Topic: Tax and Budget Policy

Securing Land Rights for Chinese Farmers

A critical determinant of China’s long-term economic growth and social stability will be whether the wealth of its economic boom can reach the majority of its 700 million farmers, who make up approximately 56 percent of the total population. In the new Cato study, “Securing Land Rights for Chinese Farmers: A Leap Forward for Stability and Growth,” authors Zhu Keliang and Roy Prosterman confirm one fundamental cause of the widening rural-urban income gap: most Chinese farmers still lack secure and marketable land rights that would allow them to make long-term investments in land, decisively improve productivity, and accumulate wealth.

Bush Administration Seeks More Risky Government Housing Handouts

John Berlau of the Competitive Enterprise Institute explains in the Wall Street Journal how the Federal Housing Administration has hindered the effective functioning of the housing market - and how Congress and the White House want to make the problem even worse:

Both Mr. Frank and President Bush support major increases in the limits on the value of loans the agency can make, which are contained in a bill that passed the House of Representatives last month. Only 72 Republicans, mostly members of the conservative Republican Study Committee, voted against the bill. A similar bill cleared the Senate Banking Committee 20-1. But before the FHA’s loan spigots are opened up, a little due diligence by the political sector is in order. The FHA’s recent credit history shows it is far from the prudent institution it is said to be. By its own estimate, next year the agency expects to be in the red, paying out more for defaulted loans than borrowers pay to it in insurance premiums. …The agency poses more than just a threat to taxpayers. The collapse of whole segments of the housing market can be traced to FHA-subsidized mortgage products. Despite its decreasing market share, the FHA appears to have played a significant role in the current mortgage “meltdown” attributed to subprime loans. For the past three years, delinquency rates on the oh-so-safe mortgages insured by the FHA have consistently been higher than even those of the dreaded subprime mortgages. …FHA-insured loans have also been at the center of some of the worst excesses of the housing boom, including mortgage fraud, loans made without income verification, and property “flipping” with inflated appraisals. …In both the Clinton and Bush administrations, the FHA’s response to private alternatives for low-income borrowers was to aggressively compete with them – by making the agency’s own lending standards even more “subprime” than those of the private sector. Since its inception in 1934, the FHA has required a down payment – originally 20%, but gradually whittled down to 3% – for a home loan. …Despite these trends, HUD Secretary Jackson’s biggest concern has appeared to be not the FHA’s solvency, but the government agency’s loss of business to the private sector. “I am absolutely emphatic about winning back our share of the market,” he told the Washington Post in 2005. Looking at the agency’s dismal performance over the past few years, we can predict that, if the FHA racks up more “wins,” taxpayers and low-income home buyers will likely be suffering the losses.

Democratic Candidates Uniformly Bad on Capital Gains Tax Issue

The Wall Street Journal opines about the universal support for higher capital gains tax rates by the leading Democratic presidential candidates. Hillary is the “moderate,” seeking to raise the rate to 20 percent, while Obama and Edwards want a 28 percent rate. Yet as the WSJ explains, the capital gains tax is a perverse form of double taxation that ultimately hurts workers by reducing the amount of capital in the economy:

When it comes to taxes, Barack Obama is no Jack Kennedy. The Illinois Senator recently announced that he wants to raise the capital gains tax to restore “fairness” to the tax code. That makes it a three-peat: All of the leading Democratic contenders for President have endorsed higher taxes on stock ownership. Hillary Clinton is the “moderate” in that so far she’d merely raise the tax to 20% from the current 15% – a 33% increase. John Edwards and Mr. Obama want to nearly double it, to 28%. …roughly 52% of American adults own stock in some form, and last year 8.5 million of these investors paid a capital gains tax. The value of those assets will decline if capital gains taxes go up because financial markets instantly capitalize higher taxes on stock profits into lower stock prices. …Since we already tax corporate earnings at 35% through the corporate income tax, taxing those profits again when the stock is sold imposes a double tax on risk capital. That’s why 12 industrialized nations, including Hong Kong and Korea, impose a zero capital gains rate. …A study by former Treasury Department economist Gary Robbins has found that from 1946-1998, about 90% of the returns to capital investment accrued to workers in the form of higher wages, because when workers have more tools like computers, forklifts and robotic equipment, they produce more.

Cut Taxes to Keep Those Assets Here

The Wall Street Journal had a tiny “In Brief” story on October 10 with the headline “To Help Reduce Tax Load, 3M to Move Plants Abroad.”

Here’s the story:

Manufacturing conglomerate 3M Co. plans to move more of its operations to low-tax locations overseas in coming years as it attempts to reduce its overall tax rate. Chief Financial Officer Pat Campbell said the move is designed to help the St. Paul, Minn., maker of products ranging from transparent tape to stethoscopes achieve a tax rate of 30.5% by 2012, a reduction of about 2.5 percentage points. That would mean a $150 million to $200 million increase in 3M earnings.

If 3M had said that it was moving plants abroad in search of lower wages, the story would have been on the front page, rather than buried in the back as a small notice. The lack of news coverage on international tax competition is odd, given the general concern about the health of the U.S. manufacturing industry.  

Here is a presentation regarding 3M’s strategy by the firm’s CFO. Check out:

Page 35: “Moving Assets to Low Tax Growth Markets.” Observation: Corporate investment flows to countries that have both strong growth potential and low taxes.

Page 38: The chart shows that 3M has a higher effective tax rate at 33% than the average of its peers at 27%. Observation: U.S. corporations pay high tax rates.

Page 39: “Locate capacity in low-tax locations with common shipping locations to growth markets.” Observation: Taxes are not the only locational factor, but are part of a strategy that also requires optimizing logistics and market locations.

Message to U.S. policymakers: cut the corporate tax rate to allow 3M to keep more of its $1.5 billion in annual capital investments here.

Why the Mechanisms of Inequality Matter

Atlantic blogger Matthew Yglesias argues that it doesn’t matter why income inequality is increasing. According to Matt, as long as higher top tax rates and more downward redistribution won’t much hurt economic performance, then we ought to just go ahead and raise taxes and increase transfers, never mind the mechanisms of rising inequality.

Oftentimes, though, liberals act as if the thing that needs to be done is to prove somehow that inequality has exploded because people are in some sense “cheating” – so you get these long stories about corporate governance and corrupt compensation committees, etc. The problem here, though, is that even if this is true, it could still also be true that the cure – policy interventions into the operation of the market – would be worse than the disease. And, conversely, if you could prove that the rise in inequality was all above board – really was driven entirely by globalization and technological change – nothing about that causal analysis would debunk the idea that we ought to make our tax system more progressive.

The relevant debate isn’t about how we got here, it’s about what would happen if we tried to change things. Some people, of course, think changing things would be immoral. Indeed, there are some people I know who adhere to the bizarre view that one source of injustice in the contemporary United States is that our richest citizens aren’t rich enough. But beyond those people, you have a lot of people who take the view that raising taxes would have dire economic consequences, whereas lowering them would have large benefits. That’s the only debate that really matters in this regard. If the costs to the non-rich of higher taxes on the rich would be small (as I believe), then higher taxes on the rich to provide more benefits to the non-rich makes sense irrespective of why inequality has grown so much whereas if the costs would be high then it doesn’t make sense – again, completely apart from the causal issue.

I think Matt and I agree that the pattern of national incomes is largely morally irrelevant, but for quite different reasons.

From the classical liberal perspective, if today’s pattern is less equal than yesterday’s, but both patterns emerged from billions of individual transactions, each one of which took place on terms agreeable to the parties involved, then there is really nothing left over to evaluate morally. The relevant questions about the distribution of the gains from trade have already been settled in both cases.

Additionally, once we notice that many of these billions of transactions take place between parties of different nationalities – Americans trading with Canadians trading with Chinese, etc. – it becomes obvious that it is extra arbitrary to focus on national patterns of income, as if the nation were a giant factory with profits in need of equitable distribution. Many liberals, even extremely gifted professional liberal economists like Paul Krugman, seem congenitally incapable of thinking carefully about why nation-level equality matters, partly due to the blithe assumption of a fundamentally fallacious economic nationalism that afflicts both popular politics and academic economics.

That said, many welfare liberals are at some level quite sensitive to the fact that if the pattern of national incomes emerged from fair processes, then the argument for taking some people’s money and giving it to others is extremely weak. That is why many of Matt’s fellow travelers are keen to show that the pattern of incomes did not emerge from fair processes. The emphasis in some quarters on the importance of unions is a good example. If you think that strong unions are required to bargain laborers a fair share of their firms’ profits, and that the power of unions has eroded, then it will be natural to think that labor is now receiving an unfairly low wage, which will likely be reflected in nation-level inequality measures. In this case it should be obvious why this mechanism of rising inequality matters: because it matters for both morality and policy. If the problem is labor’s diminishing share of profits due to diminishing bargaining power, then the appropriate response will be measures designed to improve the bargaining position of unions. An increase in taxes and transfers will simply miss the structural cause for moral concern.

I take it (both from his blogging and from personal conversation) that Matt is some kind of utilitarian who really couldn’t care less about matters of fairness or justice – or equality. What Matt cares about is utility. The reason Matt thinks we ought to redistribute “irrespective of why inequality has grown so much,” is simply that he doesn’t care about inequality per se, and so he doesn’t care what caused it. He just suspects that if it were lower, national utility would be higher. If the marginal utility of money is greater for people with less money than for people with more, then we should take money from people with more and give it to people with less, period. Whether or not people acquired their money through fair processes, whether or not they are entitled to it, or have some “right” to it, is simply irrelevant to the question of whether someone ought to take it away from them and give it someone else.

But surely Matt understands that the inability of utilitarianism to acknowledge principled constraints on the way people may use one another is the main reason why most moral philosophers believe utilitarianism to be false. Perhaps Matt thinks these philosophers confused. But if so, then they share their confusion with most Americans, who also don’t believe utility maximization is a good justification for the appropriation of their property. As a matter of practical politics, philosophers don’t matter, but the public does. Which is why Yglesias-style utilitarian arguments for redistribution are non-starters in American politics, while arguments based in structural unfairness have the potential to be powerfully persuasive. If the system is rigged at a deep level against some people, then some redistribution may seem like a good way of balancing the scales. As matter of practical politics, his welfare liberal colleagues are right to keep sniffing around for “cheating” in the system.

Now, as I like to point out, the problem with structural injustice is structural injustice, not the nation-level inequality it may help produce as a side-effect. Which is why I think national Gini coefficients are a distraction, and why programs that lower the national Gini coefficient simply by moving money around make it all-too-easy to ignore the real, hard problems. I suppose a virtue of Matt’s argument for redistribution is that it doesn’t even pretend to be fixing a problem.

Hong Kong’s Flat Tax Rate Dropping to 15 Percent

Unlike American politicians, Hong Kong lawmakers understand that lower tax rates are a key to staying ahead in a competitive global economy. The Chinese Territory’s chief executive has just announced that the flat tax will drop by one percentage point, from 16 percent to 15 percent. As BBC news reports, the corporate rate also will drop, with further reductions likely:

Hong Kong has said it will cut taxes, in a move to promote further growth and lure foreign investment. Leader Donald Tsang said taxes would be cut by 1 percentage point, to 16.5% for firms and 15% for individuals, in the first policy speech of his new term. …In announcing the tax cuts, Mr Tsang said: “We will consider further profits tax relief if our economy remains robust and our public finances stay sound.”