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More Cheap Thoughts on the Corporate Income Tax Print
Friday, 29 August 2014 15:17

The exchange I had with Jared Bernstein and subsequent comments by others have led to me do more thinking on the corporate income tax. First, just to respond to various notes and comments, I was not all upset that Jared and I disagreed. Jared is an old friend and a very good economist. I value his views, which is why I write books with him. I learned from his comments and I appreciate his concern for losing revenue even if it doesn't over-ride my my reasons for thinking that eliminating the corporate income tax (CIT) is a good idea.

I think the most useful way to think of the CIT is an optional levy placed on corporate income. We tell corporations that they have to pay 35 percent of their income in taxes to the government. It's optional in the sense that we allow them to cut this amount by two-thirds, if they instead pay one-third of this levy to Wall Street investment banks, accounting firms, and tax lawyers. (Using 2014 numbers  nominal corporate tax liability would be roughly 6 percent of GDP or $1,050 billion, with actual tax collections around 2.0 percent of GDP or $350 billion.) This is roughly how the tax boils down, with the Government Accountability Office estimating that companies pay about 13.0 percent of their income in taxes to the government, compared to the 35 percent nominal tax rate. This means that 22 percent of their profits are escaping taxation by the government.

In fairness, I don't know how much corporate America is actually paying to escape its taxes. (Someone have a good study to send me?) Essentially, I am just assuming that they spend half of their tax savings on avoidance costs. 

These avoidance costs have real economic consequences. We are paying people lots of money to do activities that have zero value to the economy even though they are hugely valuable to their corporate employers. The people working on tax scams at the major accounting firms, or working out inversion mergers at Goldman Sachs, or creating new tax shelters at private equity companies could all be employed doing something productive. This is like giving companies a tax credit to pay people to dig holes and fill them up again. The difference is that these are highly educated people and they are getting paid really big bucks for the pointless hole-digging.

Read more...

 

 
1.1 Percent First Half GDP Growth is Not Much Grounds for Celebration Print
Friday, 29 August 2014 07:12

The NYT had a piece on the upward revision of second quarter GDP data to a growth rate of 4.2 percent from 4.0 percent in the advance report. It would have been worth reminding readers that the jump was a reversal from a weather induced plunge of 2.1 percent in the first quarter. This leaves the economy growing at annual rate of just 1.1 percent for the first half of the year. Even if the growth rate is 3.0 percent for the second half that would still leave year-round growth at just 2.0 percent. This is below almost all estimates of the economy's potential which means that rather than making up ground lost during the recession, the economy is falling further below its potential level of output.

The piece also is a bit off in a couple of other areas. It noted the upward revision to investment and told readers:

"Since the economy emerged from the recession five years ago, companies have been hesitant to spend heavily on new capacity, but these figures and other recent data indicate that is finally changing."

Actually the revised 8.4 percent growth rate for investment is not especially impressive. There have been many previous quarters in the recovery where investment grew more rapidly. For example, in the second, third, and fourth quarters of 2011 investment grew at 8.8 percent, 19.4 percent, and  9.5 percent annual rates, respectively. As recenly as the fourth quarter of last year it grew at a 10.4 percent annual rate, so the most recent quarterly rate is not impressive, especially since it follows growth of just 1.6 percent in the first quarter.

One area where it paints an overly pessimistic picture is in reporting the split between wages and profits:

"Despite the faster overall growth rate, businesses still seem to be benefiting more from the economy’s upward trajectory than many individual consumers are.

"The revision on Thursday, for example, lowered the estimate of workers’ wage and salary growth slightly in the first half of 2014, with income rising 5.8 percent in the second quarter. Corporate profits, on the other hand, jumped 8 percent in the second quarter, the Commerce Department said."

The comparison with the first quarter is misleading. The profit data are always erratic and the first quarter showed a surprisingly large drop in profits. If the comparison is made with the second quarter of 2013 nominal before-tax profits are actually down by 0.3 percent. By contrast, labor compensation is up by 4.4 percent. These data are too erratic to make much of this shift, but the numbers actually suggest some redistribution from capital to labor over the last year.

 

 
NPR Celebrates France's President For Accepting Mass Unemployment Print
Friday, 29 August 2014 07:03

A Morning Edition report on French President Francois Hollande's decision to reshuffle his cabinet and eliminate members who complained about the cutbacks in government spending that are slowing growth and destroying jobs, treated him as a potential hero for trying to restructure France's labor market. This coverage directly contradicts economics, since there is no plausible story whereby the economic gains from whatever restructuring Mr. Hollande is able to engineer will be more than a small fraction of the losses it is incurring due to austerity being imposed by Germany on the whole euro zone. This austerity will have cost France several trillion dollars in lost output by the end of the decade.

 
NYT Does Free Promotion for Oil Industry Print
Friday, 29 August 2014 05:19

The NYT noted that gas prices remain relatively low in spite of the fighting taking place in or near several major oil producers. In an article entitled "a new American oil bonanza, it told readers:

"The reason for the improved economics of road travel can be found 10,000 feet below the ground here, where the South Texas Eagle Ford shale is providing more than a million new barrels of oil supplies to the world market every day. United States refinery production in recent weeks reached record highs and left supply depots flush, cushioning the impact of all the instability surrounding traditional global oil fields."

The piece also includes a chart showing daily production at around 2.5 million barrels more than its pre-recession level. While this increased production has undoubtedly had an impact on world prices (it is world prices that matter -- oil is bought and sold in the global market), so has declines in demand. There has been a sharp drop in vehicle miles driven compared with projected travel.

                                                           

                                       Vehicle Miles Traveled: Total and Per Capita

http://www.ssti.us/wp/wp-content/uploads/2014/02/2014-VMT-chart.jpg

                                                       Figure 1. VMT trends for the United States through 2013. Source: FHWA and Census Bureau.

If per person consumption had risen in line with the projected trend, it would be around 15 percent higher than it is today. Since U.S. oil consumption is around 19.0 million barrels a day (not all of it is for gasoline), this means that the reduction in driving below its trend path is saving us around 2.5 million barrels of oil a day, roughly the same amount as the increase in production.

In other words, this article could have been dedicated to the bonanza from conservation and told readers how all the happy people interviewed are enjoying lower gas prices because many people across the country (and the world) are now driving less than was projected based on prior trends. The piece then could have focused on mass transit or other factors that are leading people to drive less. (unfortunately, one of these would be the weak economy.)

 
Low Inflation Causes Consumer to Delay Purchases and Undercuts Profits and Jobs Print
Friday, 29 August 2014 04:55

In an article discussing the drop in the year over year inflation rate in the euro zone to 0.4 percent, the New York Times told readers that the inflation rate could fall further, turning into deflation, which it told readers:

"causes consumers to delay purchases and undercuts corporate profits and jobs."

That is true of deflation, but it is also true of very low inflation. The reported inflation rate is an average of the inflation rate seen in millions of different goods and services being sold at millions of different outlets. At any point in time roughly half of these inflation rates are more rapid than the average inflation rate and half are less. This means that the prices of a large number of goods and services are already falling. Insofar as this is a factor causing a delay in the purchase of goods, we would already be seeing it. A further drop in the overall rate of inflation to make it negative would change the picture little.

In terms of the impact on corporate profits and jobs, the issue here is the real interest rate, which is the nominal interest rate minus the inflation rate. Any drop in the inflation rate means a higher real interest rate and therefore provides a disincentive for investment. Whether the inflation rate crosses zero and turns negative really has no consequence in this story.

The point here is important. The euro zone is already suffering from an inflation rate that is way too low, causing real interest rates to be far higher than would be desired given the weakness of its economy. The problems of deflation are not something that it may have to worry about in the future. Those problems are here now. The situation worsens anytime the inflation rate falls further, but crossing zero and turning negative has no particular economic significance.

I should probably also mention that there is huge error in measurement. The Boskin Commission, to the widespread applause of most elite economists, said that our consumer price index overstated the annual inflation rate by 1.1 percentage point. After some changes in the index were made, they said it still overstated inflation by 0.8 percentage points. There is no reason to think the euro zone measure is more accurate than the U.S. measure, which means if people follow our elite economists then they should believe that the euro zone already is facing deflation.

I should probably also mention that the Boskin Commission's estimates were pushed as part of an effort at the time to cut the annual cost of living adjustment to Social Security benefits. For some reason no one seems to mention their work anymore, even though the Bureau of Labor Statistics has not addressed most the sources of bias they identified.

 

Note: Typo corrected, "inflation" changed to "deflation." Thanks kea.

 
NYT and Alan Krueger Discover that Some People Don't Respond to Employment Surveys Print
Wednesday, 27 August 2014 11:38

It's always nice when a prominent economist and the NYT pick up on a line of work that we started at CEPR. That is why we are all happy to see David Leonhardt's piece on a new paper by Alan Krueger, the former head of President Obama's Council of Economic Advisers.

The gist of the piece is that Krueger has discovered that many people do not respond to the Current Population Survey (CPS), the main survey used to measure the unemployment rate. Krueger discovered that the unemployment rates are higher for people the first month that they are in the survey than in later months. (People are in the survey for four months, then out for eight months and then back for four months.) The implication is that people who are not responding may be more likely to be unemployed than people who are responding.

This fits well with analysis done by John Schmitt and me nine years ago. That work noted a sharp gap between the employment rates reported in the 2000 Census and the employment rates reported in the CPS for the overlapping months, with the CPS rates being much higher. (The Census has a response rate close to 99 percent, whereas the coverage rate for the CPS is under 90 percent overall. It is under 70 percent for young black men.) The analysis focused on employment rates because employment is much more well-defined than unemployment.

The analysis also noted that the gap was largest for the groups with the lowest coverage rates. In particular the gap was largest for young black men, with the CPS showing an employment rate that was 8.0 percentage points higher than the Census data for the same month. Our conclusion was that the people who respond to the survey are more likely to be employed than the people who don't respond. It's good to see that Krueger appears to have concurred in this finding nine years later.

 

Note: Link and president corrected.

 
Headline Writer at Washington Post Gets Budget Story Backward Print
Wednesday, 27 August 2014 11:29

The headline of the Washington Post piece on the new budget projections from the Congressional Budget Office (CBO) told readers, "CBO: Deficit falls to $506 billion in 2014, but debt continues to rise."

Both parts of this are wrong if the comparison is the most recent prior set of projections. The deficit projected for 2014 is actually somewhat higher in the most recent projections, $506 billion compared to $492 billion in the projections made in April. Both figures are below last year's deficit of $680 billion. Measured as a share of GDP the deficit fell from 4.1 percent in 2013 to 2.9 percent in the most recent projections for 2014.

However the debt numbers in the new projections are lower than the debt numbers in the prior set. CBO now projects that the debt will be 77.2 percent of GDP at the end of the projection period in 2024. It previous had projected a debt to GDP ratio of 78.1 percent.

The article got both of these points right.

 
Jared Shoots Back on the Corporate Income Tax Print
Wednesday, 27 August 2014 08:54

Jared has a few more points in response to my least post -- certainly very reasonable concerns. As far as his comparison of me to Mr. Burns, I'll just say "excellent!"

 
The Mostly Good News on Housing Print
Wednesday, 27 August 2014 07:02

Neil Irwin had a good post on the latest Case-Shiller house price data. he argued that the flat, or even modestly declining house prices are good news. This means that prices are now more or less following a normal pattern where they move pretty much in step with the economy.

This is right, with one important qualification. The Case-Shiller tiered price indexes show some worrying numbers in some cities for the bottom third of the housing market. Prices for the bottom tier fell by 0.7 percent in San Francisco in June. In Atlanta, the index showed a drop of 1.3 percent and in Minneapolis the decline was 4.0 percent. This may just be a monthly blip, but there is a real risk that in some areas this could be the beginning of another plunge in low-end house prices.

House prices for the bottom tier have been on a real roller coaster ride for some time. They were inflated in the bubble years by subprime loans and then plummeted when this source of lending collapsed. Then they were propped up by one of the most hare-brained policies of all-time, the first-time homebuyers tax credit. Predictably, prices in the bottom tier plummeted again when the credit ended. (Typical of the honesty people came to expect from Timothy Geithner, his book had a chart (p 304) which showed the uptick in house prices caused by the credit, but ends before the subsequent fall.) 

Price recovered again and began to rise rapidly through the first half of 2013. There was a real danger of a new bubble forming, but then Bernanke's famous taper talk took the wind out of the market. The concern now is that with investors leaving the market prices in the bottom tier in some cities will take another major hit. This is not likely to have much of an effect on the national economy but could be bad news for moderate income homeowners that bought in near a temporary peak.

 
Subverting the Inversions: More Thoughts on Ending the Corporate Income Tax Print
Tuesday, 26 August 2014 20:08

I see that my friend Jared Bernstein has some more thoughtful (if mistaken) arguments on ending the corporate income tax. I recognize his concerns about giving more money to the people who have the most (hey, it’s the American Way), but I still think this is a policy that could be a big winner in the battle against the enemies of the people.

I will quickly address two issues Jared raised, the extent to which any of the savings will be passed on in wages and the ability to replace the revenue. However my main focus is the nature of the corporate tax avoidance industry. This is a pernicious drain of economic resources. It is also a major source of upward redistribution. I consider its elimination an enormous benefit – even if on net we give up some government revenue to do it.

First, I followed the Tax Policy Center in assuming that 20 percent of the benefits would go to workers in higher wages. Jared rightly pointed out that this will depend on workers bargaining power. However, it is worth noting that even in the worst of times workers have gotten some fraction of productivity gains. And if we look at the last year, the data show that average real hourly compensation increased almost as much as productivity growth (1.0 percent rise in real compensation versus a 1.2 percent increase in productivity). So the Tax Policy Center’s 20 percent pass back to wages hardly seems out of line.

The second question is how we would make up the lost revenue. The Congressional Budget Office (CBO) projects we will get $351 billion or 2.0 percent of GDP from the corporate income tax in 2014 (Table 4-1). This is the average for the next decade as well. Much of this can be gotten back from eliminating the special treatment of dividend and capital gains income. The major rationale for their special treatment was the argument that it amounted to double taxation since profits were already taxed at the corporate level. Since the corporate income tax will have been eliminated, there is no rationale for special treatment.

In 2012, the most recent year for which data is available, the Internal Revenue Service reported $260.4 billion in taxable dividend income and $2.217 trillion in capital gains distributions. If we assume an average increase of 10 percentage points in the tax rate on dividends and 5 percentage points in the effective tax rate on realized capital gains, this gets us $137 billion in tax revenue (26.0 billion from dividends and $111 billion from taxing capital gains). If we adjust this figure up by 10 percent to account for nominal growth from 2012 to 2014 we are up to $151 billion.

In addition, eliminating the corporate income tax will cause both sources of income to increase, which would imply a further increase in revenue. If half of profits are paid out in dividends (a bit less than the historic average) then we would see dividends increase by $175 billion (using the 2014 numbers), which at a 30 percent average tax rate gets us $53 billion in tax revenue.

The ending of the corporate income tax would increase after tax profits by around 25 percent, which presumably would lead to a corresponding increase in stock prices. That would lead to a one-time windfall for both stockholders and also the government in the form of capital gains tax revenue. However going forward stock prices should rise on average at the same pace but at base that is roughly 25 percent higher. In 2011 (sorry, most recent year I could find) the CBO projected capital gains income for 2014 of $103 billion. If we up that by 25 percent, it gets $26 billion.

This brings the total from additional capital income to $79 billion. Adding that to $151 billion from raising the tax rate, get us to $230 billion. Suppose we raise the top marginal rate by three percentage points. CBO projected that the ending of the Bush tax cut for high end individuals would raise $109 billion in 2014 (Table 3), so a three percentage point hike should get around half that, or $55 billion. That gets us to $285 billion, still a bit short of the $351 billion in lost corporate tax revenue, but it is within spitting distance.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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