OK, this analysis from Steven M. Rosenthal at the Tax Policy Center is revelatory. It makes a simple point, but one everyone — myself included — somehow missed: the Trump tax plan is a huge giveaway to foreigners. Among other things, this means that the tax plan almost certainly reduces U.S. welfare even if you ignore distributional issues. This observation should transform discussion of the whole issue, at least among economists, although my cynical guess is that Republican-leaning academics will ignore it.

Some of what follows is wonkish, but I’ve left off the label because the basic point doesn’t require the technical analysis.

So here goes: the core of the Trump tax plan, to the extent we know what’s in it, is a huge cut in corporate taxes — about $2 trillion over the next year 10 years, according to TPC’s best estimates. The administration would like you to believe that all of that tax cut will be passed on to higher wages, but this is overwhelmingly unlikely, especially in the short to medium run. In fact, the bulk of that tax cut will almost surely accrue to stockholders.

And now Rosenthal’s point: unlike the situation in previous tax reforms, we now live in a world where investment holdings are diversified across countries. Specifically, around 35 percent of U.S. equity is owned by foreign residents. So of that $2 trillion windfall, $700 billion goes to foreigners. Make non-US investors great again!

Note that you can’t wave this away by insisting that international investment considerations are somehow secondary — supposed effects on global capital flows are the whole administration rationale for the tax cut! Nor can you say that you only care about global welfare, not U.S. parochial issues — not under an administration that has adopted America First as its slogan.

So this is, or certainly should be, a very big deal.

Now for the moderately wonkish part.

I continue to find a simple MPK diagram the clearest way to think about these issues. So Figure 1 is a slightly modified version of the diagrams I’ve been using in previous posts. MPK is the marginal product of capital, r the pre-tax rate of return, declining in the capital stock K because of diminishing returns. I ignore monopoly profits. I assume that t is the rate of profit taxation, with r(1-t) therefore the after-tax rate of return. I make no assumptions about global rates of return, except to assume that in the relevant time horizon there’s no reason to expect enough capital inflows to equalize such rates.

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So Figure 1 shows what is, in effect, the conventional analysis. Suppose we cut the corporate tax rate. This will bring in some additional capital from abroad, but not enough, in practice, to keep the after-tax rate of return from rising. So there will be a direct revenue loss, some (although probably not much) being passed on to workers, but the rest showing up in higher corporate after-tax profits.

On the other hand, there will some inflow of foreign capital, and this new capital will pay taxes. These additional taxes represent an addition to overall U.S. national income, so that if you ignore distributional issues, the U.S. achieves a net gain.

But as Rosenthal points out, this misses an essential point of the situation: a lot — around 35 percent — of U.S. corporate profits actually accrue to foreign owners. This wouldn’t matter if all of the corporate tax cut were passed on to workers, but most of it won’t be, and the higher after-tax profits on foreign investments will — as shown in Figure 2 — be a windfall to foreign investors. And it’s one heck of a windfall: $700 billion over a decade.

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What this means, as I said, is that unless a lot of tax-paying capital comes in, the overall effect will be to make the U.S. as a whole poorer — even ignoring the fact that we’re cutting taxes for wealthy investors and will have to offset by, say, taking health care away from the poor.

Is it harsh to call the Trump tax plan a $700 billion foreign aid program? Yes. But it’s also completely fair.