Topic: Tax and Budget Policy

Treasury Secretary Highlights Importance of Competitive Corporate Tax System

Writing for the Wall Street Journal, Secretary of the Treasury Henry Paulson, Jr. warns that America now has an uncompetitive corporate tax system. Mr. Paulson explains that other nations have been slashing their tax rates — and reaping big rewards — while the United States has been sitting on the sidelines. This means less investment in America, which translates into lower wages for American workers:

[T]he U.S. is once again a high corporate tax country. We now have, on average, the second-highest statutory corporate tax rate (including state corporate taxes), 39%, compared with an average rate of 31% for our top competitors… Ireland, for example, has engineered its own economic miracle, in large part due to a reform program that cut corporate tax rates to a level one-third that of the U.S. And the trend continues. Germany will reduce its total rate from 38% to 30% in 2008. France, Japan and the United Kingdom have signaled they may also lower their corporate rates.

…Business tax policy levers, such as the corporate tax rate, depreciation rates and investor taxes, as well as the taxes levied on small businesses through the individual income tax, should strive towards a similar purpose: to encourage economic growth by reducing the tax burden on additional investments. Yet, the current tax code distorts capital flows, hurting productivity, job creation and our global competitiveness. Take just a few examples. Taxes on capital income raise the price of future consumption and discourage saving and capital formation. Reduced capital formation gives labor less capital to work with and lowers labor productivity, reducing real wages and income.

…Over the past two decades, while U.S. tax law has grown more complicated and our statutory corporate income tax rate has increased, other nations have been reducing their rates to replicate our miracle. A study by Treasury economists estimated that a country with a tax rate one percentage point lower than another country’s attracts 3% more capital. It’s not surprising then, that average OECD corporate tax rates have trended steadily downward.

Bush Waxes Philosophical on Health Care

People sick of the big-government conservatism practiced by the Bush administration might be excited at the headline in today’s Washington Post: “Bush: No Deal On Children’s Health Plan/President Says He Objects On Philosophical Grounds.” But President Bush’s philosophical objection to the proposed expansion of the State Children’s Health Insurance Program is in no way a reversal from his stance that big spending is okay as long as Republicans can take credit.

What philosophy does Bush subscribe to?  Apparently, it’s the philosophy that says the federal government should only expand the welfare state by billions of dollars, instead of tens of billions of dollars: “The president said he objects on philosophical grounds to a bipartisan Senate proposal to boost the State Children’s Health Insurance Program by $35 billion over five years. Bush has proposed $5 billion in increased funding and has threatened to veto the Senate compromise and a more costly expansion being contemplated in the House.” 

Later in the article Bush is quoted as saying, “I think it’s going to be very important for our allies on Capitol Hill to hear a strong, clear message from me that expansion of government in lieu of making the necessary changes to encourage a consumer-based system is not acceptable.”

He also said, “I’m worried that there will be a strong incentive for people to switch from the private sector to the government.” 

If only the president had adopted a similar attitude when he approved a $1.2 trillion expansion of Medicare in 2003 in lieu of consumer-based approaches.

Cost Overruns, More Liars

“Liar” is not a very scholarly word, but I don’t know how else to describe some of the comments that come from public officials. It’s not just the farm bill, check out this paragraph from a Washington Post story today on the Virginia highway project:

“Project officials hailed the interchange as ‘on time and under budget.’ But although the mid-2007 target date for completion was met, the final cost was nearly three times what was first projected. A more recent cost estimate of $676 million was ultimately met.”

Well, of course, the final estimate was met because it’s the final estimate. Obviously, what’s important for taxpayers is that politicians and government agencies stick to the numbers that they agree to when they first vote to approve projects.

It is my view that in many, but certainly not all, large government projects there is deliberate subterfuge about ultimate project costs. Many projects balloon in cost 50 percent or more.

For more on cost overruns, see this and this.

Word Abuse

In Washington, no word is more overused and abused than “reform.” But a Washington Post story today shows the abuse taken to new heights:

Farm bloc lawmakers yesterday offered the U.S. fruit and vegetable industry $1.8 billion in new federal grants over the next five years as part of a farm bill that would leave in place far larger subsidies for grain, cotton and dairy producers.

The concessions were part of a balancing act by House Democrats to craft a bill that will satisfy politically powerful farm interests while also bearing a Democratic imprint of reform. The House Agriculture Committee was set to vote on the legislation late last night or today.

The package, unveiled yesterday by Committee Chairman Collin C. Peterson (D-Minn.), also increases funding for land conservation, wetlands protection and nutrition programs – popular with environmental groups and urban lawmakers.

House Speaker Nancy Pelosi (D-Calif.) called the package ‘a good first step toward needed reform.’

Let’s see: Congress is keeping all the old programs, creating new subsidies for fruits and vegetables, increasing funding for conservation and nutrition programs. That’s reform?

The story title is also worthy of The Onion: “Farm Bill Leaves Some Subsidies.” Some subsidies?!

Farm Fibs

My toddlers have recently been having fun with the phrase “liar, liar, pants on fire.” I’d like to set them loose on the farm bill debate in Congress. 

Take a comment today in a Michigan news source by Rep. Timothy Walberg, a member of the House Agriculture Committee: “We want our food cheap, and we’ve become used to that, and that’s where the farm bill comes in. It guarantees cheap and plentiful food.”

But numerous farm programs raise food prices. I’ll give you three: milksugar and related products such as chocolate, and infant formula. And don’t forget about federal ethanol policies, which are pushing up prices for corn and derived products. 

Taxpayers Lose Again

In Maryland, as in many other states, legislators have to wait a year before becoming lobbyists.  The idea is to put some distance between being a member of the legislature and turning around and immediately lobbying your colleagues. Maybe it helps to reduce the impression that some legislators are thinking about their next job as they make legislative decisions.

So how can Sen. P. J. Hogan go directly from the State Senate to a cushy job as the chief lobbyist for Maryland’s university system? Because “the one-year prohibition on legislators lobbying state officials does not apply to someone moving from one state post to another.”

So if you want to lobby for the private sector, for businesses or unions or environmentalists, you have to wait a year to alleviate any appearance of impropriety. But if you want to lobby on behalf of the government itself, you can use your contacts immediately, before they get cold and distant. Indeed, you’d have to wait a year to lobby on behalf of a taxpayers group, but you can start lobbying against the taxpayers the next day. Just another way that government stacks the deck against taxpayer interests.

Economics and Values

A recent NYT article has roiled the economics blogosphere by spotlighting several prominent economists who ostensibly challenge the “fundamental assumptions” of their field. A snippet:

“Economists can’t pretend that the consensus for free markets and free trade that existed 30 years ago is still here,” said Robert B. Reich, a public policy professor at Berkeley who served in President Bill Clinton’s cabinet.

Part of the reason is the growing income inequality and dislocation that global markets and a revolution in communications have helped create. Economists who question the free-market theories “want to speak to the reality of our time,” Mr. Reich said.

The article references some interesting material, including Alan Blinder’s criticism of offshoring and David Card’s provocative work ($) with Alan Krueger on employment and the minimum wage. However, contrary to its tone, the article is not (for the most part, anyway) about disagreements in economics — it’s about disagreements over values.

Consider, for instance, this bit from Blinder’s recent Washington Post op-ed:

And if the jobs do move offshore, displaced American workers may lose not only their jobs but also their pensions and health insurance. These people can be forgiven if they have doubts about the virtues of globalization.

We economists assure folks that things will be all right in the end. Both Americans and Indians will be better off. I think that’s right. The basic principles of free trade that Adam Smith and David Ricardo taught us two centuries ago remain valid today: Just like people, nations benefit by specializing in the tasks they do best and trading with other nations for the rest.

Blinder does not dispute (and indeed endorses) the economic orthodoxy that trade materially benefits participants. Instead, he notes that a change in trading partners produces both winners (the new trading partners) and losers (displaced partners), and that change can often be painful for the loser — a notion that most all economists would endorse.

Given this economic analysis, Blinder offers a values judgment: the United States should implement public policies to aid displaced workers caught in such change (but he expressly eschews protectionist measures that would prohibit change). Libertarians may disagree with Blinder’s policy proposals (perhaps on the grounds that such policies are not appropriate for limited government, or are economically inefficient, or would create perverse incentives and unintended consequences). But this disagreement is not about economics, it’s about competing values (e.g., limited government is preferable; economic inefficiency is undesirable, perverse incentives and unintended consequences are to be avoided).

Like “hard” science, economics is a non-normative field that attempts to determine certain types of relationships — in this case, economic ones (e.g., what is a minimum wage’s effect on employment; what market power effects result from industry regulation?) — and use those determinations to predict the future. Economic analysis often leads to policy recommendations, but those recommendations are the product of value judgments: Should the well-being of one group of workers (e.g., domestic, unionized, members of a particular group) be promoted over another? Should the harm experienced by displaced workers be mitigated, and if so, how?

From a policymaking perspective, it is useful to distinguish what part of economic policy is about economics and what part is about values. Economic analysis of U.S. farm subsidies and trade protections reveals their effect on farmer and consumer behavior, but good policy ultimately comes from answering such values questions as whether the tradeoff of higher consumer food prices for higher producer revenues is acceptable, or whether ag subsidies are a good use of the public fisc.  Or, concerning Prof. Reich’s comment above about income inequality, good policy would come from answering the values question of whether it is a problem that some people are rich or, instead, that some people are poor.

All of this is not to say that we should not question whether neat, simple economic theory plays out cleanly in this messy, complicated world. The debate ($) over Card & Krueger’s minimum wage findings is one of the most interesting in economics, and the burgeoning field of behavioral economics is reinvigorating long-simmering questions about the rationality of market actors — though those questions may not support the values judgments that the apostates and heterodoxoi presume. But I would argue that economics is not so different from the hard sciences — the core tenets are quite solid (though revolution does occur). What remains (appropriately) shaky is a pluralistic society’s attempts to apply its many values (as well as its hopes, fears, grievances, immediate concerns, and political aspirations), to economic phenomena.