewart: Where do we go from here?

Jonathan Curry: Well, the House and Senate Republicans are getting their tax bills scored by the Joint Committee on Taxation. But you might see them counter by saying something like, “Well, according to some other estimates . . .” And they've already driven home for months now that their big tax cut will drive a huge amount of economic growth and that this will be a middle-income tax cut. The joint committee analyses that we've seen thus far, however, suggest that a substantial number of individuals actually will see their taxes go up. The question is, will they change their bills and shift more tax cuts to directly benefit individuals? Or are they going to bank on their plan producing economic growth and their corporate tax cuts trickling down to individuals?

David Stewart: Definitely something to keep an eye on. Jonathan, where can listeners find you online?

Jonathan Curry: You can follow me on Twitter @jtcurry005.

David Stewart: Thank you for being here. That's it for this week. You can find me on Twitter @TaxStew, that's S-T-E-W. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. Be sure to subscribe to us on iTunes or Google Play so that you get the next episode of Tax Notes Talk.

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