A few links, including a great, old, timely Pat Moynihan speech

December 30th, 2017 at 11:46 am

Over at WaPo:

–I weigh in on the “will-the-tax-plan-help-or-hurt-the-R’s” debate. Lots of unknowables that will be known soon enough, but I suspect the plan’s largely negative first impression will persist.

–Please, let’s avoid obfuscation. When politicians want to cut a program, do not let them get away with their favorite euphemisms, like “reform,” “fix,” “overhaul,” and so on.

I share this aversion with the great LA Times columnist Michael Hiltzik, who sent this 1985 speech from the great statesman, Sen. Pat Moynihan. Along with tapping his great, historical perspective, Moynihan touches on all the issues we’re still arguing about, including fiscal rectitude, eliminating the SALT deduction, federalism, and, as per my anti-obfuscation campaign, “semantic infiltration.” “If the other fellow can get you to use his words, he wins.”

If that makes me, anti-semantic, so be it!

I certainly didn’t agree with everything Sen. Moynihan put forth, but, man. Imagine if the current debate took place at one-tenth this level of depth.

A primal scream on taxes. And why the plan will likely send more, not less, jobs/investment abroad

December 20th, 2017 at 9:56 am

First, I give a primal scream over at WaPo re the tax plan that may well be law by the time you read this.

Next, there’s been a lot of writing, including my own, on the question of whether the plan further incentivizes or discourages offshoring of investment and jobs. I’ve thought so, for a number of reasons, and I’m increasingly convinced that’s the case.

However, the writing on this is often quite technical and dense. So I was glad to see this WaPo piece break it down quite simply. Here are some of the main factors that I expect to juice the incentive of to offshore production, with my bold added.

First, a corporation would pay that global minimum tax only on profit above a “routine” rate of return on the tangible assets — such as factories — it has overseas. So the more equipment a corporation has in other countries, the more tax-free income it can earn. The legislation thus offers corporations “a perverse incentive” to shift assembly lines abroad, said Steve Rosenthal of the Tax Policy Center.

Second, the bill sets the “routine” return at 10 percent — far more generous than would typically be the case. Such allowances are normally fixed a couple of percentage points above risk-free Treasury yields, which are currently around 2.4 percent.

As a result, a U.S. corporation that builds a $100 million plant in another country and makes a foreign profit of $20 million would pay roughly $1 million in tax versus $4 million on the same profit if earned in the United States, said Rosenthal, who has been a tax lawyer for 25 years and drafted tax legislation as a staffer for the Joint Committee on Taxation.

Finally, the minimum levy would be calculated on a global average rather than for individual countries where a corporation operates. So a U.S. multinational could lower its tax bill by shifting profit from U.S. locations to tax havens such as the Cayman Islands.

Simply put, the more factories you build abroad, the more you can cut your tax bill. They set the non-taxable foreign profits high enough that even with the lower rate at home, there’s still a big incentive to produce abroad. And as long as you book some of your profits in non-tax-haven countries, you can send the rest of them to bask on the beach in the Caymen’s.

For a deeper dive, see Gene Sperling, Brad Setser, Kim Clausing.

Why is the other side–the folks who claim the plan will increase onshoring/bringing foreign earnings back home–wrong?

First, some profit repatriation is sure to occur, though there’s no reason to expect it to flow into investment and jobs here as opposed to share buybacks and dividend payouts. That’s the track record, and its likelihood is significantly boosted in this repatriation round as firms are already sitting on more than enough capital to invest and expand if that’s what they wanted to do.

But the main analytic mistake I hear folks making is the use of the wrong delta. That is, they’re looking at the change in the statutory corporate rate–35-21 percent, a big 14 point drop–and keying their predicted response off that. But the true delta, especially for multinationals, many of whom are already paying effective rates well below 21%, is a lot smaller than that. And, as Setser and others stress, the fact that they can still play all the transfer pricing games they’ve long perfected–booking income in low-tax havens; booking deductible costs in higher tax places–along with the three points above from the WaPo piece, suggest more, not less, offshoring.

Trust me, I and others will be keeping a very close eye on this.

Links, and a musical gift

December 18th, 2017 at 11:35 am

I contributed to this symposium on productivity growth in the The International Economy. I look forward to reading all the entries–they’re mercifully short–but I enjoyed mine!

Boy, this tax debate has really been terrible. There’s been endless exaggerations and lies about trickle-down, growth effects, while evidence, facts, and the historical record has been kicked aside to facilitate evermore upward redistribution. My take, over at WaPo.

Now, here’s you holiday gift from OTE:

Listen to this, starting at 24:48. That’s when the third movement starts, which is the part I want you to check out. Yes, the first two movements are breathtakingly beautiful–the first: majestic, sweeping; the second: soulful, soothing, gorgeous–but we’re not talking about those. In fact, I worry they crowd out the fun and beauty of the third.

Oftentimes, the third movement of Mozart’s piano concertos is structured as a few different themes that come and go. But this one is different: it’s a variation on a theme. The orchestra offers it up and the piano runs with it, first (25:35) with some simple embellishments. Then, at 26:22 he shows off his chops, riffing off the theme in a way that share’s a lot with jazz improvisations that would come a couple of centuries later. Next, at 28:00, there’s a really interesting minor key variation–it’s the same theme, but totally reworked.

The one part that’s not a takeoff of the main theme comes with the rousing bit at 30:10 that sounds like you just mounted a mighty steed and you’re galloping to the end, when, of course, the main theme comes back to say good-bye!

If, in these difficult times, with so much coarseness and divisiveness, this reminds you of the vital importance of sublime music and what humans are capable of as much as it does me, then enjoy.

And happy holidays from OTE!