In other economic news, speed bump slows traffic…

October 15th, 2014 at 2:42 pm

The big story in tax inversion land is that despite their full-speed-ahead plans of a few weeks ago, the American big-pharma firm AbbVie might not acquire the Irish drug maker Shire. According to the NYT:

If the merger were to fall apart, it would be the biggest casualty of new tax rules aimed at inversion deals.

A few reflections:

–After Treasury announced their new rules, there was a fair bit of predictable chest-thumbing by seasoned tax avoiders who argued that the new rules would be easily gotten-around. And perhaps they will be—a lot of those folks are good at what they do.

But there’s no question that Treasury created a non-trivial speed bump. And they did so precisely in the area of “hopscotching.”

–That’s where you move deferred earnings (foreign profits of US multinationals held abroad to avoid US taxation) around through the newly inverted company in such a way as to get them back here in the US tax free. And it looks to me like AbbVie was highly motivated by precisely this possibility. According to the FT, at least half of their $10 billion in cash is held outside the US, and their foreign operations have shaved between 10 and 20 percentage points off of their effective US tax rates in recent years.

–So, let’s just try to keep it real. These companies are inverting to lower their US tax bills and the new Treasury rules make that at least marginally harder. I’d argue that’s a good thing because it looks to me like the companies are not restructuring or relocating their businesses (or at least their tax mailboxes) in ways that boost economic efficiency; they’re doing so to avoid taxes.

That’s not crazy or illegal—evasion, illegal; avoidance, legal—but Treasury has not just a right but a responsibility to try to shut these loopholes down. Of course, they have not done so here, as they themselves consistently say. It would take legislation to accomplish that.

But we all know that in this and probably in the next Congress, such legislation is not forthcoming, so I expect to see more in this area by way of rule changes that do not require Congressional approval. Meanwhile, the Treasury has clearly altered the financial incentives and shares in the new company are almost certainly worth less than they were before the Treasury acted, so the merger rethinks are not a big surprise.

Of course, the AbbVie deal may still go through—they’re required to pay Shire a $1.6 billion breakup fee (if only I’d thought of that back in high-school!) if they call off the deal—but the fact of their second thoughts suggests the Treasury’s rules are having their intended effect.

Update: This NYT piece just out seems consistent with the above.

Hey, What’d I Miss? OTE 10/07 — 10/14

October 14th, 2014 at 1:27 pm
  • Looking at the connection between full employment, trade deficits, and the dollar as a reserve currency.
  • Exploring the debate around wages and technology.
  • Responding to Paul Krugman on trade deficits as a barrier to full employment.
  • Pondering the impact of the sharp decline in budget deficit.
  • Reviewing Ed Kleinbard’s new book, We Are Better Than This: How Government Should Spend Our Money.
  • Correcting misimpressions of Klienbard’s NYT Op-Ed on the progressiveness of the US tax system.
  • Analyzing the association between child mortality, inequality, and the ACA’s Medicaid expansion.
  • Discussing the importance of extending pro-work supports in key anti-poverty programs.
  • Posting our online session on TalkPoverty Live.
  • Adjusting a standard labor market slack measure for the downward bias in the unemployment rate.
  • Fact-checking some claims about the impact of tax cuts in Kansas.

No, Ed Kleinbard Does Not Want a Less Progressive Tax System

October 10th, 2014 at 12:19 pm

I favorably reviewed Ed Kleinbard’s book here the other day so I’m obliged to step in and correct what looks to me like a misimpression growing out of an oped he has in today’s NYT.

Because the oped is entitled “Don’t Soak the Rich” and because Ed, IMHO, doesn’t articulate the nuances in his argument the way he needs to, the oped is being misrepresented as a call for a less progressive tax system (I also think Ed’s mistaken in his claim that the US tax system, all in, is the most progressive across advanced economies—in fact, it’s only mildly progressive…but more on that in a later post).

For example, responding to the oped, Len Berman, a DC tax expert, tweeted “a progressive’s call for less progressive taxation.”

I can see where Len gets that from the piece, and obviously Ed will have to speak for himself, but Ed’s book clearly supports progressive taxation. He may not see the need to make the tax system more progressive, though his book calls for just that in ways I’ll note in a moment. But he certainly does not call for less progressivity.

Ed’s argument, which is a good one, is that what matters in terms of progressivity at the end of the day is the not just taxing, but spending as well.

…achieving equality through the tax structure is the wrong way to think about the issue. Reformers have blundered by confusing what seems fair — more progressive taxation — with what is actually important, and lacking: a progressive fiscal system. As other developed countries have figured out, reducing inequality is not about where the money comes from, but where the money goes, and how much of it is spent.

Now, to be clear, the way things stand today, as I myself wrote in the NYT a few months ago, “To Lift the Poor, You Can’t Avoid Taxing the Rich.” The vast majority of growth in recent years has gone to those at the top of the scale, and since their income has grown faster than their tax liabilities, their effective tax rate—taxes paid as a share of income—has generally gone down over the decades. In the near term, it makes no sense to increase taxes on those who’ve seen so little pretax growth go their way.

And while Ed clearly doesn’t want to raise the marginal tax rates of the wealthy, he devotes a whole chapter of his book to cutting a boatload of their tax breaks in ways that would unquestionably raise their effective rates. If Len is thinking there’s a pending love match between Grover and Ed, I assure you, it ain’t happening.

Here’s what Ed says in defense of progressive taxation in his book:

If one accepts the fundamental premise of this book, that material outcomes are determined by an undifferentiated porridge of personal efforts and brute luck, by virtue of which we all have a bit less control over our material successes than we like to pretend, then some tax rate progression functions as a broad social insurance program to address the brute luck competent.

In fact, Ed advocates going back to the Clinton-era marginal tax rates, which would raise tax rates on more than just the rich, and here too he’s got an important point. As I wrote in my piece on this:

To be clear, the tax burden on all Americans, not just the wealthy, is low both in historical and international terms. We’re collecting less revenue than many other advanced economies and less than we have in the past. So it’s not just the rich that will ultimately have to pony up if we’re going to continue to fund the things we want and need in a sustainable way.

At any rate, it’s a nuanced argument, and Ed lost the nuance in his oped today. And as he’s probably finding out as we speak, the DC tax debate doesn’t do nuance.