Archives: 03/2017

Corporate Tax Rates and Revenues in Britain

If Republicans succeed in slashing the federal corporate tax rate from 35 percent to 20 percent or less, the tax base will expand as investment increases and tax avoidance falls. There is no need for a legislated expansion in the tax base, as the GOP is proposing with its “border adjustment” scheme. The tax base will broaden automatically over time to offset the government’s revenue loss from the rate cut.

New evidence comes from Britain, which has enacted a series of corporate tax rate cuts. A study by the Centre for Policy Studies includes this chart. It shows the tax rate falling from 35 percent to 20 percent since the late 1980s and corporate tax revenues as a percentage of gross domestic product (GDP) trending upwards. As the rate has fallen, the tax base has grown more than enough to keep money pouring into the Treasury.

Does legislated base broadening explain the increase in U.K. tax revenues? Not for the most recent round of rate cuts. In 2010-11, the government collected £36.2 billion from a 28 percent corporate tax. The government expected its corporate tax package—including a rate cut to 20 percent—to lose £7.9 billion a year by 2015-16 on a static basis. That large expected loss indicated that the package had little legislated base broadening. Study author Daniel Mahoney sent me a table confirming that the package included only modest base-broadening measures that were mainly offset by base-narrowing measures.

The government’s dynamic analysis of the corporate tax package projected a revenue loss of about half of the static amount over the long run. But that analysis was apparently too pessimistic: actual revenues in 2015-16 had risen to £43.9 billion. So in five years, the statutory tax rate fell 29 percent (28 percent to 20 percent) but revenues increased 21 percent (£36.2 billion to £43.9 billion). That is dynamic!

Looking at the longer term, the CPS study says, “In 1982-83 when the rate was 52%, corporation tax receipts yielded revenues equivalent to 2% of GDP. Corporation tax now raises over 2.3% of GDP when the headline rate is at just 20%.” The Brits have scheduled a further rate cut to 17 percent.

Canada’s experience also shows that when you slash the corporate tax rate, substantially more profits appear on corporate returns over time. Canada cut its federal corporate tax rate from 28 percent and higher in the 1980s to just 15 percent today, but it collects about the same amount of corporate tax revenues as a share of GDP now as then.

The British and Canadian experiences show that large corporate tax rate cuts lose governments little if any money. There is no need for risky changes to the corporate tax base, as House Republicans are proposing with border adjustments. That approach would disrupt the economy and invite retaliation from our trading partners for no economic gain.

The CPS study suggests that British industry has responded strongly to tax rate cuts, with rising investment and higher wages for workers. That’s what we want here. So Republicans should put aside their complex base-broadening plan, and just slash the corporate tax rate to the British-Canadian range of 15 to 20 percent.

The CPS study is here.

Supposed FBI Investigations into Refugees Shouldn’t Scare You

This past Monday, President Trump released a new executive order shutting down the refugee program for 120 days and banning immigration from six majority-Muslim countries for 90 days. President Trump attempted to justify these changes by stating in part that:

The Attorney General has reported to me that more than 300 persons who entered the United States as refugees are currently the subjects of counterterrorism investigations by the Federal Bureau of Investigation.

The government has refused to provide any additional details about these cases, but an investigation should not be seen as implying guilt. Almost all FBI terrorism investigations do not end with a terrorism conviction. Indeed, the numbers predict that of these 300 refugee investigations, only 1 will turn into a terrorism conviction and that conviction will not be for planning an attack against the United States. This claim about the FBI investigating refugees has turned out to be a groundless smear in the past, and history has shown that refugees have been less likely than others to commit acts of terrorism against the United States. 

These 300 represent less than 0.009 percent of all refugees admitted since 1975. As the Cato Institute’s recent report found, only 20 refugees from 1975 to 2015 have attempted, planned, or carried out a terrorist attack inside the United States. Only 3 carried out a deadly terrorist attack, and all of those were before 1980. During the 40 years from 1975 to 2015, the annual risk of death by a refugee terrorist to a U.S. resident was 1 in 3.64 billion. This makes them about 1,000 times less likely to kill a U.S. resident in a terrorist attack than other foreign-born people.

Unfortunately, this type of baseless fearmongering about FBI investigations into refugees is not new. The FBI told ABC News in 2013 that it was investigating “dozens” of refugees as terrorists. In the 26 months after the FBI made the claim, the agency arrested and convicted 31 individuals for “terrorism-related” offenses. Of these, a majority were U.S.-born citizens. Another 4 convictions were not even for terrorism offenses. In the end, the Bureau only arrested and put away for terrorism offenses 9 foreign-born residents total after it claimed “dozens” of open cases against refugees specifically. None of these individuals were planning attacks inside the United States.

So how often do FBI national security investigations actually turn into convictions?

Kenneth Boulding on the Serious Distortion of Economic Ethics

From Kenneth Boulding, A Reconstruction of Economics (NY, Science Editions 1962) pp. 481-82:

“Economic ethics has been seriously distorted by static and short-run criteria of value. ‘Justice’ has been thought of too much in terms of division of a fixed pie than in terms of encouraging the baking of more pies… .The importance of this problem rests on a matter of simple arithmetic: that if redistribution toward any group causes a fall in the rate of growth of national income, no matter how slight, there will be some date beyond which the absolute income of the favored group will be less than it would have been if the redistribution had not taken place.”

Peter Navarro, Harvard Ph.D. Economist, Trade Warrior

Peter Navarro, director of the newly-established White House National Trade Council, gave a speech last week to the National Association for Business Economics, which he condensed into an opinion piece for the Wall Street Journal. The analytical errors and the fallacies portrayed as facts in that op-ed are so numerous that it is bewildering how a person with a Ph.D. in economics from Harvard University—and a potentially devastating amount of influence within the White House—could so fundamentally misunderstand basic tenets of introductory economics.

Almost every paragraph in the op-ed includes an error of fact or interpretation.  I’ll focus on a few, deferring to others’ noble efforts (Phil Levy, Don Boudreaux, Linette Lopez) at wading through the rest of Navarro’s confused and misinformed diatribe.

Consider Navarro’s portrayal of the national income identify as an economic growth formula.  He claims:

The economic argument that trade deficits matter begins with the observation that growth in real GDP depends on only four factors: consumption, government spending, business investment and net exports (the difference between exports and imports).

The sentence betrays a deep and troubling misunderstanding of the factors of economic growth. Real GDP growth (growth in the total value produced in the economy) depends on increases in the factors of production and increases in the productive use of those factors, which trade and specialization facilitate. What Navarro refers to as the drivers of growth are actually the channels that account for the disposition of our output – what we do with our output.

The national income identify is expressed as: Y=C + I + G + X – M.  It tells us that our national output is either consumed by households (C); consumed by business as investment (I); consumed by government as public expenditures (G); or exported (X). Those are the only four channels that can account for the disposition of national output.  We either consume our output as households, businesses and government or we export it.

Imports (M) are not a channel through which national output is disposed.  We don’t import our output. But M appears in the identity and is subtracted because we consume – as C, I, and G – both domestically produced and imported goods and services.  If we didn’t subtract M in the national income identity, we would overstate GDP by the value of our imports.

But Navarro believes – or wants the public to believe – that the national income identity is an economic growth formula or function, where Y (GDP) is the dependent variable, C,I,G, X, and M are the independent variables, and the minus sign in front of M means that imports are inversely related to (or detract from) GDP.  That’s wrong and a Harvard Ph.D. economist should know that.

Reducing a trade deficit through tough, smart negotiations is a way to increase net exports—and boost the rate of economic growth.

The evidence is overwhelming – month after month, quarter after quarter, year after year – that the trade deficit and GDP rise and fall together. The largest annual decline in the trade deficit ever recorded was between 2008 and 2009, during the trough of the Great Recession. The largest annual increase in the trade deficit occurred between 1999 and 2000, when the economy grew by 4.7 percent – the strongest annual economic growth in the past 33 years.

When the economy grows, households, businesses, and government tend to spend more, and they spend more on both domestic and imported goods and services.  When the economy contracts, there is less spending on both domestic and imported goods and services.  For the past 42 straight years, the United States has registered trade deficits.  In 40 or those 42 years, annual changes in the value of imports and the value of GDP moved in the same direction.

Navarro either believes, or would have the public believe, that imports detract from GDP and that our national security requires all of the gears of U.S. trade policy be put to the service of eliminating our trade deficit. This is a fool’s errand and a Harvard Ph.D. economist should know that.

Suppose America successfully negotiates a bilateral trade deal this year with Mexico in which Mexico agrees to buy more products from the U.S. that it now purchases from the rest of the world. This would show up in government data as an increase in U.S. exports, a lower trade deficit, and an increase in the growth of America’s GDP.

First, note the implication that Navarro expects U.S. trade agreements to include commitments by our trade partners to meet certain outcomes – “…Mexico agrees to buy more products from the U.S.”  This kind of managed trade is unprecedented and utterly defies the purpose and spirit of trade liberalization.  Trade agreements are intended to reduce barriers to competition, not to preempt competition by anointing the winners at the outset.  But, okay, the administration believes it has a mandate to blow things up on the trade front.

But, here’s another problem with Navarro’s scenario.  If Mexico agrees to buy from the United States some of what it now purchases from other countries (Navarro’s key to decreasing the bilateral trade deficit with Mexico), then won’t those other countries have fewer dollars with which to purchase U.S. exports?  Wouldn’t that, all else equal, increase bilateral trade deficits or reduce bilateral surpluses the United States has with those other countries?  Yes and yes.  What Navarro is suggesting is a game of trade policy whack-a-mole. Bilateral trade accounting is utterly meaningless, and a Harvard Ph.D. economist should know that.

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Clarence Thomas Is Skeptical of Civil Asset Forfeiture

Justice Clarence Thomas yesterday signalled that the abusive practice of civil asset forfeiture is ripe for expanded constitutional scrutiny.

The case is Lisa Olivia Leonard v. Texas.  James Leonard (the petitioner’s son) was stopped by police for a traffic infraction in 2013 “along a known drug corridor.”  Police searched Mr. Leonard’s vehicle and discovered a safe containing $201,100 and the bill of sale for a home. Arguing that the money was either proceeds from a drug sale or going to be used in such a sale, the state initiated forfeiture proceedings and took the money.  The safe actually belonged to James’ mother Lisa, who brought suit to protect her property from the government seizure.

The Supreme Court denied certiorari for procedural reasons, but Justice Thomas had some harsh words for civil forfeiture anyway, and suggested that it’s time for the Supreme Court to take another look at the practice:

Civil proceedings often lack certain procedural protections that accompany criminal proceedings, such as the right to a jury trial and a heightened standard of proof.

Partially as a result of this distinct legal regime, civil forfeiture has in recent decades become widespread and highly profitable. And because the law enforcement entity responsible for seizing the property often keeps it, these entities have strong incentives to pursue forfeiture.

This system - where police can seize property with limited judicial oversight and retain it for their own use - has led to egregious and well-chronicled abuses…

Justice Thomas also noted the disparate impact these types of abuses have on the poorest and most vulnerable communities:

These forfeiture operations frequently target the poor and other groups least able to defend their interests in forfeiture proceedings.  Perversely, these same groups are often the most burdened by forfeiture. They are more likely to use cash than alternative forms of payment, like credit cards, which may be less susceptible to forfeiture. And they are more likely to suffer in their daily lives while they litigate for the return of a critical item of property, such as a car or a home.

The opinion goes on to explain that while the court has historically upheld the constitutionality of civil forfeiture, the modern practice of forfeiture has strayed far from its narrow historical use and purpose:

I am skeptical that this historical practice is capable of sustaining, as a constitutional matter, the contours of modern practice, for two reasons.

First, historical forfeiture laws were narrower in most respects than modern ones. Most obviously, they were limited to a few specific subject matters, such as customs and piracy. Proceeding in rem in those cases was often justified by necessity, because the party responsible for the crime was frequently located overseas and thus beyond the personal jurisdiction of the United States courts. These laws were also narrower with respect to the type of property they encompassed. For example, they typically covered only the instrumentalities of the crime (such as the vessel used to transport the goods), not the derivative proceeds of the crime (such as property purchased with money from the sale of the illegal goods).

Second, it is unclear whether courts historically permitted forfeiture actions to proceed civilly in all respects. Some of this Court’s early cases suggested that forfeiture actions were in the nature of criminal proceedings…

Lastly, while agreeing with the Court’s refusal to hear the case for procedural reasons, Justice Thomas nonetheless expressed his interest in taking another look at civil forfeiture:

Whether this Court’s treatment of the broad modern forfeiture practice can be justified by the narrow historical one is certainly worthy of consideration in greater detail.

In his opinion, Justice Thomas refers to the Institute for Justice’s Policing for Profit survey of forfeiture laws around the country, and also to Sarah Stillman’s expose Taken, documenting several instances of forfeiture abuse. Both of those sources are worth reading for a better idea of just how bad the incentives of civil forfeiture are and the abuses that have resulted.  

It’s heartening to have a Supreme Court Justice so squarely acknowledge and raise questions about a predatory government practice that has proceeded unchecked for so long.

One of the most common questions I receive when I talk about civil asset forfeiture is “why does the Supreme Court allow this?” My answer has always been “because these laws predate the country and the court has never seen fit to re-examine them.”  

This opinion is a clear signal that at least one member of the Supreme Court is ready to take a fresh and skeptical look.

Public-private Partnerships: a Cautionary Tale from the UK

Given the administration’s plans are still as clear as mud, yesterday’s Cato event on infrastructure was necessarily wide-ranging. Panelists welcomed Trump’s desire to harness more private sector involvement, but there are many different forms policy to support this could take, from removing regulatory and user pricing barriers, right through to the distortionary tax credits proposed by his advisors Wilbur Ross and Peter Navarro.

One possibility is greater use of public-private partnerships. These entail agreements between government and a private contractor for the building, financing or operation of infrastructure with the aim of passing on substantial risk to the private sector. They can take different forms, from simply transferring management responsibilities to a private sector firm, right through to integrated contracts that incorporate the design, build, maintenance and operation of the infrastructure (for example, toll roads.)

In terms of results, types of PPPs are not created equal. As Randal O’Toole noted, “demand risk PPPs,” where a private company builds and then runs, say, a toll road for a set period of time, allow the expansion of capacity with incentives for the private firm to control long-term costs (including considering future maintenance needs) whilst alleviating taxpayers of the usage risk. Yes, there are still political risks that governments will renege on agreements, but when there are obvious cash streams from the investment linked to usage, beneficial investment can be forthcoming. Chris Edwards has previously pointed out the success of the Capital Beltway project in Virginia, for example.

Other types of infrastructure, not least provision of loss-making modes or those with no user fees, are more difficult. In these cases, public-private partnership contracts have and can be designed such that private investors build, operate and maintain an asset with a stream of tax revenue payments from the government instead.

Sadly this “availability payment” model, as Randal calls it, where the private contractor gets paid irrespective of usage, is less likely to curb costs. In fact, the UK made extensive use of this type of agreement in the building of hospitals and schools through the 2000s, and the results have been disappointing.

Success in road schemes and a number of privately-owned prisons in the early 1990s (with a much higher proportion delivered on time and on budget than through traditional procurement) led to a huge expansion of PPPs. By 2003/04 they accounted for 39 percent of capital spending by UK government departments, and there were over 500 in operation by 2008, including in the building of schools, hospitals and public transport (especially rail). Britain led the world in their use.

This expansion of PPPs though is now associated with high lifetime costs for taxpayers, not least arising from badly negotiated bundled contracts with private contractors. Many hospitals face huge deficits. Any benefits arising from the privatization of risk and on-time and on-budget delivery of projects was eclipsed by higher borrowing costs coupled with the costs of consultants and lawyers in drawing up the contracts. Furthermore, the opacity of the liabilities for taxpayers has proved very unpopular, with significant attempts to renegotiate contracts.

The House GOP Leadership’s Health Care Bill Is ObamaCare-Lite — Or Worse

During the presidential campaign, Donald Trump promised legislation that “fully repeals ObamaCare.” Monday night, the Republican leadership of the House of Representatives released legislation it claims would repeal and replace ObamaCare. Tuesday afternoon, Vice President Mike Pence will travel to Capitol Hill to pressure members of Congress to support the bill. On Wednesday, two House Committees will begin to mark-up the legislation. House and Senate leaders are hoping for quick consideration and a signing ceremony, maybe by May, so they can move on to other things, like tax reform and confirming Supreme Court nominee Judge Neil Gorsuch.

Everyone needs to take a step back. This bill is a train wreck waiting to happen.

The House leadership bill isn’t even a repeal bill. Not by a long shot. It would repeal far less of ObamaCare than the bill Republicans sent to President Obama one year ago. The ObamaCare regulations it retains are already causing insurance markets to collapse. It would allow that collapse to continue, and even accelerate the collapse. Republicans would then own whatever damage ObamaCare causes, such as when the law leaves seriously ill patients with no coverage at all. Congress would have to revisit ObamaCare again and again to address problems they failed to fix the first time around. ObamaCare would consume the rest of Congress’ and President Trump’s agenda. Delaying or dooming other priorities like tax reform, infrastructure spending, and Gorsuch. The fallout could dog Republicans all the way into 2018 and 2020, when it could lead to a Democratic wave election like the one we saw in 2008. Only then, Democrats won’t have ObamaCare on their mind but single-payer.

First, let’s look at how the main features of this bill fall short of repeal.