Judgement Call http://blogs.reuters.com/judgement-call One the current confusion by Michael Weinstein Fri, 31 May 2013 05:58:17 +0000 en-US hourly 1 http://wordpress.org/?v=4.2.5 The fix for corporate income tax http://blogs.reuters.com/judgement-call/2013/05/31/the-fix-for-corporate-income-tax/ http://blogs.reuters.com/judgement-call/2013/05/31/the-fix-for-corporate-income-tax/#comments Fri, 31 May 2013 05:30:31 +0000 http://blogs.reuters.com/judgement-call/?p=95 Apple CEO Tim Cook (C) , CFO Peter Oppenheimer (L) and head of tax operations Philip Bullock are sworn at a Senate hearing in Washington, May 21, 2013.  REUTERS/Jason Reed

“It’s not fair,” my younger son would rant when, as a 5-year-old, life did not go his way.

I resonated to my son’s childhood dyspepsia as I listened last week to Apple’s chief executive officer, Tim Cook, defend his company’s use of perfectly legal accounting tricks to insulate billions upon billions of dollars of profit from U.S. taxes. His description before Congress of the way Apple skips past a loophole-ridden corporate tax code violated my sense of fair play as well as my populist instinct to go after fat cats.

But now a few days have elapsed. My inner economist has regained control. Yes, the corporate tax code cries out for change. But the right change would involve as many pro-business carrots as it does anti-business sticks.

Here’s a ridiculously smart plan, developed by economists who think about this subject all the time, that would raise some corporate rates but lower others. On balance, the plan would leave us with a simpler tax code that cuts out corporate trickery and encourages new investment.

Message to inner populist: Chill.

Indeed, my inner economist recognizes that there’s a good case to be made for abolishing the corporate income tax entirely rather than wasting time trying to fix it one loophole at a time. For starters, the corporate tax is fiendishly complicated, inviting all manner of gaming. Yet it generates a relatively modest amount of money: Only about $250 billion a year, in contrast to the $2 trillion that individuals pay in taxes.

Just because a tax labeled “corporate” might be assumed to go after rich shareholders does not mean it does. Economists have never been sure who bears the burden of this tax: shareholders who are forced to accept less profit; consumers who pay higher prices for goods they buy from corporations; or corporate employees – workers – who get paid less. Tax specialists also disagree.

So what should we root for?

Abolishing the corporate income tax would require rewriting the entire U.S. tax code – a Herculean labor. Besides, abolishing the tax is politically unrealistic, particularly in the run-up to the 2014 elections.

There’s a better option than plugging loopholes piecemeal or abolishing corporate taxes.  Alan J. Auerbach, director of the Robert D. Burch Center for Tax Policy and Public Finance at the University of California at Berkeley, weaving his thoughts over several decades with those of colleagues across the country, has recently proposed a clever, realistic plan to simplify corporate taxes, improve the economic performance of the corporate sector (to our collective economic benefit) and raise about the same amount of money. That’s an impressive trifecta.

To see the beauty of the Auerbach plan, consider the current code’s three large failings.

First, the corporate code now taxes the profit on investments in new plant and equipment – thereby discouraging such investment. Yet new investment is the key to boosting economic output.

Second, the corporate code encourages corporations to take on excessive debt. Take the case of a corporation that needs to raise money to cover the cost of new investment. If it borrows the money from private lenders, the corporation deducts future interest payments on those loans from its taxable income. But if the business instead raises money by issuing shares of stock, it cannot deduct future dividend payments (the return to shareholders on the money they fork over to corporations).  Few economists applaud using the tax code to tilt corporations toward taking on more debt.

Third, the current code fails any test of simplicity and common sense. Apple is far from alone in attributing profit to operations in faraway countries that impose low tax rates – or even no countries at all. Apple pays a tax rate above 35 percent for profit attributed to its U.S. operations, but near zero if it (legally) structures its accounts so that profits appear on the books of its Irish operations. Apple just happens to be far smarter at tricky accounting. Few economists think taxes ought to be levied according to how creative a corporation’s bookkeeping operations can be.

The Auerbach plan has three important parts, none radical.

First, it proposes what economists call a cash-flow tax.  That change would permit corporations to expense investments – subtracting the full amount of an investment from taxable income as soon as the investment is made. Under current law, corporations can deduct the cost of investing in new plant and equipment only over time and in accordance with complicated equations. Expensing would eliminate about four quadrillion pages of complicated tax rules and commentaries – all of those equations – freeing lawyers and accountants to do something useful with their lives.

More important, expensing would, as a matter of arithmetic, insulate the profit on new investment from taxation. The point? By driving the tax on new investment to zero, the tax code would compel business to invest in more new plant and equipment, the primary driver behind rising economic productivity (and rising wages).

Second, the Auerbach plan would have corporations pay tax on money it borrows, eliminating the current code’s unfortunate subsidy for firms that take on debt.

Third, Auerbach’s plan would tax profit only from the sale of products in the United States. In other words, his corporate tax would ignore transactions that U.S. companies undertake overseas.

Let’s pause on this third step. It would eliminate tax-driven incentives for corporations to locate facilities in low-tax countries; physical location of production would then become irrelevant to tax computations. The only fact that matters for taxes is where the product is sold.

None of this plan’s major provisions is startlingly new. They’ve been proposed in one form or another by several economists, including Auerbach, over the years.

Under plausible assumptions, the Auerbach corporate tax code would collect about the same amount of money as the current code, yet it would increase investment and, thereby, leave the economy better off. Overall, the plan would not shift additional burden onto low-income families. Indeed, it would probably help them.

Our inner populism calls for hitting corporations hard. But simple economics warns that such instincts can easily backfire. Let’s root for a corporate code that’s simple. Let’s root for a system that collects an adequate amount of revenue. Let’s insist that any changes not burden low-income families. And let’s root for a code that promotes economic growth.

That’s a tall, tall order. But, courtesy of Auerbach, and other economists who’ve thought through the details, we now know that we can have it all.

PHOTO (Insert A): Apple Inc’s logo at its Apple store in Beijing, April 2, 2013. REUTERS/Kim Kyung-Hoon






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Hating government while pining for gold http://blogs.reuters.com/judgement-call/2013/04/25/hating-government-while-pining-for-gold/ http://blogs.reuters.com/judgement-call/2013/04/25/hating-government-while-pining-for-gold/#comments Thu, 25 Apr 2013 06:15:11 +0000 http://blogs.reuters.com/judgement-call/?p=67

Gold? Why not bitcoins or conch shells?

A return to a gold standard makes perfect sense if your contempt for government runs so extreme that it trumps any consideration of consequences. As a practical matter, though, the idea of reinstating the gold standard lies somewhere between silly and perverse.

Yet passionate Republican stalwarts – including David A. Stockman, budget director under President Ronald Reagan, former presidential candidate Steve Forbes and former Representative Ron Paul of Texas – call for junking our dollar standard in favor of returning to a gold standard. The Republican Party’s national platform last year called for a commission to study a conversion to gold.

There’s also a new, fun money in town: a virtual currency known as bitcoins. Or consider conch shells: Societies from Africa to the South Pacific used seashells as money until well into the 19th century – though they wouldn’t fit well in modern pants pockets.

The common feature of using gold, bitcoins or seashells as money is that market forces – not government – would determine the amount in circulation. In the modern economy, the supply of money – the number of dollar bills chasing after goods and services – affects inflation and recession. If money pours into an economy, sellers will see higher demand for their goods. Expect them to raise prices and production in varying proportions.

Under our current dollar standard, our central bank, the Federal Reserve, controls how much money sloshes through the economy. Under a gold standard, the central bank loses control.


First, some basics. Economics 101 teaches us that money serves two key functions in society. We hold dollars because everyone else accepts them in exchange for goods and services (legal tender). We also hold dollars because they store value. We trust that the dollars we keep in our bank accounts will be worth about the same when we’re ready to use them to buy apples (fruit) and Apples (iPad). Said another way, we’ll hold dollars as a store of value if we expect inflation to remain tame.

The question, then, is: Who controls the production of money – who keeps the money sufficiently scarce that it retains its value?

Since the Fed controls the money supply, if it wants to increase the amount of money in the economy, it simply buys stuff, mostly government bonds, and credits the seller with a larger bank account. If the Fed wants to decrease the amount of money, it reverses course.

The point? A government institution rules the roost.

The gold standard, whose heyday extended from the last two decades of the 19th century until the outbreak of World War I, operated differently. The United States and other major countries set the price of gold in terms of local currency. Government stood ready and willing to exchange physical gold for dollars.

In the United States, the price was set originally at slightly more than $20 per ounce (later raised to $35 an ounce). Once the price was set, market forces, rather than a central bank, took over.

If, for example, miners struck new veins of the precious metal, physical gold would pour out of the mines and be exchanged for (new) dollars at the government-set price. New gold mines translated into more gold, which translated into more dollars, which translated into more spending – which translated into higher prices (aka, inflation) and production.

So what do we know about overall economic performance under gold-standard rules vs. Federal Reserve discretion?

Easy call. Under the gold standard, prices were less stable and crises more common – a financial crisis about every decade or two, according to Frederic S. Mishkin, professor of economics at Columbia University.

And was gold a good store of value? Hardly. Its price rises and falls in a haphazard pattern. In the 1980s, for example, the price of gold fell by half. At one point during the first decade or so of this century, the price rose sevenfold.

Worse – indeed, far worse – the rules of the gold standard, according to economics historian Peter Temin of the Massachusetts Institute of Technology, transformed an economic downturn in the early 1930s into the unspeakable disaster we call the Great Depression. Those rules led for complicated reasons to a collapse of the U.S. money supply at exactly the time that the economy needed lots more money.

Under severe economic pressure – America’s trading partners had begun redeeming unwanted dollars for gold, driving America’s stock of gold to alarmingly low levels – President Richard M. Nixon broke the legal link between gold and the dollar in 1971. That put the Fed in firmer control.

How’s government discretion working? Since the 1980s, monetary policy has keep inflation tame. Indeed, since 2008, inflation has fluctuated around 2 percent and never above 5 percent, an enviable store of value.

Here’s a startling fact: The business school at the University of Chicago hosts a survey of expert economists, academics from the country’s finest universities. Some are conservatives. Others are moderates. Still others are liberals. When asked whether they would support the return of a gold standard, 100 percent of the expert economists voted “no.” Economists are a notoriously unruly gang. I can think of no other policy that’s been greeted with such universal derision.

Those who see government as anywhere and everywhere incompetent and threatening will pine for gold to once again rule our lives. But those of us who face facts will rest happy knowing that the role that gold ingots play begins and ends with museum displays.

Right next to the seashells.


PHOTO (Top): American gold bars stand on display during a preview of “Gold”, a new exhibition dedicated to the highly prized mineral at the American Museum of Natural History in New York, November 15, 2006. REUTERS/Mike Segar

PHOTO (Insert A): Federal Reserve Chariman Ben Bernanke testifies before the Senate Banking, Housing and Urban Affairs Committee on Capitol Hill in Washington July 22, 2009. REUTERS/Kevin Lamarque

PHOTO (Insert B): William Jennings Bryan, three-time Democratic presidential nominee, electrified the 1896 Democratic convention with his “Cross of Gold” speech. LIBRARY OF CONGRESS.

PHOTO (Insert C): President Richard M. Nixon took the United States off the gold standard in 1971. WIKIMEDIA COMMONS







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The fiscal crisis nears – or not http://blogs.reuters.com/judgement-call/2013/03/12/the-fiscal-crisis-nears-or-not/ http://blogs.reuters.com/judgement-call/2013/03/12/the-fiscal-crisis-nears-or-not/#comments Tue, 12 Mar 2013 06:05:27 +0000 http://blogs.reuters.com/judgement-call/?p=30 Few economists preach spending cuts as a cure for high unemployment. Yet that’s exactly what Congress decided when it imposed, starting March 1, across-the-board spending cuts (the “sequester”). Despite Friday’s mildly upbeat jobs numbers, the economy remains limp, with 15 million or so unemployed individuals who want to work. Federal spending cuts won’t make their plight any better.

Congress has known for quite some time that the federal budget will turn sour in 10 to 15 years, with expected outlays far outstripping expected revenue. For complicated, if not odd, reasons, Congress now feels compelled to do what it ordinarily shuns: cut federal programs and raise taxes. That might seem politically brave and responsible. But brushed up against facts, the case for Congress taking swift action wobbles, hitting wrong targets at the wrong time.

Of the many reasons politicians offer for cutting federal spending during economically straitened times, two cry out for attention. First, many liberals and conservatives say, Congress needs to stanch soaring federal spending. Second, conservatives say, federal programs are growing ever more intrusive, ever more threatening to private initiative.

Those are the theories. What are the facts?

Fact No. 1: Federal spending relative to the size of the economy is not, Congressional Budget Office reports show, spiraling out of control once the temporary impact of economic recession is factored out of the calculation. Federal spending relative to the size of the economy is expected to hover between 20 percent and 25 percent over the next few years – setting off no alarm bells during the time that the economy is expected to struggle.

Fact No. 2: Federal debt has risen to about 75 percent of national income and is on course to hit 90 percent over the next decade. Is that alarming? Alan Auerbach, director of the Center for Tax Policy and Public Finance at the University of California, Berkeley, makes the hard-to-dispute point that economists have no hard evidence that the economy will operate significantly worse with a federal debt overhang of 90 percent rather than 75 percent.

What would be alarming, Auerbach makes clear, is federal debt that continues to grow faster than the underlying economy. At some point – though no economist knows what that point is – crisis erupts because Congress cannot, or will not, cut programs or boost taxes by enough to repay lenders. But the United States is nowhere near a debt crisis. Indeed, lenders are throwing money at the Treasury, demanding ridiculously little interest in return.

Fact No. 3: There is one exception to the country’s OK fiscal news: healthcare. The trilogy: Baby boomers are aging; medical expenditures rise with age; and medical expenditures per patient are rising at a fast clip in public and private sectors alike. Expect outlays on Medicare and Medicaid to soar. That won’t frighten anyone this year or next. But federal outlays on healthcare are expected to rise to 10 percent of national income from 5 percent over the next 20 years or so.

The underlying problem is that we’ve built a healthcare system that tells patients they deserve virtually any procedure that does some medical good – no matter how trivial the benefit and no matter how high the cost. The United States spends more than twice as much relative to national income on healthcare than do other wealthy industrialized countries. Congress needs to build a mechanism for saying no.

The upshot? There is a compelling need for Congress to solve the problem of soaring healthcare costs. If it does, then long-term fiscal balance will be in hand and federal debt levels will stabilize. Auerbach will rest easy. But if Congress dithers, then today’s preoccupation with billion-dollar sequesters will amount to trivial pursuits.

Fact No. 4: Government intrusion is hard to define, even harder to measure. Crude statistics, like the ratio of total federal spending to national income, do not capture what animates conservative opposition to government spending.

Consider Social Security. It’s huge and growing. But the program is growing slowly – to an expected 6 percent of national income in roughly 20 years from 5 percent today. Despite its size, however, Social Security is minimally intrusive. It doesn’t commandeer people and machinery to create a government-ordained product (like, say, a highway). Instead, it mostly uses computers to apply fixed formulas for the purpose of taking dollars from one set of pockets (current wage earners) and depositing them in another set of pockets (former wage earners). Critics of large government mislead when they bandy about statistics that lump Social Security with all other manner of federal spending.

By contrast to Social Security, consider discretionary programs – programs that require Congress’s annual review. They are the object of the current sequester. Discretionary spending includes money spent on border patrols, scientific research, public-health programs, courts, dam and highway construction, wars and a whole lot more. Here, government does intrude, steering people, machines and natural resources to government-chosen purposes. (I do not regard “intrude” as pejorative – the intrusion may be socially super.)

Liberals may take kindly to these discretionary outlays; conservatives may wish to take flight. Either way, the total bill for these “intrusive” discretionary programs amounts to a small and shrinking pittance. Non-military discretionary programs amount to only around 5 percent of national income – a small fraction of what they were as recently as the mid-1960s. Does this spending truly beg for substantial cuts?

So we face an oddball circumstance. Federal spending and debt pose no dire threat in the next few years when the economy is likely to remain fragile. Yet the picture will change a decade or more from now – when healthcare expenditures threaten to drive the federal budget deeply into the red.

What’s Congress’s response? It approves a sequester that makes cuts so immediate that they threaten to weaken an already weak economy. But they largely sidestep the sector where cuts are most needed – healthcare.

Give Congress credit. That’s impressively wrongheaded.


PHOTO (Top): House Speaker John Boehner speaks to the press after a bipartisan meeting with President Barack Obama to discuss the economy in the White House November 16, 2012. Also pictured are (L-R) House Minority Leader Nancy Pelosi, Senate Majority Leader Harry Reid and Senate Minority Leader Mitch McConnell. REUTERS/Larry Downing

PHOTO (Insert): Pills line the shelves in the pharmacy at Venice Family Clinic in Los Angeles April 16, 2007. REUTERS/Lucy Nicholson

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Weighing immigrants’ economic power http://blogs.reuters.com/judgement-call/2013/02/01/weighing-immigrants-economic-power/ http://blogs.reuters.com/judgement-call/2013/02/01/weighing-immigrants-economic-power/#comments Fri, 01 Feb 2013 13:14:11 +0000 http://blogs.reuters.com/judgement-call/?p=3

“Now is the time to [reform immigration laws] so we can strengthen our economy.” So said President Barack Obama on Tuesday as he challenged Congress to give 11 million illegal residents of the United States a road map to citizenship.

“When you legalize those who are in the country illegally, it costs taxpayers millions of dollars, costs American workers thousands of jobs.” So said Representative Lamar Smith (R-Texas), senior member of the Judiciary Committee, earlier this week.

These statements contradict one another. One must be wrong.

Actually, both are.

There are powerful reasons to change the nation’s immigration rules, but economic necessity is not one of them. Yes, immigrants make a positive economic impact.  But little of the benefit, according to careful research, spills over to non-immigrant workers. The overall economy barely notices. Besides, there’s no evidence to suggest that illegal immigrants’ effect on the economy differs from that of legal immigrants.

Translation: The compelling reasons to reform our immigration rules involve politics, not economics. Therefore, Congress can amend immigration laws to fit our values and ambitions. It need not twist the rules out of fear of economic catastrophe.

Many of us picture immigrant workers in one of two ways ‑ both incorrect. Story No. 1: Illegal immigrants steal jobs from ordinary American workers. Inference: Let’s cut their numbers. Story No. 2: Immigrants – especially illegal immigrants ‑ work at jobs (agriculture, food preparation, construction, cleaning services) under conditions that American workers simply won’t accept. Inference: Let’s integrate illegal immigrants into the economic mainstream economy as quickly as possible.

Enough storytelling. What’s the evidence?

Story No. 1: Immigrants don’t steal jobs from anyone. They work hard, and they produce (everything from fruits and vegetables to engineering and physician services). That increases the output of goods and services, which puts downward pressure on consumer prices. We all reap the benefits. In return for their work, immigrants earn wages, which they spend on goods and services and that increased spending, let’s note, generates jobs for workers across the economy. Question: Do immigrants get paid about as much as the value of the products they produce, or are they underpaid – paid less than the value of the additional goods and services they produce? If underpaid, then immigrants are generating a surplus of output that non-immigrants get to consume.

The calculations can get complicated. And economists, no surprise, do not entirely agree. But the bulk of high-quality research points to the conclusion that the impact of immigrants is small, probably less than 1 percent of the nation’s total economic output. To borrow a term from higher mathematics, the impact is bubkes.

Story No. 2: Do immigrants play an irreplaceable role by taking jobs that Americans workers won’t go near? True, California growers don’t find an army of U.S.-born workers flocking to their fields to pick fruit. Nor do suburban homeowners find an army of U.S.-born workers flocking to their homes to clean bathrooms. Don’t fret. Stanch the flow of low-skilled immigrants and the laws of demand and supply will kick in, driving up the wages for these undesirable jobs until they become, yes, desirable.

That brings us to an important matter of continuing dispute. Even if immigrants don’t much affect the overall size of the U.S. economic pie, might the influx of low-skilled immigrants (mostly from south of the border) drive down the wages of one segment of the U.S.-born workforce, low-skilled workers, those without a high school degree?

Here, there is disagreement among the experts, though the differences are narrow. George Borjas of Harvard and others say low-paid Americans take a small to modest hit – perhaps three or so percentage points of their income. David Card, of the University of California, Berkeley, along with others, finds no evidence of such a hit.

Something not in dispute is the contribution immigrants make to small-business creation. Obama points to the estimate that a quarter of new small business owners are immigrants. True, immigrants are 30 percent more likely to create businesses than are U.S.-born citizens. But it’s hard to know what to make of such facts.  Though small businesses create hundreds of thousands of jobs each year, they, by way of bankruptcy or other closing, also account for the loss of a comparable number of jobs each year. Small business holds no special economic virtue.

But if the economics of immigration is anodyne, the politics is not. Proponents of putting immigrants on a faster track to citizenship accuse political opponents of cruelly leaving 11 million residents to twist slowly in illegal winds. Opponents of fast-tracking citizenship for illegal residents say we would commit an atrocity of a different kind if we put illegal immigrants on a faster track to citizenship than those who have followed the law, placing themselves on a wait list that will take decades, if not their lifetime, to clear.

Beyond these profound matters of fair play, there’s a cruder politics at stake. Senator John McCain (R-Ariz.) conceded last weekend that his party had better embrace immigration reform if it is to have any chance of attracting Latino voters in the next presidential election.

Is America better off thanks to immigrants with diverse talents? Of course. Is America better off because some immigrants come here with high scientific training or other rare skills?  Of course.

But these issues involve fine tuning.  Immigration policy is best chosen to reflect our political values.  How do we want to treat the “huddled masses yearning to breathe free?” How do we want to treat those who entered illegally but have lived exemplary lives thereafter? And so on.

The important point is that we can make these choices secure in the knowledge that the U.S. economy will do just fine whatever our decisions.


PHOTO: President Barack Obama arrives on stage to deliver remarks on immigration reform in Las Vegas, January 29, 2013. REUTERS/Jason Reed


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