Tag: competition

Are U.S. Corporate Taxes Low?

In a new column, Bruce Bartlett argues that U.S. corporate taxes are the lowest in the OECD, and therefore there is no need to reduce them. As usual, Bruce frames the debate as between sensible center-left economists like himself vs. crackpot Republicans. Yet on this issue, the great majority of serious tax scholars agree that a corporate tax rate cut is long overdue. Indeed, there is such broad agreement among experts that even the Obama White House is considering a corporate rate cut.

Bruce offers only weak and deceptive data in support of his views:

One would not know from the Republican document that corporate taxes are expected to raise just 1.3 percent of GDP in revenue this year, about a third of what it was in the 1950s.

This statistic does not show what Bruce pretends it shows. Corporate income taxes are paid by a subset of businesses called “C” corporations. But the share of total U.S. business income reported by C corporations has plunged in recent decades with the rise in other business structures, particularly LLCs and S corporations.

In a 2007 article in Tax Notes, PwC economist Peter Merrill showed that the share of total U.S. business income reported by C corporations fell from 71 percent in 1987 to just 49 percent by 2004. C corporations are less important business structures than they used to be, so it is to be expected that corporate taxes as a share of GDP has fallen.

Another way to see the relative decline in C corporations is to look at the ratio of C corporation revenues to GDP. In 1980, for example, C corporation revenues were more than two times larger than GDP ($6.1 trillion to $2.8 billion), but by 2008 C corporation revenues were only about 1.5 times larger than GDP ($22 trillion to $14 trillion). (Revenues from the IRS corporate report for those two years).

Bruce’s centerpiece is a table showing that U.S. corporate taxes as a share of GDP were 1.8 percent in 2008, a lower share than in other OECD countries. But the rise in LLCs and S corporations in the United States makes this table almost useless in furthering Bruce’s argument. C corporations may simply represent a smaller share of the overall economy in the United States than in other countries. To make his point, Bruce would need to show that taxes as a share of corporate profits are lower in the United States than elsewhere.

If taxes are low historically and in comparison with our global competitors, how are Republicans able to maintain that taxes are excessively high? They do so by ignoring the effective tax rate and concentrating solely on the statutory tax rate.

The effective tax rate Bruce refers to is the average effective rate, which is the rate he calculates in the faulty manner of taxes as a share of GDP. However, marginal effective rates are generally considered to be more important for international competitiveness. When Toyota is considering expanding its North American production at one of its U.S. or Canadian locations, it will look at the marginal effective tax rate in the two countries. And when it comes to marginal effective corporate tax rates, the United States has one of the highest rates in the world, according to a Cato study by tax scholars Jack Mintz and Duanjie Chen.

The economic importance of statutory tax rates is blown far out of proportion by Republicans looking for ways to make taxes look high when they are quite low.

Actually, statutory corporate tax rates are extremely important in the modern global economy because of the high mobility of corporate profits. In general, marginal effective tax rates drive real investment flows, but statutory corporate rates drive cross-border movements of reported income. Politicians frequently express their outrage at corporations pushing their profits offshore through transfer pricing and other techniques, but they could fix the problem anytime they wanted by slashing the uniquely high U.S. statutory corporate rate.   

This brings us back again to Bruce’s statistic that U.S. corporate taxes as a share of GDP are low at just 1.8 percent. Another reason that figure is low is that the high U.S. statutory rate is pushing reported income offshore through avoidance and evasion. If we cut the statutory corporate rate, the apparent low burden that Bruce points to would increase. This chart shows the inverse relationship between statutory corporate taxes and corporate taxes as a share of GDP.

By the way, if the importance of statutory corporate rates were “blown far out of proportion” as Bruce says, then why has every other advanced economy put so much effort into reducing its statutory rate over the last two decades? The answer is that liberal, centrist, and conservative governments around the world have understood that a country imposing a high statutory corporate rate shoots itself in the foot in today’s competitive world economy.

To sum up:

  • The U.S. has a low average effective corporate rate when measured incorrectly as a share of GDP, as Bruce does. The low rate results from the relative decline in C corporation business activity, the high U.S. statutory rate driving profits offshore, and the high U.S. marginal effective rate suppressing real investment.
  • The U.S. has one of the highest statutory corporate tax rates in the world. The high statutory rate drives reported income offshore, and it is also an important component of the marginal effective tax rate faced by companies.
  • The U.S. has one of the highest marginal effective corporate tax rates in the world according to some calculations, which likely reduces U.S. capital investment substantially. After all, “corporate taxes are the most harmful type of tax for economic growth,” according to the OECD.

 For more, see Global Tax Revolution.

Gingrich & Woolsey on Energy

The other day, The Wall Street Journal provided a public service by lambasting Newt Gingrich for his absurd speech to the ethanol lobby in Des Moines last month (money line:  ”Obviously big urban newspapers want to kill it because it’s working, and you wonder, ‘What are their values?’”).  Today, Gingrich and fellow ethanol-maven James Woolsey struck back in those very same pages.  In doing so, Gingrich provided yet more evidence that he’s intellectually unfit for office.

“It is in this country’s long-term best interest,” he said, ”to stop the flow of $1 billion a day overseas.”  Really?  So money sent overseas is gone forever.  News to me.  The only thing you can buy with dollars earned from oil sales to the U.S. is to buy things denominated in dollars or to exchange them so that someone else can.  And we sell a lot of stuff to foreigners that are denominated in dollars (treasury bills for one) and that money comes right back to the good old U.S. of A.

But put that aside.  If Gingrich really believes this, then why not just ban all imports all together?  Is that what the GOP is about these days - rank gooberism on trade?

And one other thing; the U.S. does not spend $1 billion a day on foreign oil.  It spends about half that; $530 million a day (in 2009 anyway).

“[I] co-produced a movie with my wife, Callista, ‘We Have the Power,’ that argued for an ‘all of the above’ energy strategy which would maximize all forms of domestic energy production.”  Apparently, being a pol means that one doesn’t have to pick and choose between investments a, b, or c.  We’ll just mandate everyone invest in everything that can attract a lobbyist. 
When you hear this stuff about an ”all of the above” energy strategy, what you’re hearing is a complaint that the Democrats aren’t subsidizing enough of the energy industry.  They are too tight-fisted with the public purse.  They are not ambitious enough in their planning.  And while Republicans bang the table for more, more, and more handouts to private corporations, liberals like Amory Lovins (prominent left-of-center energy guru) and Carl Pope (former head of the Sierra Club) call for zeroing out everyone’s subsidies and leaving the energy market the heck alone (at least when it comes to this matter).  It’s a mad, mad world.
 
“Nevertheless,” says Gingrich, ”the Journal attempts to equate my career-long commitment to increased American energy production with the anti-energy agenda of President Obama. This is a laughable charge, especially considering I have been one of the most vocal opponents of the president’s energy policies since he took office.”  Perhaps, but on this matter, Gingrich is attacking the administration from the Left.  
 
Even more amusing was James Woolsey’s lecture to the editorial board over what it means to be a conservative.   “We could not help wondering,” he asked along with his co-author, Gal Luft, ”why the Journal, despite its commitment to free enterprise, chose to attack Newt Gingrich for his call to open vehicles to fuel competition, which would cost auto makers under $100 per new car.”  Well Jim, a commitment to free enterprise is a commitment to allow enterprises to be free to produce whatever they want.  Of course, if Woolsey had read Gingrich’s speech to the ethanol lobby, he would not need to wonder - it’s about their sick, twisted values.
 
Nonetheless, Woolsey claims that such a mandate ”is perfectly in line with conservative economic principles.”  That may be true given what conservatives believe about economics.  But it’s not consistent with a principled support for a free market.
 
Finally, “Challenging Mr. Gingrich’s conservative bona fides based on his support for breaking oil’s virtual monopoly over transportation fuel is not only myopic but also the best gift the Journal can give OPEC.”  But … oil dominates the transportation market because it is a heck of a lot cheaper than any other fuel.  If it weren’t so much cheaper than ethanol, then we would have no need for such massive subsidies for the same.  The same goes for electric cars.  If and when that changes, oil’s “monopoly” will crumble.  Until then, taking oil out of transportation markets simply takes cheap fuel out of transportation markets.  It would be fun to watch a Gingrich/Woolsey ticket run on that.

Krugman (Both of Them) on Competitiveness

When it became clear that President Obama would make “competitiveness” a theme of his SOTU address, I looked forward to seeing Paul Krugman’s statement pointing out how much nonsense that is. Here he is, after all, in his excellent 1997 book, Pop Internationalism (MIT Press):

…International trade, unlike competition among businesses for a limited market, is not a zero-sum game in which one nation’s gain is another’s loss. It is [a] positive-sum game, which is why the word “competitiveness” can be dangerously misleading when applied to international trade.

Sure enough, President Obama’s speech last night was peppered with references to “the competition for jobs,” “new jobs and industries take root in this country, or somewhere else, “the competion for jobs is real,” etc. And of course there was a healthy dose of the usual mercantalist obsession with exports.

Although written before the President’s address was delivered, what would Paul Krugman 2.0 think of this sort of talk? The title of his column Sunday was certainly encouraging: “The Competition Myth.” But the substance of the column went in a … er… different direction from that which I had anticipated/hoped:

…talking about “competitiveness” as a goal is fundamentally misleading. At best, it’s a misdiagnosis of our problems. At worst, it could lead to policies based on the false idea that what’s good for corporations is good for America

So what does the administration’s embrace of the rhetoric of competitiveness mean for economic policy?

The favorable interpretation, as I said, is that it’s just packaging for an economic strategy centered on public investment, investment that’s actually about creating jobs now while promoting longer-term growth. The unfavorable interpretation is that Mr. Obama and his advisers really believe that the economy is ailing because they’ve been too tough on business, and that what America needs now is corporate tax cuts and across-the-board deregulation. [emphasis mine]

In other words, Krugman’s objections to the “competitiveness” rhetoric are based on his fear that it will lead to policies favorable to corporations, not that the whole concept is flawed.

[Disclaimer: the above is by no means an exhaustive analysis of the problematic parts of the column]

I yield to no-one in my admiration for Paul Krugman, trade economist. He made a real contribution to the discipline I’ve loved since I was a teenager. But Paul Krugman, columnist…not so much.

Getting Serious about Antidumping Reform in 2011

The U.S. antidumping law still enjoys broad bipartisan support in Congress and within pockets of the executive branch. Although some of that support can be chalked up to politicians representing the narrow interests of influential constituencies that have mastered the use of antidumping as a bludgeon to cripple the competition, much more support stems from a fundamental misunderstanding of the purpose, history, mechanics, and consequences of the law.

Too many policymakers passively accept the anachronistic rationalizations proffered by the steel industry, labor unions, other big antidumping users, and their hired guns in Washington. Too many buy into the idealized imagery of a patriotic, upstanding American producer working tirelessly to ensure the preservation of well-paying jobs for hard-working Americans, but is suffering the ravages of unscrupulous, predatory foreign traders intent on destroying U.S. firms and monopolizing the U.S. market. What politician could oppose a law presumed to protect that kind of a company against that kind of a scourge?

But when the curtain is peeled back, exposing the reality of the operation of the U.S. antidumping law, one discerns a very different reality.  Antidumping measures always raise the costs of firms in downstream industries that rely on the affected imports.  The law routinely claims domestic firms as victims.  The law is often used as a tool by domestic firms waging battle for supremacy over other domestic firms.  Sometimes foreign-owned firms are the petitioners and U.S-owned firms are the respondents.  Rarely does the law lead to job creation or job restoration in the domestic industry.  And never is the allegation of “unfair trade” substantiated, or even investigated.  Myth and misinformation explains the persistence of the U.S. antidumping regime.

Over the next few months, the Cato Institute’s Center for Trade Policy Studies will shine the spotlight on  U.S. antidumping policy and update its large body of research on the subject by publishing some new papers and hosting discussions about the prospects for meaningful antidumping reform. The new Congress should pay attention.  After all, if renewed talk about completing the Doha Round in 2011 is to become action, so must antidumping reform.

The first of those studies is now available on the Cato home page. That paper describes the evolution of U.S. antidumping policy from an obscure offshoot of competition law into the predominant instrument of contingent protection that it is today and provides an account of some of the crucial statutory and administrative changes that have occurred over the decades. Its purpose is to demonstrate that the increase in antidumping activity reflects several developments that have nothing to do with foreign behavior whatsoever, including a progressive expansion of the definition of dumping, relaxation of evidentiary standards, and a pro-domestic-industry bias in the law’s administration at the U.S. Department of Commerce. The arcane mix of statutory rules and discretionary whims that emerged as contemporary antidumping policy is a far cry from the first antidumping law—in practice and intent. Today, antidumping is little more than an elaborate excuse for run-of-the-mill protectionism. And overwhelmingly, U.S. businesses and consumers are its victims.

Postmaster General Stepping Down

Postmaster General John Potter has announced that he is stepping down. The Washington Post speculates on the reason for Potter’s departure:

It is not immediately clear why Potter decided to step down, though USPS staffers and others in the postal community – a wide fraternity including the shipping industry, labor unions and large retailers – signaled recently that he was likely to go after another record year of financial losses and failing to earn greater management flexibilities from Congress.

When Potter testified before a Senate Appropriations subcommittee hearing in March on the USPS’s desire to drop Saturday delivery, I noted that his comments indicated the need to privatize the U.S. Postal Service.

In his testimony, Potter stated:

If the Postal Service were provided with the flexibilities used by businesses in the marketplace to streamline their operations and reduce costs, we would become a more efficient and effective organization. Such a change would also allow us to more quickly adapt to meet the evolving needs, demands, and activities of our customers, now and in the future.

Of course, Congress has shown virtually no interest in giving the USPS, which is bleeding red ink, the greater flexibility it needs. This makes me wonder if Potter will reach the same conclusion that his predecessor, William Henderson, reached following his departure from the USPS.

Three short months after Henderson stepped down as postmaster general in June 2001, he penned an op-ed in the Washington Post that called for the USPS to be privatized.

Henderson wrote:

But for all the ways in which the Postal Service already resembles a private company, it lacks the advantages of any other corporation, such as being able to turn on a dime when it comes to rate changes, perhaps raising prices at times of high demand and lowering prices to entice customers during traditionally slow times, which for the Postal Service means summer. Today, a price change requires the permission of the Postal Rate Commission – a yearlong process.

And unlike a private company, the Postal Service has a universal service obligation, meaning it must deliver everywhere, six days a week, at a regularly scheduled time, making the delivery even for a single piece of mail, which is not cost-effective. And it means delivering in the Grand Canyon and in rural Alaska and in high-risk neighborhoods and lots of other places where delivery is not cost-effective.

The trade-off is that the Postal Service gets monopoly protection; no private company is allowed to compete with it head to head by carrying letter mail or using the mailbox. It should give up that protection for the greater benefits of privatization.

Henderson’s conclusion still rings true almost ten years later:

I can’t believe that 25 years from now the Postal Service will still be owned by the federal government. But the point is that, as with any government asset, this one needs to be maximized. And that means we need to free ourselves from the usual discussion about controlling costs or keeping rates stable or mailing more, all of which is simply a form of denial about the real issue. The model itself is not going to work for the long haul: It must be changed.

Unfortunately, Congress is still in denial. In commenting on Potter’s departure, Sen. Susan Collins (R-ME) offered the vacuous statement that his successor “must strengthen the Postal Service by cutting costs, enticing more customers and putting this vital institution on a sound financial footing.” Instead, Sen. Collins and her colleagues need to recognize that the USPS model “is not going to work for the long haul” so long as politicians ultimately remain in charge.

Would the Schools Work Better If They Outlawed All Competitors?

In the Washington Post, columnist Courtland Milloy praises the “profound egalitarian insights” and “radical oneness” of D.C. Schools Chancellor Michelle Rhee (and billionaire Warren Buffett):

“I believe we can solve the problems of urban education in our lifetimes and actualize education’s power to reverse generational poverty,” Rhee wrote. “But I am learning that it is a radical concept to even suggest this. Warren Buffett [the billionaire investor] framed the problem for me once in a way that clarified how basic our most stubborn obstacles are. He said it would be easy to solve today’s problems in urban education. ‘Make private schools illegal,’ he said, ‘and assign every child to a public school by random lottery.’ “

Milloy’s not satisfied that Rhee is taking on entrenched interests, firing principals and teachers who aren’t doing a good job, and apparently actually improving the schools in the District of Columbia. No, he’s attracted to the “radical concept” of outlawing private schools and forcing everyone in the District into the same schools, with no hope of escape. There would be one method of escape, of course: moving to the suburbs.  And you can bet that lots more people would do that if Milloy and Rhee got their way.

I wonder what a total government monopoly on education would look like. Are Buffett and Rhee right that a government monopoly forced on every citizen would work well? Would work so well that it would “solve the problems of urban education … and reverse generational poverty”?

Well, one answer might be glimpsed on the same page B3 where part of Milloy’s column appeared. In an adjacent column, columnist John Kelly discussed his “Kafkaesque” five-hour visit to the state of Maryland’s Motor Vehicle Administration:

I was at the MVA. I was in Hell.

I know that complaining about the MVA or the DMV is the last refuge of a scoundrel columnist, but I don’t care. You don’t know what it was like. You weren’t there, man. I spent five hours at the Beltsville MVA on Thursday. Five hours. I could have driven to New York in that time….

I thought: Can this really be happening? Can I really have stepped into a Kafka story? Shouldn’t every counter be filled with employees working as fast as possible? Shouldn’t management be out there helping, and Maryland state troopers, too? This is the Katrina of waiting, people.

The MVA, of course, is a monopoly government bureaucracy. Everyone must go there – CEOs, diplomats, even Washington Post columnists. And yet, somehow, that has not led to the MVA equivalent of solving problems and reversing poverty. Five hours to get a drivers’ license just might be worse performance than that of the public schools.

It’s the system, Mr. Milloy and Ms. Rhee. Monopolies don’t have much incentive to improve. Give everyone the chance to go to a different supplier, and then you’ll see improvement. Giant Food wouldn’t last long if it took five hours to buy your groceries – because it has competitors. But as long as the schools are a near-monopoly, and the MVA or DMV is a total monopoly, don’t expect real improvement.

Well-Worn Ideological Grooves II

The Consumerist relates the story of a potential Verizon customer who grew frustrated with his inability to get its high-speed FiOS Internet service. After resorting to emailing the CEO of the company, his service was promptly installed.

“Verizon is a corporation who cares about their customers and not only about the bottom line,” wrote the newly happy customer.

Now ask yourself: Just how separable are “caring for customers” and “the bottom line”?

It’s interesting that many people’s ideological grooves have these concepts in opposition. But business owners know how much time they spend slavishly trying to please customers—because that affects their bottom lines. When big businesses do it badly, that affects their bottom lines and invites competition.

(Needless to say, the telecommunications area needs more competition, to bring customer service and bottom lines closer together).

See also: Well-Worn Ideological Grooves I