According to Wall Street Journal writer Laura Saunders, future Treasury Secretary Mnuchin must be wrong because Tax Policy Center experts say so. Actually, Mr. Mnuchin may be partly right, but the experts are almost entirely wrong.

“Steven Mnuchin, the likely next Treasury secretary, this week said rich U.S. taxpayers won’t get “an absolute tax cut” under President-elect Donald Trump,” writes Ms. Saunders; “But that is not what Mr. Trump says in his taxation plan. In fact, under his approach the wealthy would receive an average tax cut of about $215,000 per household, experts say.” 

“What Mr. Trump says” is not at all the same as what some “experts say.” Expert or not, Tax Policy Center (TPC) estimates of who pays what under different tax rates are distressingly capricious.

Mr. Mnuchin appeared to be talking only about individual income taxes. That is why he suggested that lower marginal tax rates for high earners “will be offset by less deductions.” So long as we focus only on non-business taxes (including high salaries and dividends), Mr. Mnuchin was probably right. Indeed, according to Ms. Saunders’ experts, the lost revenue from lower tax rates over 10 years totals $1.49 trillion plus $145 billion from eliminating the 3.8% Obamacare surtax. Yet those individual tax cuts are more than offset by $2.6 trillion in added revenue from Trump’s cap on itemized deductions and the loss of personal exemptions. More than doubling the standard deduction loses considerable revenue, but not from high-income taxpayers.

Ms. Saunders mentions only the loss of itemized deductions—not exemptions—and concludes “these limits don’t fully offset the effects of income- and estate-tax cuts for high earners proposed by Mr. Trump, according to experts.” 

Repealing the estate tax loses very little revenue, but it is arbitrary for the TPC to assign that lost revenue to people with high incomes because the estate tax is borne by heirs and charities—not dead people.

With estate tax repeal included, only 22% of the Trump tax cut goes to households (including investors) according to the TPC, with 44% of Trump tax cuts going to corporate earnings (and the rest to unincorporated business). 

In the estimates Ms. Saunders presents as facts, her experts claim to estimate how the corporate income tax is distributed among households, even though they know they have no proof of the actual incidence of the corporate tax. If the corporate tax reduces capital formation, for example, then the relative scarcity of capital would raise pretax returns to capitalists while reducing productivity and real wages. 

Those squeamish about watching sausage being made should not look closely at how distribution estimates are concocted. 

A suspicious hint (from the Wall Street Journal graph) is that the Top 1% are defined as those earning more than $699,000 in 2017. By contrast, the Top 1% in the famed Piketty and Saez estimates started at $442,900 in 2015. The $699,000 figure is 24% larger than TPCs estimate of Adjusted Gross Income needed in 2017 to be among the Top 1%. That huge difference is because the TPC has lately opted to compare taxes with a big stew called Expanded Cash Income (ECI). 

The main reason TPC estimates of “Expanded” Top 1% income are 24% larger than AGI is that the TPC assumes that 60% of the corporate tax is borne by owners of capital. Before 2012 they assumed 100% was borne by capital. It’s all quite hypothetical and arbitrary:

“We define ECI to be adjusted gross income (AGI) plus: above-the-line adjustments (e.g., IRA deductions, student loan interest, self-employed health insurance deduction, etc.), employer paid health insurance and other nontaxable fringe benefits, employee and employer contributions to tax deferred retirement savings plans, tax-exempt interest, nontaxable Social Security benefits, nontaxable pension and retirement income, accruals within defined benefit pension plans, inside buildup within defined contribution retirement accounts, cash and cash-like (e.g., SNAP) transfer income, employer’s share of payroll taxes, and imputed corporate income tax liability” [emphasis added].

It takes a lot of “imputation” (heroic guesswork) to assemble this plump sausage. Nobody has credible data on the ever-changing “inside buildup” within private IRA and 401(k) plans, or how all that unseen wealth is distributed among constantly changing annual income groups. 

Nobody knows how to “impute corporate income tax liability” and the related corporate income to income groups either.

Since TPC claims 60% or 100% of the corporate tax is born by domestic (not foreign) owners of capital, this assumption invites them to add most corporate profits to the pretax incomes of the Top 1%. To do that, TPC (and CBO) examine shares of capital income reported on income tax forms to infer that most capital must be owned by the Top 1%. Emmanuel Saez and Gabriel Zucman made a similar mistake when basing wealth estimates on individual income tax returns.

The trouble is that most middle-income Americans keep trillions of dollars in tax-free retirement accounts, which means taxable investment income reported on their tax returns tell us absolutely nothing about what assets they own. As Tax Foundation economist Alan Cole noted, “Much capital income—especially capital income in tax-free middle-class retirement accounts—goes uncounted in income data, heavily distorting the measurement and making people appear poorer than they are. Thomas Piketty’s income inequality data leaves out $19 trillion of pension assets, which are yet to be attributed to any individual.” 

Another big problem is that the expensing of business investment and deep cuts in business tax rates are sure to have huge dynamic effects on investment and economic growth, yet “by convention, TPC distributes only the static impacts of tax changes.” An OECD study finds “lowering statutory corporate tax rates can lead to particularly large productivity gains in firms that are dynamic and profitable, i.e. those that can make the largest contribution to GDP growth.” It makes no sense to talk about who benefits from lower tax rates without including workers who benefit from “large productivity gains.”

Even the static distribution is another arbitrary guess. “Although firms pay the corporate income tax, the economic incidence of the tax falls on individuals. TPC’s tax model therefore distributes the burden of the tax to individuals. The incidence of the corporate tax, however, is an unsettled theoretical issue. The tax could be borne by the owners of corporate stock, or passed on in part to labor in the form of lower real wages, to consumers in the form of higher prices, or to the owners of some or all capital in the form of lower real rates of return.” 

The TPC static estimate of the Trump tax cut is twice as large for corporations as it is for individuals, yet their allocation of the corporate tax is (1) completely static “by convention,” and (2) completely erroneous in using shares of taxable capital income as a proxy for wealth, and (3) completely arbitrary in assuming corporate taxes are mostly born by capital. For such reasons, the TPC distribution estimates cannot be credibly cited to “prove” Trump or House Republican tax plans are too generous to those who pay the most taxes or too stingy to those who pay the least. 

The truth is these “experts” simply do not know who will benefit most from a low corporate rate. What they do know, or should, is that a low corporate tax cut will greatly improve the growth of jobs and real wages for many ordinary Americans. Unfortunately, their static methodology stubbornly refuses to take that into account.