Topic: Tax and Budget Policy

The European Commission’s War against Pro-Growth Corporate Tax Policy

I have a love-hate relationship with corporations.

On the plus side, I admire corporations that efficiently and effectively compete by producing valuable goods and services for consumers, and I aggressively defend those firms from politicians who want to impose harmful and destructive forms of taxes, regulation, and intervention.

On the minus side, I am disgusted by corporations that get in bed with politicians to push policies that undermine competition and free markets, and I strongly oppose all forms of cronyism and coercion that give big firms unearned and undeserved wealth.

With this in mind, let’s look at two controversies from the field of corporate taxation, both involving the European Commission (the EC is the Brussels-based bureaucracy that is akin to an executive branch for the European Union).

First, there’s a big fight going on between the U.S. Treasury Department and the EC. As reported by Bloomberg, it’s a battle over whether European governments should be able to impose higher tax burdens on American-domiciled multinationals.

The U.S. is stepping up its effort to convince the European Commission to refrain from hitting Apple Inc. and other companies with demands for possibly billions of euros… In a white paper released Wednesday, the Treasury Department in Washington said the Brussels-based commission is taking on the role of a “supra-national tax authority” that has the scope to threaten global tax reform deals. …The commission has initiated investigations into tax rulings that Apple, Starbucks Corp., Amazon.com Inc. and Fiat Chrysler Automobiles NV. received in separate EU nations. U.S. Treasury Secretary Jacob J. Lew has written previously that the investigations appear “to be targeting U.S. companies disproportionately.” The commission’s spokesman said Wednesday that EU law “applies to all companies operating in Europe – there is no bias against U.S. companies.”

Some Context on Pentagon Spending

General David Petraeus and Brookings Fellow Michael O’Hanlon recently took to the Wall Street Journal to assure the American people that, despite sequestration, there is no military readiness crisis. A few days later, Thomas Donnelly and Roger Zakheim published a rebuttal in the National Review claiming that the challenges of too few personnel and aging, overextended equipment induced a “wasting disease.” They alleged that the size of the defense budget was a misleading statistic without context.

So, here’s some context. After a rapid demobilization following World War II, the United States slowly rebuilt its forces to balance against the Soviet Union. Spending remained far above pre-World War II levels for the remainder of the decades-long conflict, and ever since. The Pentagon budget averaged $462 billion from 1948–1990 (in FY2017 dollars), with notable spikes for the Korean War, Vietnam War, and the Reagan build up in the 1980’s (See Figure 1). With the end of the Cold War, we see a fairly steep decline in military spending during the H.W. Bush and Clinton years. In the aftermath of the 9/11 terrorist attacks, the reductions of the 90s gave way to much larger Pentagon budgets, as the George W. Bush administration embarked on the wars in Afghanistan and Iraq. Defense spending during the early years of the Obama administration remained above $750 billion as the president ramped up the war in Afghanistan while working to end the war in Iraq. In constant, 2017 dollars, annual Pentagon spending during Bush 43’s eight years in office averaged $612 billion; under Obama, the average is $675 billion (See Figure 2).

One side-note regarding the grouping by presidential administration: Taken alone, the picture can be misleading, in that Reagan inherited Carter’s final budget, Clinton inherited H.W. Bush’s, etc. And, besides, Congress, not any single president, makes the final decision on what the government spends. It is also true, however, that Congress has typically deferred to presidential preferences, particularly when it comes to military spending. Had Clinton wanted more, he likely would have gotten it (and did, starting in 1999); Obama, meanwhile, could have requested less (and, eventually, did). Those variations within four- or eight-year terms get lost in a graph that lumps all the years together in one fat bar for each president.

With respect to whether current spending levels are far too low, far too high, or somewhere in between, the Budget Control Act (BCA) of 2011 and its threat of sequestration tried to rein in spending on both defense and non-defense discretionary spending, but has been only partly successful. Congress has found ways around the defense caps, in part by funneling extra money to the base budget through the Overseas Contingency Operations (OCO) account, which is exempted under the BCA. And, under the BCA caps revised late last year, estimated military spending would average at least $551 billion from 2017 to 2021 (.pdf, see page 15) – and likely more than that if Congress doesn’t kick its OCO addiction. That’s 28 percent higher than in 2000, and 19 percent higher than the Cold War average.

In short, if there is a readiness gap, it’s not due to lack of funding. The BCA, by itself, has not resulted in significant cuts in military spending. In inflation-adjusted dollars, we spend more today than during the average Cold War year, and more than we spent at the start of the War on Terror. It would appear that we are mostly getting less “bang for our buck” than during previous generations.

Prof. Laurence Tribe on IRS Targeting

Last week Harvard law professor Larry Tribe sent out a tweet brusquely dismissing the IRS targeting episode as a debunked non-scandal. I and others promptly took issue with him, and pointed him toward the August 5 D.C. Circuit opinion laying out the scandal’s genuineness. (I also referenced my Ricochet article summarizing the decision and citing the Inspector General report from Treasury.)

Within an hour or two Prof. Tribe sent this tweet very graciously conceding error, along with several similar.

I have on occasion had my differences with Prof. Tribe’s views, but what an honorable example he sets here. May all of us prove equally ready to re-examine our own views when challenged [cross-posted and slightly adapted from Overlawyered].

P.S. If word of the D.C. Circuit panel decision has not gotten around as widely as it should, one reason is that some major news organizations have still, nearly three weeks later, not seen fit to cover it. 

New CBO Numbers Confirm Simple Task of Balancing the Budget with Modest Spending Restraint

It’s not a big day for normal people, but today is exciting for fiscal policy wonks because the Congressional Budget Office has released its new 10-year forecast of how much revenue Uncle Sam will collect based on current law and how much the burden of government spending will expand if policy is left on auto-pilot.

Most observers will probably focus on the fact that budget deficits are projected to grow rapidly in future years, reaching $1 trillion in 2024.

That’s not welcome news, though I think it’s far more important to focus on the disease of too much spending rather than the symptom of red ink.

But let’s temporarily set that issue aside because the really big news from the CBO report is that we have new evidence that it’s actually very simple to balance the budget without tax increases.

According to CBO’s new forecast, federal tax revenue is projected to grow by an average of 4.3 percent each year, which means receipts will jump from 3.28 trillion this year to $4.99 trillion in 2026.

And since federal spending this year is estimated to be $3.87 trillion, we can make some simple calculation about the amount of fiscal discipline needed to balance the budget.

A spending freeze would balance the budget by 2020. But for those who want to let government grow at 2 percent annually (equal to CBO’s projection for inflation), the budget is balanced by 2024.

So here’s the choice in front of the American people. Either allow spending to grow on autopilot, which would mean a return to trillion dollar-plus deficits within eight years. Or limit spending so it grows at the rate of inflation, which would balance the budget in eight years.

Seems like an obvious choice.

Hillary Clinton’s “Exit Tax” Is an Unseemly Example of Banana Republic Economics

If you get into the weeds of tax policy and had a contest for parts of the internal revenue code that are “boring but important,” depreciation would be at the top of the list. After all, how many people want to learn about America’s Byzantine system that imposes a discriminatory tax penalty on new investment? Yes, it’s a self-destructive policy that imposes a lot of economic damage, but even I’ll admit it’s not a riveting topic (though I tried to link it to popular culture by using ABBA as an example).

In second place would be a policy called “deferral,” which deals with a part of the law that allows companies to delay an extra layer of tax that the IRS imposes on income that is earned - and already subject to tax - in other countries. It is “boring but important” because it has major implications on the ability of American-domiciled firms to compete for market share overseas.

Here’s a video that explains the issue, though feel free to skip it and continue reading if you already are familiar with how the law works.

The simple way to think of this eye-glazing topic is that “deferral” is a good policy that partially mitigates the impact of a bad policy known as “worldwide taxation.”

Japan’s Slow-Motion Fiscal and Monetary Suicide

Remember Bill Murray’s Groundhog Day, the 1993 comedy classic about a weatherman who experiences the same day over and over again?

Well, the same thing is happening in Japan. But instead of a person waking up and reliving the same day, we get politicians pursuing the same failed Keynesian stimulus policies over and over again.

The entire country has become a parody of Keynesian economics. Yet the politicians make Obama seem like a fiscal conservative by comparison. They keep doubling down on the same approach, regardless of all previous failures.

The Wall Street Journal reports on the details of the latest Keynesian binge.

Japan’s cabinet approved a government stimulus package that includes ¥7.5 trillion ($73 billion) in new spending, in the latest effort by Prime Minister Shinzo Abe to jump-start the nation’s sluggish economy. The spending program, which has a total value of ¥28 trillion over several years, represents…an attempt to breathe new life into the Japanese economy… The government will pump money into infrastructure projects… The government will provide cash handouts of ¥15,000, or about $147, each to 22 million low-income people… Other items in the package included interest-free loans for infrastructure projects…and new hotels for foreign tourists.

As already noted, this is just the latest in a long line of failed stimulus schemes.

The WSJ story includes this chart showing what’s happened just since 2008.

CBO Projections Are No Basis for Claiming Tax Reform “Loses Trillions”

I recently wrote in The Hill on Donald Trump’s fiscal plan. The graph below clarifies some of my comments.

CBO REVENUE PROJECTIONS

Estimates purporting to show the new, evolving Trump/Ryan Tax Reform must “lose trillions” over 10-20 years are usually static – meaning they assume lower marginal tax rates on labor and capital have zero effect on economic growth or tax avoidance.  Yet that is a relatively small part of the problem.

Even if static estimates made any sense, the alleged revenue losses would still be wildly exaggerated because they compare estimated revenues from reform plans with “baseline” revenues projections from the Congressional Budget Office (CBO).  

As the graph shows, CBO projections pretend that revenues from the existing individual income tax will somehow rise as a share of GDP every year –forever– reaching levels never before seen in U.S. history, even in World War II. 

Real wages in the CBO forecast supposedly rise so rapidly that more and more middle-income taxpayers are pushed into higher and higher tax brackets.  Since tax reform eliminates the highest tax brackets, it thwarts these sneaky tax increases and thus appears to “lose money.” But the CBO’s phantom projections are sheer fantasy and no basis for rejecting sensible tax reforms to encourage more business investment and greater labor force participation.