Must- and Should-Reads:
Might Like to Be Aware of:
Must-Read: : Why Is so Much Wealth hidden? Failed Democracy: “It’s worth noting that few economists would support the existence or proliferation of tax havens…
… [which] impair both efficiency and equity. Zucman proposes… first and foremost, to create a public database of the ownership of registered securities… straightforward, but… still radical: the nationalization of quasi-administrative data for the public benefit. We already do that for the property and housing market in the United States…. Doing the same for financial wealth is straightforward, but it would challenge the interests of an even wealthier demographic…. Zucman further proposes to move to a global apportionment system for corporate taxation…. If the economics is so clearly against tax havens and the policy solutions are straightforward, then how did we get to where we are? The answer is not that a few villainous, self-serving countries act as parasites…. U.S. policymakers tacitly encourage the proliferation of tax havens…. Even now, Congress is debating a ‘Repatriation Holiday’….
Moving beyond tax havens in particular, the ideological justification for low and falling rates of taxation on capital is the Chamley-Judd Theorem, which ‘proves’ that the optimal tax rate on capital is zero in the long run…. The intellectual influence of the theorem has been strong…. Policymakers [tend] to be too credulous about formal ‘optimal policy’ results in theoretical economics. But the worse tendency is to enshrine those theoretical results in the policymaking apparatus at the expense of democratic control…. Subverting democratic control of economic policy is a big reason why inequality has gotten so high across the developed world…
Must-Read: I have long thought that both Forbes and the Wall Street Journal have in mind as their target audiences that small segment of the human race that actually enjoys being free-riders, rather than that much larger segment of the human race that wants to engage in win-win reciprocal gift-exchange as a mode of social interaction…
: The Moral Universe of the Corporate Killers: “Daniel Fisher… writes for Forbes… hates plaintiffs’ lawyers…
…his first reaction to the VW emissions-cheating scandal was to criticize–not VW–but a class-action law firm threatening to sue VW on behalf of consumers. His point is that the buyers… weren’t in any direct sense harmed by VW’s fraud…. Therefore, the plaintiffs’ lawyers are being silly again. Tort reform, tort reform, sis, boom, bah!… Of course an individual car buyer isn’t directly harmed by driving a car that pollutes a lot, unless that buyer is burdened with a conscience ….
VW managers [have] committed a rather horrible set of crimes…. Fisher offers an ignorant sneer about the health effects of what VW did: “The Volkswagen defeat software is hardly deadly, unless one thinks the marginal nitrogen oxide it allowed into the atmosphere was enough to kill innocent bystanders.” Well, actually, “deadly” is precisely the correct word. Increasing NOx increases particulate emissions, and particulates kill…. Somewhere between 50 and 150 deaths per year (times six years) seems like a good first approximation, well above any single mass-murder incident in the U.S. save 9/11…
Must-Read: Let me underscore this: economists–especially economists who work for the Federal Reserve system–seem to strongly believe, unless they have themselves tried to estimate Phillips Curves, all three of:
The slope of the Phillips Curve is a lot higher than actual statistical estimates suggest–unless you put your thumb on the scale and pick the single specification that generates the highest slope estimate.
The gearing between recent past inflation and the expected-inflation measure that best forecasts is a lot higher than actual statistical estimates suggest–unless, once again, you put your thumb on the scale and pick the single specification that generates the highest slope estimate.
The confidence intervals of parameters are a lot smaller than actual statistical estimates suggest.
Thus rising inflation in 2017 is a very real thing to the Federal Reserve system–but not to those outside the Federal Reserve who are working with the numbers without having as their goal finding a specification that generates such a forecast…
: Economics: What Went Right: “One piece of the conventional story hasn’t worked that well…
…namely the Phillips curve, where the ‘clockwise spirals’ of previous protracted large output gaps haven’t materialized. Maybe it’s about what happens at very low inflation rates. What’s notable about the Fed’s urge to raise rates, however, is that Fed officials, including Janet Yellen, are acting as if they have high confidence in their models of inflation dynamics –which is the one thing we really haven’t done well at recently. I really fear that we’re looking at incestuous amplification here.
Must-Read: I sometimes wonder: would Matthew Yglesias be a better economist and moral philosopher now if he had been an Economics rather than a Philosophy major at Harvard College? If the answer is–as I think it is–“no”, then some people have a lot of ‘splainin to do…
: Thoughtful opponents of the welfare state have generally avoided making the argument that capitalism is good because it promotes human well-being…
…Since capitalism does promote human well-being, ‘capitalism promotes human well-being’ sounds like a good argument in its favor. But it turns out that capitalism plus a large welfare state promotes human well-being even more. So you either need to embrace the welfare state (the correct answer) or come up with another justification of capitalism. One that frequently arises is what Greg Mankiw has referred to as the ‘just deserts’ perspective in which ‘people should receive compensation congruent with their contributions’ and we should aim for a society in which public policy ought to ensure that ‘every individual would earn the value of his or her own marginal product.’ So if… you are blind and… [thus find] hard for you to earn a living in an unregulated market that’s too bad for you… your ability to contribute… is limited… [so] it is morally appropriate that your living standards be limited as well…. If… genetics and childhood living conditions have left you with an IQ… 2 standard deviations below average… you deserve to have a much lower standard of living than [if] society… were willing to do… redistribution.
Mankiw’s moralized capitalism seems bone-chilling to me, but I don’t really think I can prove him wrong…. Mankiwism isn’t a Christian worldview. Jesus didn’t preach ‘blessed are those with high marginal products, for they shall inherit incomes proportionate to their contributions.’ The practical benefits of capitalism are something that maybe a Christian should care about, but the practical benefits of capitalism-plus-welfare-state are bigger. To justify the tax-cutter policy agenda, you need some thicker ethical theory, and it ends up being a distinctly non-Christian one.
J. Bradford DeLong and Michael M. DeLong
Over at Project Syndicate: Pay attention to U.C. Berkeley’s newly-hired Gabriel Zucman, author of the just-released The Hidden Wealth of Nations: The Scourge of Tax Havens (Chicago: University of Chicago Press) http://amzn.to/1KziL29.
His figures are the hardest figures about tax havens–Switzerland, Bermuda, the Cayman Islands, Singapore, Luxembourg, and so forth–and about the quantity of money stored in them that we are likely to get. His estimate? 8% of the world’s financial wealth. $7.6 trillion. That is more wealth than is owned by the poorer half of the world. And this is money that is not in the tax base, but should be in the tax base–and would be if we had sufficient international tax harmonization to close off loopholes that allow for (legal) tax avoidance and sufficient cooperation and enforcement to make (illegal) tax evasion not worth the risk. READ MOAR
Zucman’s estimates are largely based on discrepancies in the international accounts we have. He is undertaking the hazardous leap of assuming that what are usually classified as “errors and omissions” have meaning. So how solid are his estimates? The Swiss Central Ban reports that $2.4 trillion in funds are held by foreigners in Swiss banks. Switzerland is the jurisdiction that has made living as a tax haven for the longest period of time, but it is not the most advantageous place for a plutocrat to park money. Thus we can be confident that $7.6 trillion is in the ballpark.
The North Atlantic has no chance of using national governments’ taxing powers to preserve social democracy and offset the great upward leaps in income and wealth inequality that have afflicted it over the past generation and continue to afflict it if its governments cannot tax. Emerging markets have no chance of instituting the progressive taxes needed to fund social democracy if they cannot find their plutocrats’ money. Tax havens are right now a small problem for a center or a left-of-center government in North America. They are a significant problem for Europe. But they are an enormous problem for the Middle East, for Russia, and for China. Or perhaps they are not a problem for these last three but an opportunity? To the extent that the executive of the modern state is little but a committee for managing the affairs of the ruling class, international tax havens are not a bug but a feature.
And even in the United States it is the case that too often in the past generation policy details have been deliberately constructed to enable rather than to discourage tax avoidance via tax havens. In the words of one former Bush 43 senior staffer: “it is, ultimately, about freedom”. This is a big chunk of the 1/3 fall in the effective reach of the U.S. corporate income tax since the late 1990s.
A century ago, when the First Gilded Age was at its height, noted American Progressive Louis Brandeis famously said that “sunlight is the best disinfectant”. Thus the creation of transparency is the first task–Zucman favors a single global registry, a publicly-accessible database of the ownership of financial instruments. If that is the first step, the shifting of the corporate tax base from profits reported to have been earned in a country to sales made in a country is the second. The point would still be to tax corporate profits–it does nobody any good to tax corporations that are truly losing money. But opportunities for tax havens would be greatly reduced if profits were apportioned among countries by the share of wages and of sales made in a country. As Zucman stresses, a corporation can move its legal headquarters and transfer-price its internal transactions, but it has a much much harder task in moving its employees across national borders, and it cannot move its customers.
It is fashionable to say that nothing can be done–that national sovereignty is too strong a meme, and that today’s plutocrats have too much political power both over elected politicians and even more so over appointed civil servants who expect someday not too far distant to go through the revolving door. It is fashionable to recall that, more than a century ago, then-Governor Woodrow Wilson of New Jersey convinced his legislature to get New Jersey out of the corporate-haven business. And America’s corporations picked up their legal headquarters and moved next door to Delaware.
Those who say that international policy coordination is impossible are always right–until, someday, things change and they are wrong. Why, right now it looks as though international policy coordination is very possible when it comes to ISDS: investor-state dispute settlement. But if we do not get the transparency and prepare the ground for formula apportionment now, someday the opportunities to make the taxation of our Second Gilded Age’s global plutocracy genuinely progressive when those opportunities will be at hand, yet we will fail to grasp them.
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Must-Read: I think that Simon Wren-Lewis is not nearly hard enough on Britain’s austerians here–if the Bank of England was indeed confident in the power of unconventional monetary policy, it was so without warrant. Elementary benefit-cost considerations strongly argued for waiting until a strong recovery was well-established before attempting to tackle not the desirable short-term deficit but the long-term funding challenges of the social insurance state:
: The Path from Deficit Concern to Deficit Deceit: “I have always written that the arguments in 2010 for focusing fiscal policy on reducing debt were understandable…
…They were wrong, but you could understand why reasonable people might make those arguments…. The problem of the recession appeared to be over, recovery was under way, and the Bank of England seemed confident in the power of unconventional monetary policy. It seemed reasonable to move attention to the deficit. So when 20 economists and policy makers wrote in February 2010 apparently supporting George Osborne’s deficit reduction plans, I was not surprised. The majority… disagreed, and we were right, but I could understand…. One of those signing that letter was Lord Turnbull…. By August 2012 around half of those that signed the letter had the good sense and honesty to backtrack….
[When the] Chancellor… was re-elected in May, it was for a programme of renewed austerity…. Lord Turnbull had the opportunity to question the Chancellor….
I think what you are doing actually, is, the real argument is you want a smaller state and there are good arguments for that and some people don’t agree but you don’t tell people you are doing that. What you tell people is this story about the impoverishment of debt which is a smokescreen. The urgency of reducing debt, the extent, I just can’t see the justification for it.
A former head of the civil service, who had initially supported Osborne on the deficit, was now accusing him of deliberate deceit. Big news you might have thought. And quite a turnaround in just 5 years…. Either Osborne is just stupid and cannot take advice, or he has other motives. George Osborne is clearly not stupid, which leaves only the second possibility. It is therefore entirely logical that Lord Turnbull should come to agree with what some of us were saying some time ago. What a strange world we are now in. The government goes for rapid deficit reduction as a smokescreen for reducing the size of the state. No less than a former cabinet secretary accuses the Chancellor of this deceit. Yet when a Labour leadership contender adopts an anti-austerity policy he is told it is extreme and committing electoral suicide. Is it any wonder that a quarter of a million Labour party members voted for change?
Conversations about business taxation in the United States usually center on the corporate income tax. For a long time, this intellectual shortcut made a good amount of sense, as traditional corporations that paid the corporate income tax earned the vast majority of business income. If you wanted to try to tax the capital flowing through businesses then you’d want to focus most of your attention on the corporate side.
But that doesn’t seem to be the case anymore. A new working paper by economists at the U.S. Treasury Department, the University of California-Berkeley, and the University of Chicago Booth School of Business uses administrative tax data to show that the majority of business income is now earned by companies set up as “pass-throughs,” such as partnerships. (With pass-through entities, income taxes aren’t paid at the business level—the income “passes through” the business to the owners’ individual tax returns.)
This new information on the rise of the pass-through sector should help shape our thinking about how business income contributes to income inequality in the United States, and how we tax businesses.
The paper’s authors have access to tax data at the Treasury Department for 2011 that lets them match pass-through entities with their respective owners. Again, this is important because pass-through entities themselves aren’t taxed; the income they earn is taxed as the income of the business owners. Take, for example, a law partnership. The profits from the partnership are dispersed to the different partners and the income is taxed once it shows up as income for the individual partner.
The new research reveals a number of new facts about business income in the United States. First, the share of business income going through pass-throughs has risen dramatically—from about 21 percent of business income in 1980 to 54 percent in 2011. Why is this shift significant? For starters, income earned in the pass-through sectors is much more unequally distributed than income in other business sectors. Sixty-nine percent of all income earned in pass-through companies goes to taxpayers in the top 1 percent, while only 45 percent of income from classic corporations goes to the top 1 percent. When it comes to partnerships, a sub-segment of pass-throughs, the majority of income earned by the top 1 percent is from partnerships in finance and professional services.
Not only are these incomes more unequal, they are also taxed less. According to the authors’ estimates, the average income tax rate for partnerships in 2011 was 15.9 percent. S corporations, another kind of pass-through business, have an average tax rate of 25 percent. That means the pass-through sectors have an average tax rate of 19.5 percent, compared to the average rate for traditional corporations of 31.6 percent. Combine all those estimates together and you get a total business tax rate of 24.3 percent. (All of these rates are from 2011.) The shift to pass-through entities has pushed this rate down—if the sources of business income were the same as they were in 1986, the overall business tax rate would be about 28 percent.
Partnership income is also quite opaque—the authors couldn’t confidently trace either the source or the ultimate destination of 30 percent of partnership income. The fact that almost a third of this income is hidden in one regard or another is, as the authors note, another sign that we should be concerned about businesses trying to hide business income in order to pay lower taxes.
This trend of more business income going to the pass-through sector should be seen in the light of other shifts among kinds of companies in the U.S. economy. The number of publicly traded companies in the United States peaked in 1998 and continues to decline. Firms are increasingly less likely to go public. Private companies are also opaque. And at the same time, start-up rates for businesses are declining, businesses are becoming larger, and workers increasingly work for those large companies.
These changes in the business sector shouldn’t be ignored when we’re talking about business taxation or a variety of other policy areas. The implications for the functioning of the U.S. economy, both for economic distribution and growth, look too important to ignore.
Must- and Should-Reads:
Might Like to Be Aware of:
The collapse of housing investment in the U.S. after the bubble pop began in late 2005 was absolutely huge:
By the end of 2007, about $400 billion/year–2.5% of GDP–of spending on residential construction that had been there in 2005 was no longer. Yet the U.S. economy was not in recession. The predominant worries in the councils of the mighty were that the Federal Reserve would do too much to boost spending and so cause inflation rather than too little and cause recession. And the slack created by the collapse in investment in residences had been quickly and smoothly picked up by rising exports and rising business fixed investment.
The lesson? Make sure the pieces of the government–the fiscal-policy authorities, the president and congress at the federal level and their counterparts in the states, plus the monetary-policy authority that is the Federal Reserve–are doing their job. Make sure they use the levers they control to keep aggregate demand humming along at a stable path. Then sector-specific shocks–even huge sector-specific shocks–are not a big deal for the economy as a whole.
That, at least, is the lesson I draw from 2005-2007. As long as aggregate demand is properly managed, a decentralized market economy is a wonderfully flexible thing. It can and does adjust swiftly to even big sectoral shocks. Shifts in the flow of demand rapidly pull resources out of now-unproductive and into newly-productive uses. As John Maynard Keynes wrote back in 1936:
The State will have to exercise a guiding influence… partly through its scheme of taxation, partly by fixing the rate of interest, and partly, perhaps, in other ways…. [But] if the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary…. Our criticism of the accepted classical theory of economics has [thus] consisted not so much in finding logical flaws in its analysis as in pointing out that its tacit assumptions are seldom or never satisfied…. But…[with] an aggregate volume of output corresponding to full employment as nearly as is practicable, the classical theory comes into its own again…. There is no objection to be raised against the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed… no objection to be raised against the modern classical theory as to the degree of consilience between private and public advantage…. Thus I agree with Gesell that the result of filling in the gaps in the classical theory is not to dispose of the ‘Manchester System’, but to indicate the nature of the environment which the free play of economic forces requires if it is to realise the full potentialities of production…
Yet, writing from the Earthly Paradise that is San Diego, CA, the very sharp Jim Hamilton disagrees:
: Economic importance of China: “How important would an economic downturn in China be for the United States?…
…Paul Krugman reviews… reasons why… [we] shouldn’t worry too much…. I’ve long believed that to understand business cycles we need to consider not just net flows but also gross interdependencies…. While China may only account for 15% of world GDP, it has been a huge factor in commodity markets… 55% of the increase in global petroleum consumption between 2005 and 2013…. Arezki and Matsumoto note that China now accounts for about half of global consumption of iron ore, aluminum, copper, and nickel…. U.S. exports of goods and services to China… [are] only about 1% of U.S. GDP. But U.S. investment in mining structures (explorations, shafts, and wells) amounted to $146B at an annual rate in 2014:Q4. By the second quarter of this year that number was down to $89B, largely a result of cutbacks in the U.S. oil patch…. This development alone has already subtracted about 0.3% from U.S. GDP…. Another concern comes from financial linkages…. I don’t know what the ultimate implications for the U.S. of a significant recession in China would be. But things I don’t know cause me to worry.
If we take the current shock to oil-patch investment of 0.3% of GDP to be half the shock from China, right now the shock from China is one-quarter of the 2005-2007 shock from the housing market that the U.S. economy was adjusting to and shrugging off without much difficulty until the financial crisis began the collapse of Wall Street. Thus, IMHO, the major lesson of 2005-7 is that for the macroeconomy it is finance and only finance–plus the ability of the government to react properly and in a timely fashion–that matters. A sectoral shock one-quarter as large as 2005-7, or indeed one-sixth as large as 1999-2001, ought not to matter much at all.