The non-need for tax cuts: The corporate sector is doing fine; it’s the gov’t sector that’s hurting

August 31st, 2017 at 9:58 am

Matthew Gardner, from the excellent Institute on Taxation and Economic Policy, made a great point in this NYT article from yesterday (a smart account of the tenuous relationship between corporate tax cuts and investment).

Mr. Gardner argued that a broader definition of American competitiveness is needed that includes not only the tax system, but also the business infrastructure that the tax system supports — bridges and roads, health care, education and research and development. “If all you think about is the tax rate, then it should be zero,” he said. “Competitiveness is about finding the right balance.”

This resonates because it gets at the many contradictions raised by team Trump’s drive to slash the corporate rate by more than half (from 35 to 15 percent). As measured by profitability, share prices, and cash reserves, the corporate sector is booming. By these concrete metrics, they’re already “competitive.”

But that word means something specific in this debate: it’s just saying that our statutory corporate rate is well above the rates that prevail elsewhere. To normal people, not steeped in this debate, the idea of closing that gap makes sense.

But here’s the thing: because of deferral–the ability to avoid US taxation on foreign profits by booking them overseas–and many other tax avoidance techniques, the gap between the statutory rate faced by our international companies and that of our competitors is not operational.

But aren’t their foreign earnings locked up overseas, unavailable for US investment? First, I used the word “booked” for a reason. From the Times piece:

The whole notion of earnings trapped offshore is misleading, Steven M. Rosenthal, a tax lawyer and senior fellow at the Urban-Brookings Tax Policy Center. “The earnings are not ‘trapped,’” he said. “They’re not offshore. They’re not even earnings. They’re accounting gimmicks that allow earnings to be shifted abroad.”

What’s more, companies already get something akin to tax-free repatriation by borrowing against those funds, with the added bonus of being able to deduct the interest paid on those loans from their tax bill.

Second, there’s nothing stopping these cash-rich firms from investing more if that’s what they want to do. Cheap capital is plentiful.

Unfortunately, the same cannot be said for the federal government sector, which is anything but a smoothly running machine these days. It’s dysfunction is such that it is underinvesting in the public goods ticked off by Gardner above. And its majority party is proposing to significantly reduce its revenue stream, making any such investments an even heavier lift.

That’s the real threat to competitiveness.

It is well-known that private-sector investment is largely demand-driven, far more responsive to the strength of the business cycle than to tweaks in the tax code. But government investment is politically driven (and disaster driven…after-the-fact). Therein lies the difference, and I’m much more worried about the gov’t sector than the corporate sector.

Catching up with links, and a quick word on Harvey (w/ more to come)

August 30th, 2017 at 1:15 pm

–Ben Spielberg and I have a new piece out today on the drip of anti-worker rule changes, executive orders, and legislation from the Trump administration targeting worker safety, pay, and unions. I suspect that even for those who are paying attention, some of this wasn’t on your radar.

–Speaking of unions–and we should be doing so, especially as Labor Day approaches–I recently penned this piece based on  some new work by EPI on the benefits of unionization. I tried to take a slightly different angle on this one. Instead of focusing solely on what I consider the central problem facing many workers today–the lack of bargaining clout–and unions’ role in alleviating that problem, I wanted to also amplify EPI’s points regarding the forces responsible for unions’ decline. The rise of the union-busting industry, the need for modernizing labor law, including moving to bargaining by sector, not by firm–these are essential factors that must be dealt with if there’s any hope of bending the trend. Key point: the trends you see in the figure–negative for unions, positive for inequality–are not the result of natural forces. It’s policy.

–Finally, I haven’t written yet about the disaster and suffering in Houston and other parts of the state–the extent of devastation takes your breath away, and my heart goes out to the people trying to deal with this.

From a policy perspective, one thing that’s going on here is the intersection of three dangerous forces: bad price signals, climate change, and hyperbolic discounting.

I’ll have more to say about this soon, but here’s what I’m talking about:

–The true cost of building homes and businesses in flood zones is masked by highly subsidized federal flood insurance and outdated information on the true risk profiles of the zones themselves. The true cost of paving over the natural water-absorptive capacity of the ground in Houston is, as we are learning, part of the problem, though no storm management system could have dealt with a deluge of this magnitude, which brings us to point #2:

–Much good writing on climate change and Harvey suggests that while the hurricane itself may or may not be associated with the warmer climate and warmer seas caused by human activity and carbon emissions, the unprecedented extent of rainfall surely is a side effect of global warming.

–We as humans are programmed to heavily discount the future. So, building in flood zones and not recognizing the threat to an especially vulnerable city from the clear increase in extreme weather comes naturally to us (this was written over a year ago).

We must work against this unfortunate instinct and getting the prices right should be the easy part. More to come…

#Fiscal_Friday: Three fiscal points to absorb before you start your weekend

August 25th, 2017 at 10:12 am

–Deficit neutral vs. revenue neutral: This is really important and while the distinction is straightforward, I’m seeing some confusion out there. The R’s get this and they’re clearly, though subtly, shifting their rhetoric from rev neutrality to deficit neutrality.

To pass their tax cuts under budget rules that allow them to evade a Senate filibuster, the cuts cannot raise the deficit outside the 10 year budget window. There are two ways to do so. One way, revenue neutrality, is to raise other revenues through base broadening to offset the cost of the rate cuts. The other way to cut taxes and hold the deficit constant is to cut spending. That’s deficit neutrality, and since federal taxes and spending are both progressive, cutting spending to pay for cutting taxes is doubly regressive, as I argue here.

I’ve also argued that, given our demography, climate change, inequality, geopolitics, infrastructure needs, etc., we’re going to need more, not less (and not even the same amount of) revenues going forward – at least, as long as we boomers remain in the system. So revenue neutrality is, in my view, already too low a bar. But deficit neutrality is no bar at all.

–A quick point about the debt ceiling: If you read this blog, then you surely know this already. But just in case, here it is: Congress must raise the debt ceiling to pay for spending they’ve already approved. As the date that the ceiling must be raised approaches, you’ll hear some Republicans argue that raising the debt ceiling is fiscally irresponsible and just encourages more spending. That argument is perfectly analogous to this one: paying your restaurant bill after you’ve eaten is irresponsible and just encourages more dining out.

–This one is particularly technical, but there’s a budget scheme R’s are flirting with that could artificially make their tax cuts look $440 billion cheaper than they really are. The jargon here is that in scoring the cost of their cuts, they’re talking about using a “current policy baseline” versus a “current law baseline.” The reason they’d do so is so they don’t have to come up with a bunch more revenue to pay for expiring tax breaks that they plan to keep in place. Simply assume, contrary to the law, that the cuts remain in place and you don’t have to raise more taxes to pay for them. CBO won’t buy it, but if they try to pull this off in their own scores, we’ll be blowing the whistle.

Here’s the explanation from my CBPP colleagues:

That $439 billion figure represents the cost of extending, through the next decade, dozens of corporate and individual tax provisions that would otherwise expire or have already expired under current law.  A current law baseline reflects their scheduled expiration, so proposals to extend them would cost money.  A current policy baseline, by contrast, assumes that they will remain in effect indefinitely, so proposals to extend them would not lose revenues.  That could help a Republican tax bill appear to be less costly than if it were assessed relative to current law — and could be crucial for hitting a desired revenue target, particularly one that facilitates the use of a privileged, fast-track status in the Senate that would allow the bill to pass without any Democratic support.

It’s no mystery why Trump is alienating “fellow” Republicans. (Hint: they’re not really “fellows.”)

August 24th, 2017 at 8:07 am

Trigger warning: I’m stepping outside my econozone for some political commentary (don’t worry; I’ll make it quick). Sorry to do so, but I find this surprisingly naïve. At this late date, a lot of well-placed people still seem to miss President Trump’s sole motivation. I’m talking about these complaints from today’s papers that the President is mistaken alienating his own party by attacking Republicans, i.e., the folks he’ll need to move his agenda.

From WaPo:

“It’s entirely counterproductive for the president to be picking fights with Republican senators who he will need for important agenda items that they both agree on,” said Rep. Charlie Dent (R-Pa.). “Does he think that Democratic senators will be more cooperative than John McCain and Jeff Flake and Susan Collins? It doesn’t seem to make any sense.”

From the NYT, re his caustic speech in AZ:

“[After railing on the media]…this time he gave equal billing to his fellow Republicans in Congress — the people he will surely need if he hopes to deliver on infrastructure or anything else of value to the working-class Americans who elected him.”

Trump cares not about his party. It’s not even really his party. He doesn’t care about his “agenda.” He doesn’t have an agenda, other than to elevate himself and his brand. Any action he takes must be understood from the perspective, “does this make me look good or bad? And if it’s “bad” then who can I blame?”

He doesn’t really care about (or understand) health care, foreign policy, jobs, the stock market, or even taxes beyond wanting to help himself and his kids (ergo, he wants to eliminate the estate tax and the AMT), except to the extent that he can tap any of these issues/policies to elevate himself.

Surely, no one who’s paying even a whit of attention can believe he cares about the actual living conditions of “the working class Americans who elected him.” His concern for them extends only to how he can get and keep them behind him.

Once you understand this, and I grant you, it’s not a deep insight, actions that “don’t seem to make any sense” make perfect sense. All the lies, the split personality stuff, the complete flipping of positions one day to the next. He’s always and everywhere just doing the only thing he’s good at, and he’s very good at it: generating conflict. Attacking others, deflecting blame, playing one group off of another. And it’s all purely in the service of making him look strong and everybody else, including those supposedly on his team, look weak.

OK, rant over. Back to the spreadsheets.

What’s (not) up with productivity growth? A quick overview

August 22nd, 2017 at 11:35 am

For a long while now, I’ve been thinking and reading about the great productivity growth slowdown, so it seemed like a good time to give the lay of the land as I see it:

–Facts of the case, 1: As measured (as you’ll see, this caveat is important), since 2010, output per hour has been growing about 1% per year, half the growth rate of the long-term average. Slowdowns of similar magnitudes have occurred across most advanced economies.

Source: Furman, https://www.vox.com/the-big-idea/2017/3/21/14938698/growth-trump-economic-us-slowdown-demographics-stagnation

–Facts of the case, 2: The bulk of the slowdown is attributable to a decline in total factor productivity (TFP), or the growth in output when you take out all the measurable inputs. TFP is reasonably considered a proxy for innovation.

–The dreaded “empty hole problem:” Outside of accounting exercises that raise as many questions as they answer, economists do not understand the underlying forces that make productivity speed up and slow down. This creates the “empty hole problem:” since no one knows the answer, partisans fill the hole with their favorite candidate. E.G., here in DC “tax cuts and deregulation!” become the solution du jour.

–Optimists and (sort of) pessimists: When it comes to how lasting our plodding productivity growth rates will be, commentators fit roughly into pessimistic and optimistic camps. The pessimists are the larger group and, at least in my judgement, have better evidence. Their focus is on the slowdown in TFP, and for all the talk about it, no one really knows what drives innovation cycles. In that sense, “who knows?” is a subgroup among the pessimists wherein I place myself. The real pessimist caucus is chaired by the productivity expert Robert Gordon, who argues that the big-ticket productivity movers—e.g., electricity diffusion, air conditioning, indoor plumbing, air travel—are long behind us. Candy Crush is a fun, free diversion, but it ain’t a big efficiency play.

–What about mismeasurement? The optimists largely depend on mismeasurement and they bring some evidence to the table. Since we’re talking about growth rates, showing evidence of mismeasurement alone is not proof of anything. It must be shown that mismeasurement is getting worse, i.e., that we’re increasingly leaving out value added in our measures of real output. Some mismeasurement claims stem from the observation that sectors wherein it is harder for national accountants to pick up true declines in quality-adjusted prices—health care, software, the “app” economy—are the very sectors that are growing as a share of value added, meaning even constant mismeasurement in those sectors could lead to downward bias in measured output and thus productivity.

The biggest mismeasurement advocates are the typically hard-nosed economics team at Goldman Sachs. The figure below shows their portentous adjustments to output from significantly goosing the quality adjustments to IT hardware, software, and “free digital content.” Based on this work, they conclude that both GDP and productivity growth are understated by 1/4-1/2 percentage points, which is big in this biz.

Source: GS Research

However, I don’t find all their adjustments fully convincing. Careful research points out that we’re doing a better job than we used to measuring hardware and software, thus the productivity slowdown may be understated (in the US, we’re also producing less IT hardware). Other work finds that, yes, our price indices are missing tech improvements, such that TFP in that sector has hardly slowed at all. But this just implies that TFP outside of tech has decelerated even faster than we thought. Then there’s research showing that productivity is falling across many countries, and its decline is uncorrelated with their production of IT.

Also, a bunch of what’s allegedly being increasingly mismeasured – e.g., the value of software – are intermediate goods, meaning you’ve got to show the links in the chain such that final demand is increasingly biased down.

Wherein I fill the empty hole: Here are three explanations that make sense to me. First, some of the most interesting research in this space shows an historically unique divergence between the productivity growth of so-called “frontier” and “laggard” firms. Why has the latter failed to adopt the technologies of the former, and why hasn’t that failure led to their demise? This may be an important market failure.

Second, though the productivity slowdown predates the Great Recession, “secular stagnation” has been upon the land for quite a while now, and thus it might be a mistake to reject the hypothesis that weak demand is a factor. I can think of a simple, intuitive model wherein strong demand boosts unit labor costs, squeezing unit profits, such that maintaining profit margins means finding ways to produce more efficiently (this is the “full employment productivity multiplier” about which I’ve theorized). Third, the most accurate forecasts of productivity growth over the next few years require the use of very long—as in 40 years—autoregressive lags, so perhaps we will eventually mean-revert back to healthier productivity growth rates.

That last point is in the spirit of the most honest answer: who knows?