Topic: Government and Politics

Reply to Tax Policy Center on Corporate Tax Rates and Revenue

Len Burman, director of the Urban-Brookings Tax Policy Center, suggests  I was “careless” in a recent Wall Street Journal article when I said, “the Tax Policy Center (TPC) estimate of corporate rate cuts … is also nonsense because it’s entirely static. The estimate assumes raising or lowering corporate tax rates has no effect on corporate decisions about where to locate production, income or costs, and no effect on the economy’s performance.”

Burman says, “That is simply untrue (as we would have told Mr. Reynolds had he asked). If corporate tax rates were 10 percentage points below the top ordinary income tax rate, there would indeed be increased reporting of corporate income. But individual income tax revenues would fall too, quite possibly by more than the pickup in corporate revenues… . Investors would have had a huge incentive to channel their income through closely-held corporations instead of reporting it on their individual tax returns. Many S-corporations and partnerships, which are taxed at individual rates, would have chosen to be taxed as C-corporations at a lower rate… .I know the Wall Street Journal editorial page tries not to let facts get in the way of its tax-cut narrative, but those facts do matter.”

Was it “simply untrue” for me to say the Tax Policy Center’s corporate income tax estimates are static?  The footnote to their Table T08-0167 about “Senator John McCain’s Tax Proposals” could not be more clear: “Corporate income tax estimates are static (they do not include a behavioral response). Official estimates from the Joint Committee on Taxation would likely differ.”

Burman attempts to justify static revenue estimates by asserting that “quite possibly” there is no behavioral response to corporate tax rates, aside from shifting business income to and from the individual tax system.  But that just proves he is assuming, as I correctly said, that lowering corporate tax rates wold have literally “no effect on corporate decisions about where to locate production, income or costs, and no effect on the economy’s performance.” If that static assumption made any sense, then doubling corporate tax rates would double revenues (though more of the loot would show up on individual tax returns). That is certainly not what the economic literature suggests. Many countries in which income switching is impossible or trivial have cut their corporate tax rates to 25% or less with no loss in revenue as a share of GDP.

Trying justify static estimates on the basis of undocumented conjectures about the scale income shifting looks like an ad hoc rationalization. Guessing what might “quite possibly” be true has nothing to do with “facts.”  It amounts to abandoning economic theory and evidence in favor of a dubious hunch.

Under both the Obama and McCain plans the corporate tax rate would be 5-7 points below the individual tax through 2013.  Yet the Tax Policy Center mentions income shifting only in connection with the McCain plan.  If bias does not explain that, what does?

If income switching was as huge as Burman speculates, then the Tax Policy Center’s estimates of individual tax revenues from the Obama plan (which include a very modest behavioral response) are much too large, though corporate receipts would be somewhat higher.  In fact, that is exactly what I estimated in the 60-page paper cited in the byline to my op ed, which is mainly an empirical critique of Tax Policy Center methodology. I estimate that corporate income tax receipts under the Obama plan would be larger than the Tax Policy Center expects (because they ignored income shifting in Obama’s case).  But I also found their estimates of added receipts from higher tax rates on individual income, capital gains and dividends to be unbelievably rosy.

Obama’s Shock Doctrine

Paging Naomi Klein. In her book The Shock Doctrine, the left-wing polemicist claimed that right-wing governments — which she defined very broadly — take advantage of crises, or “shocks,” to implement their dastardly policies of free trade, privatization, and tax cuts. Well, one government has now announced its intention to take advantage of an economic crisis to implement “things you could not do before.” And since this government no doubt includes a lot of people who have read Naomi Klein, she may very well be able to take credit for giving them the idea.

According to the Wall Street Journal, President-elect Obama’s first and most central appointee is excited at the opportunities presented by the current economic shock:

Obama Chief of Staff Rahm Emanuel, speaking to a Wall Street Journal conclave of business leaders Tuesday, said the economic crisis facing the country is “an opportunity to do things you could not do before.”

“You never want a serious crisis to go to waste,” Mr. Emanuel said.

“You never want a serious crisis to go to waste.” Klein’s fans would be all over that if a Republican had said it. Instead, Paul Krugman praises that very line. Maybe he’s learned a few things from Naomi Klein, too.

In Crisis and Leviathan, Robert Higgs demonstrated that government growth in the United States has not been slow and steady, year in and year out. Rather, its scope and power tend to shoot up during wars and economic crises. Occasionally, around the world, there have been instances where a crisis led to free-market reforms. Generally, though, governments seek to expand their power, and they take advantage of crises to do so. But they rarely spell their intentions out as clearly as Rahm Emanuel did.

See Klein’s thesis skewered by Johan Norberg here and here, and by Jonathan Chait here.

Observations about the Auto Bailout

Things went badly for Detroit’s automakers in Washington this week. What was to be a decisive lobbying blitz planned months in advance proved reminiscent of GM’s efforts to market the Chevy Nova in Latin America. Both were all show, no va!

The arguments against a bailout under any circumstances are well-established. A lot has been said and written lately, including this new piece, about the improprieties of so-called bailouts, generally, and in this case, specifically. Basically, we need a shakeout, not a bailout. What we’re witnessing is a shakedown.

Rather than emphasize those arguments here, there is a lot of subtext to this auto bailout frenzy. The subtext hasn’t received much attention, but is fascinating enough (to me at least) to write about.

Even before CorporateJetGate forced Democratic leaders Nancy Pelosi and Harry Reid to bid the CEOs an abrupt and scathing adieu, support for Detroit’s case to raid the Treasury was melting away. But there wasn’t that much of a partisan divide over the issue. In fact, early October’s limited government, fiscal conservative darling, Rep. Thaddeus McCotter (R-MI), who gave one of the most compelling, moving, forceful, principled floor-speeches I’ve ever seen on the House floor in opposition to the financial bailout, is this month’s political hack. Apparently, his principled opposition to bailing out the “very people who caused this problem” doesn’t extend across state lines into Michigan. What a bitter disappointment he turns out to be.

The failure to garner enough support for a bailout bill was mostly the result of intra-party squabbling between factions within the Democratic Party — the Greens and the Laborites. The Greens view Detroit as carbon-belching heathens who must be brought to their knees before the almighty Sierra, Goddess of Flora and Fauna. The Laborites view the Greens as the Palinistas view those big shots who go to college to learn and stuff.

A Wall Street Journal editorial today picks up on this theme, which colors the battle between Henry Waxman (of the ascendant Greens) and John Dingell (of the declining Laborites) for Dingell’s long-held seat as top Democratic on the House Energy and Commerce Committee. Much of the same cultural and class animus that popularly defined the Red State-Blue State divide is very much evident within the Democratic Party itself and could mean that we have some form of divided government after all.

Credit the Bush administration for helping to drive this wedge between the factions and sideline the bailout — for the time being at least. “Credit” might be too strong a word since, after all, it was the Bush administration that concocted the mother of all bailouts in the first place. The automakers just want a teensy-weensy $25 billion, or 3.57%, of the $700 billion pot.

But here’s how the administration played a role. First, Treasury secretary Henry Paulson claimed he was unauthorized to allocate any of the $700 billion to the automakers under the TARP law. Congress didn’t challenge that interpretation too vehemently, and set out to rewrite the law to specifically authorize $25 billion for Detroit. But the White House indicated it wouldn’t sign that legislation, but that it would go along with a bill to redirect the $25 billion already authorized under the energy bill for Detroit to “retool” its plants to produce higher-mileage vehicles. This seemed the more workable political solution, until the Waxman faction objected and mobilized. Prospects for a deal went south after that.

The corporate jet scandal was actually a gift to Pelosi and Reid. Instead of the focus being on the fractiousness of the Democratic Party and the question of whether those two can herd cats, the press had a field day with the spectacle of top hats and tails in soup kitchens.

It’s revealing, though, that the congressional leadership didn’t once ask how the $25 billion infusion would be used to right the ship until AFTER the bailout idea was made toxic by the CEOs’ choices of transportation. It should have been the very first question. Other than helping to cover operating expenses for four to five months, how is $25 billion going to rescue three companies that are bleeding $6 billion per month? Seems pretty straightforward. When you go to a bank for a loan and say you’re bleeding cash and facing imminent collapse, should you expect the loan officer to write you a check? Shouldn’t the banker at least be interested in a business plan?

Well, the idea of a business plan didn’t even strike Pelosi and Reid until yesterday, when they told the CEOs to go back, sharpen their pencils, and show us how you’ll succeed. In a statement this afternoon reported in CQ Daily, which reveals how utterly lost in space the leadership is when it comes to business, Pelosi said she and Reid “would make it clear [to the three auto companies] they want to know how the automakers ‘plan to make investments in the advanced technologies, so that they can compete in the marketplace, so that people will want to buy their cars.’ The letter will also reiterate demands for accountability, including a ban on bonuses for executives earning more than $200,000 and a freeze on dividend payments.”

Then, as though to give the Justice Department’s antitrust division one last task, Pelosi invited the companies to collude. About providing their business plans, she said, “They could do it singly, jointly or severally, however they wish. But we need to have that response” (as though it were akin to a permission slip signed by a parent).

Maybe someone will say I’m being too harsh. But this dismissive tone, this lack of understanding the purpose of business plans, this conflating of irreconciliable objectives (like stopping the immediate financial bleeding by investing in green car technology), all suggest that the congressional leadership, and probably most Greens and Laborites, don’t really care one bit what happens to the companies, as long as their own political objectives are served.

The Greens want to show the world that consideration of production costs and consumer demand is passé. It’s all about the product being made quietly and invisibly. Someone should remind them there were no latte stands in the Stone Age either.

The Laborites seem most concerned about making sure the unions persist, but act as though the companies’ health has nothing to do with the unions’. If they really cared about saving the Detroit automakers, they would support the bankruptcy process. The automakers cannot survive much longer unless they shred their labor contracts. But if they shred the contracts, union management will have less to give to the Laborite politicians. It’s tough business these days being a leach on a leach.

Obama the Question Mark Man

I picked up my local beer magazine, On Tap, and was surprised to see a front page story on Matthew Lesko, the government subsidies guy who famously wears a question mark jacket. The question marks indicate that all you folks out there can get on board the federal gravy train, and Lesko can show you how.

As president-elect Barack Obama is trying to fill out his cabinet posts, I realized that Lesko would be perfect. I’m thinking maybe secretary of commerce because Lesko’s approach to commerce is to get everybody hooked on federal handouts. That’s exactly the same as Obama!

Obama has refundable tax credits for everyonehe’s got goodies for federal unions, and he’s got subsidies for health care, toddlers and college students, homeowners, prescription drug users, energy companies, and on and on.

Once President Obama gets all those new subsidy programs through Congress, Lesko would be the perfect salesman to travel the country and pump up excitement over a new era of subsidy-fueled prosperity.

Mr. Lesko, all your years of hard work making late-night TV commercials may pay off big time! All the Obama administration would have to do is change www.lesko.com to www.lesko.gov and Americans could start cashing in.

Let’s face it: Lesko’s message captures today’s new spirit perfectly. Working hard for a paycheck is for chumps. Today, everybody can become a member of the Government Money Club and experience Hope and Change under the new administration.

Dynastic Politics in Alaska

A year ago it looked like we might replace the son of a president in the White House with the wife of a president, while some Republicans grumbled that it was too bad the president’s brother couldn’t succeed him. I wrote then that Americans fought a rebellion to replace a monarchy with a republic, “in which men (and later women) would be chosen to lead the republic on the basis of their own accomplishments, not their family ties.” But

In a country formed in rebellion against dynastic government, some 18 members of the US Senate in 2005 had gained office at least in part through family ties, along with dozens of House members.

And the trend continues. Now Alaska, the Last Frontier, the state of rugged individualism, is going to be represented in the U.S. Senate by the daughter of a former governor and senator and the son of a former congressman. In a bit of a War of the Roses twist, Sen. Mark Begich’s father won his first congressional election by defeating Sen. Lisa Murkowski’s father.

Peekaboo, I See a Challenge to Sarbanes-Oxley in the Supreme Court

An intriguing case that alleges a high-profile violation of the president’s exclusive power to appoint and remove government officials is winding its way through the courts.  Free Enterprise Fund v. Public Company Accounting Oversight Board challenges the constitutionality of a key part of the Sarbanes-Oxley Act.

Congress passed Sarbox, as the law is called, in the wake of the Enron and WorldCom scandals to protect investors from shoddy accounting practices perceived as being rife in publicly traded companies.  (We now know that Sarbox’s regulatory burden costs the economy much more than the fraud it prevents and detects, but never mind.)  Among other things, the law created the Public Company Accounting Oversight Board – PCAOB, pronounced “peak-a-boo” – a private board exercising government power. Its members are appointed by the SEC, which has limited removal power.  In short, the president has neither any appointment nor removal power, in seeming violation of Article II, section 2 of the Constitution.

On Monday, the D.C. Circuit, now consisting of nine members after Judge Raymond Randolph took senior status as of November 1, split 5-4 in denying en banc review of a panel decision in the government’s favor.  Judges Janice Rogers Brown, Merrick B. Garland, Karen LeCraft Henderson, Judith W. Rogers, and David S. Tatel voted against rehearing while Chief Judge David B. Sentelle and Judges Douglas H. Ginsburg, Thomas B. Griffith and Brett M. Kavanaugh supported it.  Interestingly, the three Clinton appointees and one George H. W. Bush appointee voted in the majority, while both Reagan and two of the three George W. Bush appointees dissented.  The other George W. Bush appointee, Judge Brown, who is considered to be the most libertarian (she gave the B. Kenneth Simon Lecture at Cato’s 2007 Constitution Day conference) but also the most inscrutable, turned out to be the wild card.  (But she won’t be the swing vote for long because President Obama will have two vacancies to fill on the court.)

Lawyers for the Free Enterprise Fund, who include our friends at the Competitive Enterprise Institute, had earlier indicated that if they failed to get en banc review, they would seek certiorari in the Supreme Court. The narrow split in the D.C. Circuit probably enhances the chance that the justices would agree to hear the case, except that the Court this year has shown a reluctance to take on especially newsworthy (i.e., both controversial and significant) constitutional cases.