Hey, What’d I Miss? OTE 7/15 — 7/21

July 21st, 2014 at 11:23 am
  • On PostEverything:

a) pointing out the negative media bias surrounding the Affordable Care Act
b) explaining why cutting corporate taxes won’t help the middle class.

  • Testifying before the Joint Economic Committee on the progress we’ve made five years into the recovery.
  • Describing why critics of June’s jobs report are wrong to say we have a structural problem of too much part-time employment.
  • Explaining why we should fix our tax aversion inversion problem before we tackle broad tax reform.
  • Raising concerns over the GOP’s backdoor route to tax evasion.

Music: saying goodbye to the great Texas blues guitarist Johnny Winter in this week’s musical interlude.

GOP: Tax Evasion as a Back Door Strategy

July 20th, 2014 at 8:43 pm

My CBPP colleague Chuck Marr flags something important from a recent press release by Rep. Dave Camp, the Republican Chair of the tax writing committee in the House.

In regard to their bill to patch the Highway Trust Fund through next May, Rep. Camp writes:

I certainly do not support permanent tax increases to pay for just 10 months of highway programs.  Furthermore, it is inconceivable that the House would, as the Senate proposes to do, grant the IRS additional authority to audit and investigate taxpayers simply so Washington can spend more money.

In just a few words, the Congressman manages to make some truly scary assertions.

First, while it’s true that we don’t need a permanent tax increase to support temporary spending, why would Congress fund critical national infrastructure with patched, temporary, gimmicky spending bills like this one?  In fact, we precisely need a permanent tax increase, specifically in the federal gas tax—stuck at 18.4 cents/gallon since 1994!—to avoid these temporary fiscal patches, which by definition just create a new fiscal cliff a few miles down the pothole-infested road, in this case in May 2015.

This is fiscal policy malpractice, rhetorically disguised as some kind of fiscal rectitude: “How dare you ask us to raise the resources needed to fund critical infrastructure in perpetuity, when we can fake a temporary patch?”  It’s Alice-in-Wonderland budgeting, where fiscal responsibility is cast as irresponsible.

But Camp’s second sentence is far worse, for here we have one of the nation’s most important tax legislators asserting that it is “inconceivable” that the House majority would fund and facilitate the IRS’s ability to enforce tax law and collect taxes owed.

Marr notes that the policies to which Camp is objecting ensure “…adequate disclosure of mortgage transactions and [clarify] what constitutes a “substantial omission of income” on a tax return.  They are tax compliance provisions, meant to enable the IRS to collect the revenues that taxpayers owe.”

Camp’s position must be considered in tandem with House Republican’s recent attack on the IRS budget, including their vote last week to cut the agency’s tax enforcement budget by one fourth.

Let’s not put too fine a point on this.  Though the hard right has gridlocked the federal government, they haven’t been able to repeal Obamacare, cut taxes for the wealthy, or kill social insurance.  Reducing the IRS’s ability to collect taxes owed thus becomes a backdoor route to realizing these goals.

I expect some readers’ may consider the implicit support of tax evasion to be “inconceivable” as a political strategy.  I’m afraid those readers need to wake up a smell the stench of what passes for governance these days.

Inversion Diversions: Yes, we need broader corporate tax reform. But we should fix our inversion problem first

July 18th, 2014 at 3:15 pm

Over the past few weeks, I’ve engaged in a number of debates about “tax inversions”—where US companies merge with foreign companies to reincorporate in a country where they can pay less taxes.

Let me tick through some of the issues here, including some key policy flashpoints, and link to some useful work on the subject.

–As Tom Hungerford stresses in a very useful review of the topic, don’t think of this as relocation of economic activity as much as pure tax avoidance.  Perfectly legal—i.e., avoidance, not evasion—but problematic nevertheless.

–Allen Sloan also has a worthwhile take on the issue, wherein he admittedly rants on the lack of economic patriotism of the corporate inverters.  Treasure Sec’y Jack Lew made similar points in a speech this week.  (By the way, as WaPo journalist Ylan Mui pointed out to me, calling this tax avoidance scheme “inversion,” which sounds technical and even mathematical, is a nice, antiseptic way to obfuscate what’s really going on here.)

I must say, while I’m totally sympathetic to this patriotism argument, it doesn’t really move me. This is globalization in action, a dynamic which most policy makers praise on a daily basis.  It’s companies maximizing after-tax profitability and shareholder value—though I’m not so sure about that last part, as you’ll see below—goals that are pretty solidly American.

As Jeff Faux pointed out years ago, globalization erodes social contracts between elites and others, rendering the idea of corporate responsibility to the US Treasury’s coffers a quaint anachronism.

Sloan points out that the cruise ship firm Carnival, “a Panama-based company with headquarters in Miami, was happy to have the U.S. Coast Guard, for which it doesn’t pay its fair share, help rescue its burning Carnival Triumph. (It later reimbursed Uncle Sam.)”  Others note that inverters who pay taxes “over there” but locate operations here take unfair advantage of our public goods from education to infrastructure without paying their fair share of the bill.

All true, and all play second fiddle, if not third viola, to the motivation to maximize profits and avoid taxes.  I’m not saying we shouldn’t play the “shame-on-you” card.  To the contrary, we should early and often.  But we unquestionably need a strong “plan B.”

–In that regard, my main man Chuck Marr tells of Congressional actions being contemplated, though I see mostly D’s cited in his review.  It’s not at all hard to imagine that the buzzsaw of House R’s will let tax law around inversions stand as is.

–In a CNBC debate this AM (clip to come), I touted my favorite solution: require that pre-inversion shareholders hold 50% of the value of the newly formed company as opposed to the 20% under current rules.  As Chuck points out, hurdles like the 20% rule erected a decade ago are now being easily cleared.  So they need to go up.

Hungerford adds the requirement that new merged company “…be treated as a U.S. corporation if it is managed and controlled in the United States, and had “significant domestic business activities” in the United States.”  That’s a good idea too, but squishier and easier to game.

Interestingly, my interlocutors on TV accepted the higher 50% stock ownership bar, but insisted such a change occur in tandem with broader tax reform.  To which I say a) “why wait??!!”—even corporate tax reform, which everyone says they want, is surely way, way off, with many inversions betwixt here and there, and b) tax reform could help dampen the inversion impulse, but maybe not by much.  The Irish statutory business tax rate is 12.5%.  We’re not going to match that.

–Do inversions really maximize shareholder value?  Sure, the share price gets a pop when the inversion is announced and it makes sense that higher after-tax profits could raise share prices for the longer term, for which there’s some anecdotal evidence.

But the original shareholders typically owe capital gains taxes on appreciated shares in the new, merged company, and a complete analysis of the benefit/cost outcome must include this factor.  I’ve not seen such analysis and thus do not assume that inversions are an obvious winner for all shareholders.

One final thought, and it’s one that some commenters here at OTE recently noted around other corporate tax discussions.  Engage in this and related debates for a while and you quickly start to wonder if the US corporate tax system is even worth having around anymore.  As the figure below reveals, it’s nothing like the revenue generator it once was and not a day passes wherein someone doesn’t complain about how it’s hurting our ability to compete internationally.  (Though I’m not sure how those two facts—corps paying less revenue yet the tax is more of a competitive burden—actually square off.)

End of the day, however, I say: mend it don’t end it.  The various schemes to replace it tend to be fraught with complexities (e.g., taxing unrealized capital gains from public companies and ?? re private ones) or unrealistic assumptions about the ability of the system to tax income flows from businesses to households.  Better to simplify the current system and hammer away as best we can at the loopholes, from inversion to deferrals to pass-throughs, etc.  I actually think the Obama administration’s white paper on this sets forth an under-appreciated, useful framework.

But while we’re contemplating larger reform, there’s no reason to fall prey to inversion diversion.  This is a problem we should take action against starting yesterday.

corptax_omb

Source: OMB, table 2.3

Part-time Work and the Recovery: Some Evidence to Counteract the Noise

July 18th, 2014 at 11:15 am

Over at PostEverything.

Key points: Clearly, this economic recovery has evolved too slowly and is still not reaching enough of us.  Just as clearly, it is improving, particularly in the job market.  I stress both these themes in my recent testimony before the Joint Economic Committee (JEC).

But based on a June spike in the monthly number of part-time workers, too many critics are trying to make the case that we have a structural problem of too much part-time employment–some add that Obamacare is too blame.

Not so.  Involuntary part-time work, while still elevated, is down almost 20% over the recovery, while voluntary part-time work is about where it was five years ago.  According to White House economists, “88 percent of the jobs added [over the recovery] have been full time, and that number is 99 percent in the last year.”

And there’s nothing wrong, btw, with voluntary part-time work.  In fact, as I boldly assert:

There’s nothing wrong, and a lot right, with voluntary part-time work. There’s not even anything wrong with affordable health care coverage allowing involuntary full-time workers to work less and still maintain coverage. That’s unequivocally good!

pt_recov

Source: BLS