My latest podcast, “IPAB: ObamaCare’s Next Constitutional Hurdle.”
My latest podcast, “IPAB: ObamaCare’s Next Constitutional Hurdle.”
This morning the Obama administration lodged an official complaint with the World Trade Organization’s (WTO) Dispute Settlement Body over China’s ongoing restrictions of exports of “Rare Earth” minerals. Rare Earths are crucial ingredients used in the production of flat-screen televisions, smart phones, hybrid automobile batteries, and other high technology products.
The formal complaint was not entirely unexpected since the dispute has been on a low boil for nearly 18 months; the U.S. government recently prevailed in a WTO dispute over a similar issue concerning Chinese export restrictions on nine raw materials used in manufacturing; and, this is an election year in which President Obama has carte blanche to outbid the Republican presidential aspirants’ China-bashing rhetoric with administrative action. So, no surprises really.
Despite the added political incentive to look tough on China this year, the administration should be applauded for its efforts to compel China to oblige its WTO commitments. This is a legitimate complaint following proper channels. In fact, this is exactly the course of action I have long argued for. Negotiations, consultations, and formal WTO dispute resolution (which begin with a long consultation period in which the parties are encouraged to find solutions without formal adjudication) are precisely the methods of dispute settlement conducted by governments that respect the process, their counterparts, and the rule of law in international trade.
In a Cato paper published last week, I wrote:
There is little doubt that certain other Chinese policies would not pass muster at the WTO. China’s so-called indigenous innovation policies, forced technology transfer requirements, porous intellectual property enforcement regime, and rare earth mineral export restrictions are some of many legitimate concerns that might justify formal WTO challenges. (Emphasis added.)
Now, my perspective is not motivated by a fetish for WTO litigation, but a certainty that the alternatives would be bad. Unilateral, discretionary actions taken by governments to redress perceived violations or shortcomings of another government undermine the rule of law in trade and encourage retaliation. Both China and the United States are guilty of taking such unilateral, discretionary actions, and bilateral tensions have increased as a result (see here).
U.S. policymakers should appreciate that today’s formal complaint on rare earths is an example of the right way to address perceived trade barriers. They should also recognize in the arguments advanced by the Office of the U.S. Trade Representative the flawed economics in their support of last week’s countervailing duty legislation (the so-called GPX or NME/CVD bill).
Here’s the USTR’s rationale for the Rare Earths complaint:
China imposes several different types of unfair export restraints on the materials at issue in today’s consultations request, including export duties, export quotas, export pricing requirements as well as related export procedures and requirements. Because China is a top global producer for these key inputs, its harmful policies artificially increase prices for the inputs outside of China while lowering prices in China. This price dynamic creates significant advantages for China’s producers when competing against U.S. producers – both in China’s market and in other markets around the world. The improper export restraints also contribute to creating substantial pressure on U.S. and other non-Chinese downstream producers to move their operations, jobs, and technologies to China.
And here’s a quote from USTR Ron Kirk:
America’s workers and manufacturers are being hurt in both established and budding industrial sectors by these policies. China continues to make its export restraints more restrictive, resulting in massive distortions and harmful disruptions in supply chains for these materials throughout the global marketplace.
And here’s Ambassador Kirk in a statement responding (a few months ago) to the WTO Appellate Body ruling that China’s export restrictions on nine raw materials were not in conformity with that country’s WTO commitments:
Today’s decision ensures that core manufacturing industries in this country can get the materials they need to produce and compete on a level playing field.
And, finally, a statement from the USTR’s website on the raw material export restrictions cases:
These raw material inputs are used to make many processed products in a number of primary manufacturing industries, including steel, aluminum and various chemical industries. These products, in turn become essential components in even more numerous downstream products.
USTR’s argument against Chinese export restrictions in the raw materials and Rare Earths cases are just as applicable to U.S. import restrictions. Removing restrictions—whether the export variety imposed by foreign governments or the import variety imposed by our own—reduces input prices, lowers domestic production costs, enables more competitive final-goods pricing and, thus, greater profits for U.S.-based producers.
Yet the U.S. government imposes its own restrictions on imports of some of the very same raw materials. It maintains antidumping duties on magnesium, silicon metal, and coke (all raw materials subject to Chinese export restrictions). In fact, over 80 percent of the nearly 350 U.S. antidumping and countervailing duty measures in place restrict imports of raw materials and industrial inputs—ingredients required by U.S. producers in their own production processes. But those companies—those producers and workers for whom Ambassador Kirk professes to be going to bat in the WTO case on rare earths (and the previous raw materials case)—don’t have a seat at the table when it comes to deciding whether to impose AD or CVD duties. (Full story here.)
Ambassador Kirk’s logic and the facts about who exactly is victimized by U.S. trade policies provide a compelling case for trade law reform, such as requiring the administering authorities to consider the economic impact of AD/CVD measures on producers in downstream industries—companies like magnesium-cast automobile parts producers, manufacturers of silicones used in solar panels, and even steel producers, who require coke for their blast furnaces.
Last week, when the CVD legislation passed both chambers overwhelmingly, Congress was implicitly thumbing their noses at these same producers and workers who the USTR rightly identifies as victims of Chinese trade restrictions. They are clearly victims of our own policies, derived in dark shadows by interests with asymmetric influence on the process. Maybe we should dwell on that hypocrisy for a while, and work to fix it by reconsidering the self-flagellation that is the U.S. trade remedies regime.
American companies are hindered by what is arguably the world’s most punitive corporate tax system. The federal corporate rate is 35 percent, which climbs to more than 39 percent when you add state corporate taxes. Among developed nations, only Japan is in the same ballpark, and that country is hardly a role model of economic dynamism.
But the tax rate is just one piece of the puzzle. It’s also critically important to look at the government’s definition of taxable income. If there are lots of corrupt loopholes – such as ethanol – that enable some income to escape taxation, then the “effective” tax rate might be rather modest.
On the other hand, if the government forces companies to overstate their income with policies such as worldwide taxation and depreciation, then the statutory tax rate understates the actual tax burden.
The U.S. tax system, as the chart suggests, is riddled with both types of provisions.
This information is important because there are good and not-so-good ways of lowering tax rates as part of corporate tax reform. If politicians decide to “pay for” lower rates by eliminating loopholes, that creates a win-win situation for the economy since the penalty on productive behavior is reduced and a tax preference that distorts economic choices is removed.
But if politicians “pay for” the lower rates by expanding the second layer of tax on U.S. companies competing in foreign markets or by changing depreciation rules to make firms pretend that investment expenditures are actually net income, then the reform is nothing but a re-shuffling of the deck chairs on the Titanic.
Now let’s look at President Obama’s plan for corporate tax reform.
In other words, to paraphrase the Bible, the President giveth and the President taketh away.
This doesn’t mean the proposal would be a step in the wrong direction. There are some loopholes, properly understood, that are scaled back.
But when you add up all the pieces, it is largely a kiss-your-sister package. Some companies would come out ahead and others would lose.
Unfortunately, that’s not enough to measurably improve incomes for American workers. In a competitive global economy, where even Europe’s welfare states recognize reality and have lowered their corporate tax rates, on average, to 23 percent, the President’s proposal at best is a tiny step in the right direction.
As discussed yesterday, the most important number in Obama’s budget is that the burden of government spending will be at least $2 trillion higher in 10 years if the President’s plan is enacted.
But there are also some very unsightly warts in the revenue portion of the President’s budget. Americans for Tax Reform has a good summary of the various tax hikes, most of which are based on punitive, class-warfare ideology.
In this post, I want to focus on the President’s proposals to increase both the capital gains tax rate and the tax rate on dividends.
Most of the discussion is focusing on the big increase in tax rates for 2013, particularly when you include the 3.8 tax on investment income that was part of Obamacare. If the President is successful, the tax on capital gains will climb from 15 percent this year to 23.8 percent next year, and the tax on dividends will skyrocket from 15 percent to 43.4 percent.
But these numbers understate the true burden because they don’t include the impact of double taxation, which exists when the government cycles some income through the tax code more than one time. As this chart illustrates, this means a much higher tax burden on income that is saved and invested.
The accounting firm of Ernst and Young just produced a report looking at actual tax rates on capital gains and dividends, once other layers of tax are included. The results are very sobering. The United States already has one of the most punitive tax regimes for saving and investment.
Looking at this first chart, it seems quite certain that we would have the worst system for dividends if Obama’s budget is enacted.
The good news, so to speak, is that we probably wouldn’t have the worst capital gains tax system if the President’s plan is enacted. I’m just guessing, but it looks like Italy (gee, what a role model) would still be higher.
Let’s now contemplate the potential impact of the President’s tax plan. I am dumbfounded that anybody could look at these charts and decide that America will be in better shape with higher tax rates on dividends and capital gains.
This isn’t just some abstract issue about competitiveness. As I explain in this video, every single economic theory – even Marxism and socialism – agrees that saving and investment are key for long-run growth and higher living standards.
So why is he doing this? I periodically run into people who are convinced that the President is deliberately trying to ruin the nation. I tell them this is nonsense and that there’s no reason to believe elaborate conspiracies.
President Obama is simply doing the same thing that President Bush did: Making bad decisions because of perceived short-run political advantage.
President Obama’s budget proposal was unveiled today, generating all sorts of conflicting statements from both parties.
Some of the assertions wrongly focus on red ink rather than the size of government. Others rely on dishonest Washington budget math, which means spending increases magically become budget cuts simply because outlays are growing at a slower rate than previously planned.
When you strip away all the misleading and inaccurate rhetoric, here’s the one set of numbers that really matters. If we believe the President’s forecasts (which may be a best-case scenario), the burden of federal spending will grow by $2 trillion between this year and 2022.
In all likelihood, the actual numbers will be worse than this forecast.
The President’s budget, for instance, projects that the burden of federal spending will expand by less than 1 percent next year. That sounds like good news since it would satisfy Mitchell’s Golden Rule.
But don’t believe it. If we look at the budget Obama proposed last year, federal spending was supposed to fall this year. Yet the Obama Administration now projects that outlays in 2012 will be more than 5 percent higher than they were in 2011.
The most honest assessment of the budget came from the President’s Chief of Staff, who openly stated that, “the time for austerity is not today.”
With $2 trillion of additional spending (and probably more), that’s the understatement of the century.
What makes this such a debacle is that other nations have managed to impose real restraints on government budgets. The Baltic nations have made actual cuts to spending. And governments in Canada, New Zealand, Slovakia, and Ireland generated big improvements by either freezing budgets or letting them grow very slowly.
I’ve already pointed out that the budget could be balanced in about 10 years if the Congress and the President displayed a modest bit of fiscal discipline and allowed spending to grow by no more than 2 percent annually.
But the goal shouldn’t be to balance the budget. We want faster growth, more freedom, and constitutional government. All of these goals (as well as balancing the budget) are made possible by reducing the burden of federal spending.
Salting mandated health insurance with birth control is exactly the same as a tax—on employers, on Catholics, on gay men and women, on couples trying to have children and on the elderly—to subsidize one form of birth control…
The tax rate and spending debates that occupy the media are a small part of the effective taxes and spending that the government achieves by these regulatory mandates…
The natural compromise is simple: Birth control, abortion and other contentious practices are permitted. But those who object don’t have to pay for them. The federal takeover of medicine prevents us from reaching these natural compromises and needlessly divides our society…
Sure, churches should be exempt. We should all be exempt.
My only quibble is with his claim, “Insurance is a bad idea for small, regular and predictable expenses.”
That’s generally true. But medicine is an area where, potentially at least, small up-front expenditures (e.g., on hypertension control) could prevent large losses down the road. So it may be economically efficient for health plans to cover some small, regular, and predictable expenses. Both the carrier and the consumer would benefit. In fact, that would be the market’s way of telling otherwise uninformed consumers, “Hey! Controlling your hypertension is a really good for you!” And really, if someone is so risk-averse that they want health insurance with first-dollar coverage of everything – and they’re willing to pay the outrageous premiums that would accompany such coverage – why should we take issue with that?
ObamaCare’s contraceptive-coverage mandate demonstrates that government does a horrible job of picking only those types of “preventive” services for which first-dollar coverage will leave consumers better off. But I also think advocates of free-market health care generally need to let go of the idea that health insurance exists only for catastrophic expenses.
This work by Cato Institute is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License.