Urgency on Corporate Tax Reform

The U.S. Treasury held a conference today regarding the growing uncompetitiveness of the U.S. corporate tax system.

Scholars and heads of large corporations have been pointing out the serious problems with the corporate tax for more than 15 years. There is now a growing consensus that the complex and high-rate corporate tax needs to be overhauled.

Here are some of the themes discussed today:

  • Europe is on a corporate tax-cutting binge. Today, the U.S. federal plus average state corporate tax rate stands at 40 percent, which is much higher than the average rate of 24 percent in the European Union. It appears that foreign rates will keep on falling for some time, putting an ever greater squeeze on U.S. competitiveness.
  • Intel Corporation stressed that tax costs are an important consideration when they locate new semiconductor plants. Over a 10-year time frame, Intel figures that it costs $1 billion more to build and run a plant in the United States over competing countries such as Ireland and Malaysia. About 70 percent of the U.S. cost disadvantage stems from taxes.
  • General Electric noted that taxes are not the key issue in determining where it builds new plants. Instead, in GE’s case, tax rules on foreign income determine whether, say, a U.S. or German company ends up owning a new facility in other countries such as Brazil. From a tax perspective, the United States is a bad place to locate the headquarters of a multinational corporation. Most economists believe that damages the U.S. economy.
  • There is a trend toward “territorial” corporate tax systems, with about two-thirds of countries having such systems today. A U.S.-style “worldwide” system is less and less popular because it puts home-country corporations at a disadvantage in global markets.
  • Several speakers stressed that a greater share of corporate value is in the form of intangible property such as patents. Intangible property is more mobile than tangible property, and thus easier to relocate to low-tax jurisdictions.
  • Peter Merrill of PricewaterhouseCoopers noted that because of higher capital mobility, a greater share of the U.S. corporate tax burden is falling on U.S. workers. Kevin Hassett of the American Enterprise Institute has shown statistically that higher corporate tax rates mean lower worker wages.
  • Supply-side economists have long pushed for tax breaks on new capital investments. But there was widespread agreement at the Treasury roundtable that getting the corporate tax rate down is more important than incentives such as investment tax credits. A lower corporate rate reduces all the distortions in the corporate tax code and directly responds to the challenges of growing global capital mobility.

The only red herring I noticed was a repeated suggestion that we should “broaden the base” of the corporate tax to pay for a corporate rate cut. But there is very little broadening that we could do that wouldn’t be economically damaging. There are not a great number of obvious loopholes in the corporate income tax. (There is lots of tax avoidance, but that is a different issue.) The Treasury listed some targeted loopholes in a recent report, but I bet most people at the conference today would object to repealing most of those, such as “deferral of income from controlled foreign corporations.”  

Anyway, kudos to Treasury Secretary Henry Paulson for the important conference and beginning some momentum for corporate tax reform. 

See here for more background on international tax competition and corporate tax reform.

FBI’s Argument is ‘Absurd’

Today, a federal judge awarded plaintiffs $101 million in a lawsuit that was filed against the federal government. FBI officials looked the other way as the plaintiffs were framed for crimes that they did not commit. FBI lawyers said there was no merit to the lawsuit because the FBI had no obligation to come forward with the information it had. The federal judge said that was “absurd.” 

Will the FBI headquarters inform the tourists who visit their facility of its peculiar legal argument? The question sorta answers itself, doesn’t it?   

A great legal victory, to be sure. Unfortunately, I expect the government attorneys will offer a substantially lower amount — or threaten to drag the case through the appellate courts for several more years. Still, this is an important precedent.

It is an outrage that so many wrongfully convicted people get little or no compensation. I don’t know how these politicians can spend the enormous sums that they do and let this go on. Do we need any additional argument for term limits (pdf)?

Previous coverage of this litigation can be found here.

‘God Created Man on Friday’

The title quote is from a language textbook soon to be used in a bilingual Hebrew-English charter school in Florida. Many other religiously themed passages also appear in the book, though they are to be used for translation rather than devotional purposes. Is this constitutional?

Probably, but it’s hard to say. What can be said for sure is that it already has been and will continue to be a source of controversy in the community. This is yet another reason why charter schools do not go far enough on the path to educational freedom.

 So long as all taxpayers are compelled to fund a school, that school must dilute its curriculum to a lowest common denominator: it must contain nothing truly objectionable to any organized interest group, or it will be the subject of contention and quite often litigation. For a full discussion of the social conflicts caused by conventional public schools, please Neal McCluskey’s fascinating paper “Why We Fight.”

Fortunately, there is a simple alternative to charter schools that provides freedom of choice not just to parents but to taxpayers as well: education tax credits. As I’ve previously discussed here and here, non-refundable education tax credits do not constitute public funding and can allow universal access to the educational marketplace without forcing people to subsidize education that they find morally objectionable.

So for anyone who is truly concerned with separation of church and state, and with minimizing social conflict, education tax credits are the answer. To claim that these religious and social concerns are one’s reasons for objecting to school choice while ignoring the tax credit solution is either lazy or disingenuous.

Illegal Manicure in the ‘Live Free or Die’ State

In response to to my post about a (possibly) illegal hairdresser in Massachusetts, Michael Hampton of Homeland Stupidity forwards a link to a priceless local New Hampshire news report. (It’s two years old, but it’s new to me and to this blog.)

Free State Project member Mike Fisher performed an illegal manicure right in front of the “Live Free or Die” state’s Board of Barbering, Cosmetology and Esthetics. (Motto: Yew Best Drop That Thar Em’ry Board, Son.)

When the police asked Fisher if he had a license to perform that thar manicure, Fisher said no. When the police issued him a summons and asked that he stop performing that thar manicure, Fisher refused. So the cops slapped handcuffs on this dangerous outlaw and put him in a squad car. Fisher reportedly received a 30-day suspended sentence, with a vow from the judge that if Fisher receives so much as a traffic ticket, it’s off to the pokey he goes.

I wonder what the Granite State wasn’t doing with the time and resources used to arrest and prosecute Fisher.

The New Face of Copyright Infringement?

Is this America’s youngest music pirate?

Under the 1998 Digital Millennium Copyright Act, copyright owners can issue so-called “takedown notices” to sites like YouTube seeking the removal of infringing material. (This is a different section of the act than the anti-circumvention provision I criticized in a policy analysis last year.) According to Ars Technica, Universal issued such a takedown notice in June against this clip because of the Prince song playing in the background.

Now Stephanie Lenz, the owner of the clip, with help from the Electronic Frontier Foundation, a digital civil liberties group, has filed a lawsuit against Universal demanding the recovery of attorney’s fees and a declaration that the file is fair use under copyright law.

I think that Lenz has an open-and-shut case that her use of the Prince song is fair, and therefore legal. But the question of whether Universal should be held responsible for issuing an erroneous takedown notice is more complicated. On the one hand, a takedown notice is a formal accusation of copyright infringement and it will often require seeking the advice of an attorney, which isn’t cheap. It’s not right for copyright holders to issue takedown notices too recklessly. On the other hand, it’s not hard to sympathize with Universal’s position. There are thousands of plainly infringing videos on YouTube, and so it’s not too surprising that in the process of issuing thousands of takedown notices they’d make a few mistakes.

This is an area that will continue to evolve rapidly, as policymakers struggle to balance the need to protect copyright against the desire not to squelch innovative new products. A site like YouTube probably couldn’t exist at all if the DMCA didn’t provide service providers a “safe harbor” against liability for the infringing activities of their customers. But some copyright holders complain that the “safe harbor” shifts too much of the burden of enforcing copyright law onto them, by requiring them to issue an individual takedown notice against every instance of copyright infringement. As we see in this case, companies sometimes make honest mistakes. Striking the appropriate balance will be an ongoing challenge for Congress and the courts.

Andy Stern’s Angle on Universal Coverage

Last night, I debated Andy Stern on the Jim Bohannon radio showStern is president of the Service Employees International Union, which represents 1.8 million nurses, health care workers, janitors, security officers, and public employees. He is definitely not a member of the Anti-Universal Coverage Club.

I was pleased to find that we agree that the employment-based health insurance system cannot last. What I found most interesting, though, were two weaknesses in the case he makes for universal coverage.

First, Stern argues that unless we have universal coverage, American firms won’t be able to compete with foreign firms. To me, that claim is economic nonsense, as I explained in our debate and in Health Care News:

Employers don’t need the government to save them from the rising cost of health benefits. Just as Dorothy always had the power to return to Kansas by clicking her heels, employers have always had the power to pare back their health benefits…

All else being equal, firms that contain their labor costs this way will beat the firms that don’t. Those companies that support ‘universal coverage’ want to increase the labor costs of their competition, whether through higher taxes or health premiums. Universal coverage won’t make America more competitive — it will cripple America’s most competitive firms to protect its least competitive firms.

And, of course, that’s the entire point…. Companies that support ‘universal coverage’ never bother to mention that covering all the uninsured would cause health spending to explode, because they don’t really care about overall health spending. All they care about is that their competitors spend as much as they do.

Nor does Stern seem to mind if health spending explodes. I think that may be because…

Second, Stern argues that we could get a better deal on prescription drugs if Medicare were allowed to negotiate with drug companies. But seeing as how he represents so many health care workers, I don’t think he’s going to be leaning on Medicare to be that tough a negotiator. During our debate, I invited him to discuss SEIU’s role in helping Medicare set the payment rates that affect his members. He didn’t take the bait.