James Pethokoukis

Politics and policy from inside Washington

No April Fools’ joke, U.S. now world’s highest corporate taxer

Apr 1, 2011 01:41 UTC

If only it were an April Fools’ Day prank. With Japan officially cutting its corporate tax rate as of today, America now has the highest rate among advanced economies. Even its effective tax rate is way above average despite the likes of General Electric spending billions to game the labyrinthine code. A smarter approach would be to substitute a business consumption tax.

Now the United States might cling to second place if Japan cancels the rate reduction to help pay for the tsunami and earthquake devastation. After factoring in state taxes, America’s top rate of 40 percent would still exceed the average of 26 percent for the rest of the OECD.

Headline rates, of course, are like sticker prices on new cars. The real numbers are lower, thanks in part to the $40 billion companies spend annually to comply with, and often sidestep, the maximum levy. GE, for example, has taken heat for consistently paying less than what the U.S. tax code would imply it should.

But even taking into account the efforts of attorneys and lobbyists, the average effective U.S. rate in 2010 was 29 percent against 21 percent for international counterparts, according to the  American Enterprise Institute. And before the recession, corporate tax revenue as a share of U.S. GDP was at its highest since the 1970s.

Politicians of all stripes have been talking about lowering corporate taxes and eliminating loopholes to pay for a sharp rate reduction.  A sharply lower rate —  Canada’s will be just 15 percent in January 2012 — would boost worker wages, investment, productivity, jobs and growth. Such reforms, though a big improvement, would still leave in place a flawed and unwieldy structure.

A better alternative might be a consumption tax where business would simply determine its liability by subtracting total purchases from total sales. The tax would then be imposed on what’s left, essentially a firm’s value added. Unlike the corporate income tax, a consumption tax would allow the cost of investments to be fully deducted immedi ately, providing incentives for more. Such a tax also could be imposed on imports and deducted from exports, as other nations currently do with their VATs.

The Tax Policy Center estimates an 8.5 percent consumption tax — by broadening the tax base and boosting output – would boost corporate tax collections as a percentage of GDP to 4.5 percent from the 2.4 percent the White House forecasts for the next few years. (This is the corporate tax plan, by the way, found in Rep. Paul Ryan’s “Roadmap for America’s Future.”) That’s no laughing matter.

Supply-side Pawlenty?

Mar 29, 2011 16:08 UTC

My pal Larry Kudlow had a great chat with Tim Pawlenty last night on CNBC. And he pressed T-Paw hard on a lack, so far, of a detailed pro-growth agenda:

KUDLOW: Reagan had flatter tax rate reforms. … Let’s have new incentives.  Let’s stop the double tax on capital gains and dividends and estates and savings and investment. Where are the business tax cuts? We need specifics governor. You’ll turn people on with specific growth measures but you don’t have them yet.

PAWLENTY:  Larry, I think have been in the race for all of three business days now. Nonetheless, I agree with what you said. I’ve talked publicly and repeatedly … whether it’s corporate rates, whether it’s individual rates, whether it’s dividends, whether it’s capital gains, whether it’s the death tax, whether it’s capital equipment … we need to take all of those rates and reduce them as far as we can. We need to simplify the tax code, make it pro-growth, make it more transparent and make it friendlier for investment and the deployment of capital.

And then Larry asked him if he was in favor of a 15-17% flat tax. Pawlenty’s response: “Of course, I support a flatter tax rate. I don’t know if we can get to a flat tax in one leap, but moving in a flatter more transparent direction, absolutely.”

Me:  By not pushing bold reform on taxes from the outset, Pawlenty is in danger of negotiating against himself. Now is the time for big ideas. Beyond that, Pawlenty did talk coherently about a strong dollar — maybe creating some sort of commodity link — and applying Six Sigma to the federal government, which is an intriguing notion.

It’s still early, but it seems to me that with current and potential  GOP 2012 candidate all saying kind of the same thing about Obamacare and debt, taxes are a way for Pawlenty to distinguish himself. He’s not going to overwhelm people with his personality, so why not do it with bold ideas, as Kudlow suggests?

Obama fails ‘Nixon to China’ budget moment

Mar 29, 2011 15:25 UTC

President Barack Obama should get in a New York state of mind. Over the weekend, Andrew Cuomo, the Democratic governor of the Empire State, struck a deal to balance the budget without major tax increases – and five days ahead of deadline. It’s the latest example of how left-of-center politicians, often considered profligate, are better sometimes placed than conservatives to cut spending. Obama is missing a “Nixon to China” moment on dealing with America’s dangerous budget deficit. Consider the following:

1) During the rare times when lawmakers attempt a measure of fiscal responsibility, liberals, generally speaking, prefer to close deficits by raising taxes while conservatives favor reducing spending. But when the spenders do the trimming, it can provide greater confidence to interest groups and voters that the cuts are rational and reasonable. And budget-minded liberal leaders can keep their free-spending legislative allies in check.

2) The phenomenon is global. Starting in 1984, New Zealand’s Labour party slashed the government’s share of GDP by 40 percent over the course of a decade. From the mid-1990s through the mid-2000s, Canada’s Liberals cut federal spending by a third, helping reduce the nation’s debt load from 68 percent of output to 39 percent. Around the same time, Bill Clinton, a Democrat, reached an agreement with congressional Republicans to balance the U.S budget for the first time since 1969.

3) Cuomo could have followed his party’s playbook. In Illinois, Governor Pat Quinn, a Democrat, rammed through dramatic increases in individual and corporate tax rates. Instead, Cuomo opted to eliminate a $10 billion shortfall with a 2 percent spending cut. He may have been worried about his chances for 2016 presidential nomination, but the state’s competitiveness also will have been a consideration.

4) Obama’s decisive moment was last December when his debt commission released its austerity recommendations. But the president has neither embraced that agenda nor given support to a bipartisan group of senators pushing the panel’s plan. Without Obama’s explicit backing, Capitol Hill Democrats will almost certainly kill the effort because it slashes entitlement spending.

When House Republicans come out with their 2012 budget in the coming days, the president may have his final chance to push a comprehensive fiscal reform plan. If Obama’s not careful, it could pass him by in a New York minute.


…which study after study shows brings a return on investment into the economy — unemployment compensation, for instance, injects $1.65 into the economy for every $1.00 of unemployment compensation paid out…

Well now there’s a sure-fire cure for the US economy! Fire EVERYBODY and put ‘em on unemployment – that’ll grow the economy 65%. Just like that!

Posted by Elektrobahn | Report as abusive

Would Tim Pawlenty be America’s Six Sigma president?

Mar 28, 2011 19:04 UTC

Much more of this, please:

Six Sigma dates back to 1986, when a Motorola engineer created the methodology to boost productivity and quality with as few errors in production as possible — fewer than 3.4 defects for every 1 million attempts, to be exact. The result was data-driven program that systematically measures, defines and analyzes all aspects of a business. Its name derives from a statistical term that calculates how far a process deviates from perfection.

Pawlenty was first introduced to Six Sigma during his tenure as governor. In 2003, the new commissioner of the Minnesota Pollution Control Agency brought in Six Sigma to train her staff. At the time, agency was only issuing about 9 percent of its permits every six months. But with Black Belts and Green Belts from Six Sigma on board, the agency greatly accelerated its work and began issuing 70 percent of the permits within that time frame — all without layoffs or relaxing environmental standards.

Pawlenty admitted he hasn’t taken the Six Sigma Six Sigma dates back to 1986, when a Motorola engineer created the methodology to boost productivity and quality with as few errors in production as possible — fewer than 3.4 defects for every 1 million attempts, to be exact. The result was data-driven program that systematically measures, defines and analyzes all aspects of a business. Its name derives from a statistical term that calculates how far a process deviates from perfection.

I repeat, voters would be more willing to accept cuts to favored programs if they felt government operated a bit more like FedEx or Wal-Mart.

How big a budget fight?

Mar 28, 2011 18:19 UTC

I partially agree with Philip Klein of the Washington Examiner:

As everybody who studies the federal budget knows, the true drivers of our long-term debt are entitlement programs. Under President Obama’s proposed budget, so-called “mandatory spending” on programs including Social Security, Medicare and Medicaid would approach $3.5 trillion by 2021, according to the Congressional Budget Office, representing roughly 60 percent of that year’s federal spending.

So the question facing conservative activists is whether to focus all their energies on the short-time budget fight that deals with $61 billion in cuts over the next several months, or place more emphasis the next fight that could affect spending for decades to come.

There’s nothing wrong with making gradual-but-sustained progress on an issue.  But don’t underestimate the important of cutting discretionary spending. If such spending were rolled back to 2008 levels, frozen for a decade and then allowed to increase at 3 percent a year, the long-term savings would be equal to long-term Social Security deficit.

The economics of small classroom size

Mar 28, 2011 18:11 UTC

A charter school boss runs the numbers (via the WaPo):

At Harlem Success Academy Charter School, where we’ve gotten some of the best results in New York City, some classes are comparatively large because we believe our money is better spent elsewhere. In fifth grade, for example, every student gets a laptop and a Kindle with immediate access to an essentially unlimited supply of e-books. Every classroom has a Smart Board, a modern blackboard that is a touch-screen computer with high-speed Internet access. Every teacher has a laptop, video camera, access to a catalogue of lesson plans and videotaped lessons.

Outfitting a classroom this way costs about $40,000, or $13,500 amortized over three years. That’s how much New York charter schools receive per pupil annually, so we can afford this by just increasing class size by a single student. .. In other words, a 19th-century school can be transformed into a well-managed 21st-century school by adding just two students per classroom. Reducing class size is expensive because most costs vary with class size. Decrease a class from 25 to 24 students and you need to hire 4 percent more teachers as well as build and maintain 4 percent more buildings.

Obsession with class size is causing many public schools to look like relics. We spend so much to employ lots of teachers that there isn’t enough left to help these teachers be effective. According to the city’s education department, New York public schools spend on average less than 3 percent of their budgets on instructional supplies and equipment (1 percent), textbooks (0.6 percent), library books and librarians (0.5 percent), and computer support (0.5 percent). Basic supplies are rationed in absurd ways: A school will pay $5 million in salaries to teachers who end up wasting time writing on blackboards because the school has run out of paper that costs a penny a page. (Don’t believe me? Ask a teacher.)

Also, class sizes would not need to be as small if teachers were better trained in classroom management skills. Here is a bit from a must-read NYTimes magazine piece on the topic:

By figuring out what makes the great teachers great, and passing that on to the mass of teachers in the middle, he said, “we could ensure that the average classroom tomorrow was seeing the types of gains that the top quarter of our classrooms see today.” He has made a guess about the effect that change would have. “We could close the gap between the United States and Japan on these international tests within two years.”


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Extra Fed transparency might keep Congress at bay

Mar 24, 2011 21:14 UTC

By James Pethokoukis
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

WASHINGTON — Federal Reserve Chairman Ben Bernanke must know the unprecedented quarterly media briefings he is starting won’t hurt the central bank’s effectiveness. After all, Jean-Claude Trichet, president of the European Central Bank, gives one after each of his group’s monthly meetings. A bit more openness by the U.S. central bank might even help dissuade Congress from trying to exert more influence over monetary policy.

Whatever Bernanke’s ability to read economic tea leaves, he certainly has a grasp on political ones. The bank’s historic interventions into the U.S. economy have put its independence at risk as never before. A recent Bloomberg poll found that only 37 percent of Americans favored leaving the Fed alone compared to 39 percent who think it should be more accountable to Congress — and 16 percent who want the central bank abolished.

Perhaps reflecting public unease — while also seeking to boost its own power — Congress has been trying to chip away at Fed independence. Democrats have suggested removing regional Fed bank presidents from the policymaking Federal Open Market Committee, considering them too hawkish on inflation. And some Republicans want to give Congress vast new discretion to audit Fed activities.

Other members of the GOP want to alter the central bank’s dual mandate to maximize employment and restrain prices and have it focus exclusively on inflation. And just this week the U.S. Supreme Court ruled that the Fed must disclose details about its 2008 emergency lending program.

The court loss may have been a blessing in disguise. Combining great power and secrecy fosters the sort of public distrust that can inspire further meddling. As it is, Bernanke had already moved to open up the Fed a little by having it issue forecasts and publish meeting minutes more frequently.

Regular Q&A sessions with Fed beat reporters were a logical next step. A recent internal study at the central bank found that while more sunlight doesn’t necessarily help central banks in advanced economies, it doesn’t hurt them, either.

The Fed’s next big task will be to withdraw monetary stimulus despite a U.S. economy where unemployment is likely to be high and growth sluggish. Bernanke will need all the public forums he can to explain just how that will work.

Walking on the supply-side

Mar 23, 2011 20:09 UTC

One of my favorite blogs, The Supply Side, has a great round-up of an NY conference supply-side economics:

Regarding substance, here are a few notes:

Lindsey predicted the end of fiat money by the end of the decade. He also observed that congressional Democrats lost the House because they lost seniors. He believes Nancy Pelosi plans to win them back in 2012 by aggressively attacking GOP proposals to cut entitlement costs.

Kudlow disputed that the budget deficit represents a “red menace” (Indiana Gov. Mitch Daniels’ description), arguing slow growth was the bigger threat. He noted that one can almost plot the rise of American power in recent decades with gold coming down, and its decline with gold’s rise.

Lehrman explained that the U.S. will never get fiscal deficits under control without monetary reform through a convertible dollar, because the world sells us its goods, then uses the dollars buy up our debt.

Laffer was typically optimistic, saying supply-siders are still winning the tax cut argument and that the rate of growth over the next three decades will exceed the 1980s and ‘90s.

Prof. Mundell argued the route to stronger U.S. growth is making the Bush tax cuts permanent and cutting the corporate tax rate to 15 percent. Explaining his view that exchange rates – set by the U.S. Treasury not the Federal Reserve – transmit inflation and deflation to the domestic economy, he suggested the biggest threat to recovery isn’t inflation but a significant rise in the dollar against the euro later this year. Such a rise would cut off the already-weak expansion and magnify America’s debt crisis.

White House confusion on corporate tax holiday

Mar 23, 2011 19:18 UTC

The White House perhaps rightly worries, via a Treasury blog posting, that a tax amnesty for U.S. companies repatriating profit might distract from broader reform. (House GOP Majority Leader Eric Cantor recently came out for the idea.)  But its economic objection to the idea is confused.

As things stand, there’s an incentive for companies to stash cash overseas, because bringing it back triggers a U.S. tax rate of up to 35 percent, depending on the level of local taxes already paid. A big but temporary reduction could see a lot of cash returning to the domestic economy — especially in the technology and drugs sectors.

Treasury notes, though, that this might result in very little direct new investment or job creation. When such a holiday was last tried in 2004, tax data show that 843 companies brought back nearly $400 billion. But for every dollar returned, about 91 cents went toward share buybacks with another eight cents toward boosting dividends, according to research from economists at the University of Connecticut and the National Bureau of Economic Research.

Meanwhile, President Barack Obama and others want to reform corporate taxes more broadly. A reduction in America’s fairly high headline tax rate would most likely come with the elimination of some tax breaks beloved of companies. With limited political capital available — his own congressional Democrats don’t want to cut rates or provide a tax holiday — Obama may need to focus on this more lasting change. Moreover, if company bosses are given reason to believe they’ll get an amnesty every few years, they might lobby harder to keep their favorite tax breaks, thereby derailing reform.

If the political calculation is slightly negative, though, the economic one tips the other way. Treasury is stretching a point in assuming the government would somehow lose revenue by taxing repatriated income at a sharply lower rate. In reality, without the reduction most of the money will remain offshore.

And even if all the cash returning to the United States went to companies’ shareholders, that could still generate more consumption, growth and jobs, a knock-on effect Treasury ignores. Yet this so-called wealth effect is explicitly part of the rationale behind the Fed’s second round of quantitative easing. Some economists dispute the linkages, but not the ones that work for Obama. So despite some political risks, it might be time go on holiday — as long Washington also continues the work of reform.


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Rand Paul and the 2012 Republican presidential nomination

Mar 23, 2011 19:01 UTC

Steve Kornacki of Slate makes the case:

Rand Paul was in South Carolina on Monday and will soon make appearances in Iowa and New Hampshire. On Monday he told reporters that “the only decision I’ve made is I won’t run against my dad. I want the Tea Party to have an influence over who the nominee is in 2012.” An unnamed “Paul family advisor” also told CBS News that “there’s better than a 50/50 chance that there will be a Paul in this race.”

While it’s hard to envision Paul actually winning the GOP nod, improving on his father’s performance in the 2008 primaries seems entirely possible. Ron Paul finished fifth in Iowa with 9 percent and fifth in New Hampshire with 8 percent, then became a media afterthought. Given that he began the campaign with no money, no name recognition and no expectations, this represented a remarkable showing; he ended up beating Rudy Giuliani — the early GOP front-runner — in nearly every state in which they both competed. But it was also something of a disappointment, given the tens of millions of dollars Paul was able to raise and the free media he attracted. The New Hampshire GOP electorate, with its fierce libertarian bent, seemed a particularly promising audience for his message, and his campaign had hoped to break through with a much stronger performance there.

The best-case scenario for Paul would probably be replicating what Pat Buchanan achieved in 1996: a surprisingly strong showing in Iowa (he nabbed 23 percent, good for second place), followed by a startling win (with just 29 percent of the vote) in New Hampshire — at which point a panicked GOP establishment rallied around the strongest non-Buchanan candidate (Bob Dole) and denied him the nomination.

And James Antle of the American Spectator gives his two cents:

The case against Paul running is obvious. The voters in Kentucky just elected him in November. Like Chris Christie, Bobby Jindal, and a host of other recently elected promising Republicans, he should wait until he has accomplished more. For those of us who think a successful Senator Paul could do better than the Buchanan ’96 campaign, a concern might also be that becoming a perennial candidate by running too early could undermine that. It could also hurt his support at home in Kentucky if voters there think he’s only using their Senate seat as a stepping stone to his own ambitions.

The case for Paul running is that he’s simply a better politician than his father and would move the ball farther than either Ron Paul or Gary Johnson could. As a senator, he’d have the luxury of four years to mend fences with Kentucky voters. Paul could bring the constitutionalist message to the forefront of the Republican primary debates without getting sidetracked into theoretical discussions of libertarianism. And a premature presidential campaign in 1968 ultimately didn’t hurt Ronald Reagan.

To me, the biggest thing Paul has going for him is that he is perfectly attuned to the Tea Party GOP. He is actually saying something with a degree of specificity that puts to shame the current crop of GOP presidential contenders. He has, for instance, put forward a 5-year balanced budget. Among its high points:


Brings spending near historical average in very first year

Reduces spending by nearly $4 trillion relative to the President’s budget

Achieves a $19 billion surplus in FY2016

Brings all non-military discretionary spending back to FY2008 levels

Requires the process of entitlement reform, including Social Security and Medicare, with final implementation by FY2016

Does not change Social Security or Medicare benefits

Block-grants Medicaid, SCHIP, foods stamps, and child nutrition

Provides the President’s request for war funding

Reduces military spending 6 percent in FY2012

Eliminates four departments:

Department of Commerce (transfers certain programs)

Department of Education (preserves Pell grants)

Department of Housing and Urban Development

Department of Energy (transfers nuclear research and weapons to Department of Defense)

Repeals Obamacare


Never exceeds $12 trillion in debt held by public

Creates $2.6 trillion less in deficit spending relative to the President’s Budget


Extends all the 2001 and 2003 tax relief

Permanently patches the Alternative minimum tax

Repeals Obamacare taxes


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