Fast track to more jobs and higher wages

It's Time To Eliminate the U.S. Corporate Income Tax
By Laurence J. Kotlikoff, Professor of Economics, Boston University
Monday, January 27, 2014

Though taxing corporations may be a political no-brainer, it may be a big economic mistake. This column discusses recent research showing that the tax is not paid primarily by rich corporate shareholders. They can, and do, move their capital away from countries that have high corporate rates. Eliminating the U.S. corporate tax by, for example, taxing accrued global corporate profits as personal income can produce dramatic increases in U.S. investment, output, real wages, and saving. Modest gains accrue to early generations with very sizable gains going to young and future generations, both skilled and unskilled.

Perhaps the most maddening aspect of America's dangerous government's political infighting is the failure of politicians in both parties to agree to reforms on which they agree.

Take, for example, taxing wealth, and taxing consumption. Many Democrats would love to enhance tax progressivity by taxing wealth and lowering taxes on workers. In contrast, Democrats think retail sales taxation is the most regressive tax around. For their part, many Republicans would applaud switching from wage to retail sales taxation, but would be appalled by wealth taxation.

Economists know replacing wage taxes with a consumption tax – whether implemented as a retail sales tax or otherwise – is equivalent to taxing wealth and using the proceeds to lower taxes on wages.

The wealth tax hidden in the retail sales tax

To see the wealth tax hidden in the retail sales tax, consider the legendary Uncle Scrooge McDuck swimming in a pool full of 50 billion $1 bills. Were the U.S. government to enact today, say, a 34% retail sales tax, it would remove none of Uncle Scrooge's precious greenbacks from his pool. But it would reduce their purchasing power by 25%, since it would now take 1.34 of these dollars to buy what cost $1 dollar yesterday.

Scrooge, being Scrooge, has no interest in spending his money. Instead, he'd likely bequeath all 50 billion pieces of paper to his nephew Donald Duck who would inherit less real wealth – namely, 25% less purchasing power. In other words, neither Scrooge nor Donald can escape the immediate, if implicit wealth tax arising from retail sales taxation by leaving their money to their heirs.

It's easy to show mathematically that consumption taxation is equivalent to taxing wealth on a one time basis, and wages on an ongoing basis. The only difference between the two is in the choice of words used to describe their equivalent effects. Any wealth tax used to lower taxes on wages could be implemented as a consumption tax, coupled with a cut in wage taxes. Indeed, the former policy could simply be relabeled as the later policy, since they are equivalent. Perhaps we could get Democrats and Republicans to agree on this policy by writing the law in Russian, and letting each party translate the law in their preferred fiscal language.

Politicians mistake language for economic substance routinely. No surprise. Of the 535 members of Congress, not one has a PhD in Economics.

Gains from eliminating the corporate tax: New evidence

When it comes to corporate tax reform, the true incidence of who bears the tax is also lost in the words. Most people, regardless of political party, think the corporate income tax is primarily paid by rich corporate shareholders. But this is not necessarily the case (Felix and Hines 2009, Kotlikoff et al. 2013). In particular, a recent large-scaled dynamic simulation study, entitled "Simulating the Elimination of the U.S. Corporate Income Tax," (Kotlikoff et al. 2013) strongly suggests otherwise. As I discussed in a recent NY Times column (Kotlikoff 2014), corporate shareholders can, and do, move their capital and production away from countries that impose high corporate income tax rates to countries that impose low corporate income tax rates.

Our paper simulates corporate tax reform in the U.S. and abroad, including the complete elimination of the U.S. corporate income tax. The model features a single good produced in five regions – the U.S., Europe, Japan (plus Korea and Taiwan), China, and India – with skilled and unskilled labor. It also closely models demographics, including age-specific birth and death rates, as well as each countries'/regions' fiscal policy.

We find that:

Eliminating the U.S. corporate income tax with no changes in the corporate tax rates of the other regions can produce rapid and dramatic increases in U.S. domestic investment, output, real wages, and national saving.

These economic improvements expand the economy's tax base over time, producing additional revenues that make up for a significant share of the loss in receipts from the corporate tax.

The simulated economic gains from eliminating the corporate tax – while insufficient to fully finance the corporate tax cut (i.e., there is no Laffer Curve, per se) – are large enough to produce a Pareto improvement. Modest welfare gains accrue to early generations, both skilled and unskilled, and very sizable welfare gains go to young and future generations, both skilled and unskilled.

Importantly, these gains arise naturally with no special compensation mechanism required to transfer from winners to losers.

Stated differently, the elimination of the U.S. corporate income tax has the potential to be a win-win for all U.S. generations.

These results are predicated on three assumptions – that taxes on wages, levied with the same degree of progressivity as current U.S. wage taxes, are used to offset the loss in corporate tax revenues, that the U.S. marginal effective corporate income tax rate is 35%, and that the U.S. average effective corporate income tax rate is 13%.

Source of the Pareto gains: Corporate tax's inefficiency

Relying on higher consumption taxes to offset the loss in corporate taxes leads to even larger long-run welfare gains, albeit at the price of small welfare losses to initial older generations. The difference between the 35% marginal effective U.S. corporate tax rate, recently estimated by Mintz and Chen (2013), and the 13% average tax rate, suggested by the U.S. National Income Accounts, tells us an important fact.

A substantial share of the corporate tax's distortionary impact – namely, dissuading investment in the U.S. – comes with no gain in terms of extra revenue.

This makes the tax particularly inefficient, and helps explain the scope for a Pareto improvement. For example, when wage taxation is used as the substitute revenue source, eliminating the U.S. corporate income tax, holding other countries' corporate tax rates fixed, engenders a rapid and sustained 23% to 37% higher capital stock, depending on the year in question, with most of the added investment reflecting capital inflows in response to the U.S.'s highly favorable corporate tax climate.

Higher capital per worker means higher labor productivity and, thus, higher real wages. Indeed, in the wage-tax simulation, real wages of unskilled workers end up 12% higher, and those of skilled workers end up 13% higher.

There is some question in the literature about the magnitude of the U.S. marginal corporate tax rate. Devereux and Bilicka (2012) put the rate at 23%, not at 35%. Our paper produces smaller, but still substantial, economic gains, and a Pareto path assuming a 23% rate. Importantly, we also find substantial, if smaller, gains to U.S. workers – particularly young and future workers – if other countries match the U.S. and also eliminate their corporate income taxes.

Concluding remarks

Eliminating the corporate income tax could be implemented (http://www.thecommonsensetax.org/) as part of corporate tax integration in which shareholders are required to pay tax at the personal level on their shares of their companies' profits as those profits accrue.

In short, if Democrats and Republicans started thinking about what they want, not what they want to hear, we could begin making substantive tax reforms in the U.S. that would make both sides happy.

Davos Unburdening as Memes Begin to Fail - Capital Partners Staff Report - January 23, 2014

Davos Unburdening as Memes Begin to Fail

Capital Partners Staff Report - January 23, 2014

Crippled eurozone to face fresh debt crisis this year, warns ex-ECB strongman Axel Weber ... Ex-Bundesbank head Alex Weber expects fresh market attacks on eurozone this year and economist Kenneth Rogoff says the euro was a "giant historic mistake." ... A top panel of experts in Davos has poured cold water on claims that the European crisis is over, warning that the eurozone remains stuck in a low-growth debt trap and risks being left on the margins of the global economy by US and China. – UK Telegraph

Theme: Europe is over its crisis and soon any doubts about recovery will be a thing of the past as well.

Analysis: You can tell certain memes are failing when elite bagmen begin to broadcast their doubts. From this article, we determine that even top elites are beginning to worry about upcoming EU difficulties.

Axel Weber says what is not to be spoken, for instance, though Weber has been speaking out for a while and had to resign from the Bundesbank for his trouble. Perhaps Weber is courageous, or more likely – as he moves in these circles – he is just covering his backside.

The more of these confessionals we observe, the more certain we are that significant trouble is brewing. We've seen the same kind of thing with global warming.

But when it comes to the EU, we're only surprised that there are not many more like Weber. After all, we are in the middle of a bear business cycle. In a "bear" it is not possible to get long-term recoveries. We go back to the 1970s for this information.

The 1970s – the last real bear cycle – saw numerous sporadic "recoveries." But the struggle was really between those who owned the fiat and wanted to re-stimulate and the economy itself, which was badly in need of a cleansing.

It is much the same today. The economy crashed worldwide but instead of allowing the banking system to experience the insolvency it richly deserved, banking officials began to print money in vast amounts – tens of trillions – that were funneled directly to "too big to fail" financial institutions.

The money flowed from these institutions not into the average man's pocket, but into stocks, commodities, housing and other assets that were sought after from those employed by these institutions or close to them.

These sorts of money flows do not create a "recovery" but they do create asset bubbles and overall price inflation. The bubbles are troublesome, the price inflation over time is intolerable and demands and interest rates rise.

The interest rate rises of the early 1980s were terrible, but when the cycle finally reaches this point in the 2000s, they will be catastrophic because the economy has been unbalanced for so long.

Axel Weber is correct. Here is more:

Weber, the former head of the German Bundesbank, said the underlying disorder continues to fester and region is likely to face a fresh market attack this year. "Europe is under threat. I am still really concerned. Markets have improved but the economic situation for most countries has not improved," he said that the World Economic Forum in Davos.

Mr Weber, now chairman of UBS, said the European Central Bank's stress test for banks in November risks setting off a new sovereign debt scare, reviving the crisis in the Mediterranean countries.

"Markets are currently disregarding risks, particularly in the periphery. I expect some banks not to pass the test despite political pressure. As that becomes clear, there will be a financial reaction in markets," he said.

Weber was not alone at Davos. Harvard's Kenneth Rogoff is quoted as saying in his speech that the euro was a "gigantic mistake." Of course, as we have indicated many times, the euro was NOT a mistake. Those initiating it believed that the stress caused by the euro would eventually lead to a deeper political union. But we'll give Rogoff a gold star for addressing the issue at all.

Like Weber, Rogoff may be worrying not about the EU so much as his own reputation. Again, think of these statements as a kind of early warning system. The most sensitive of bagmen want to issue "distancing" statements.

Here's what Rogoff had to say:

Harvard professor Kenneth Rogoff said the launch of the euro had been a "giant historic mistake, done to soon" that now requires a degree of fiscal union and a common bank resolution fund to make it work, but EMU leaders are still refusing to take these steps.

"People are no longer talking about the euro falling apart but youth unemployment is really horrific. They can't leave this twisting in wind for another five years," he said.

Mr Rogoff said Europe is squandering the "scarce resource" of its youth, badly needed to fortify an ageing society as the demographic crunch sets in. While Europe still has great skills in technology and an established rule of law that is the envy of most emerging market states, it risks losing footing as a major player in the global economy.

"If these latent technologies are not realized, Europe will wake up like Rip Van Winkle from a long Japan-like slumber to find itself a much smaller part of the world economy, and a lot less important."

Mr Rogoff said debt write-downs across the EMU periphery "will eventually happen" but the longer leaders let the crisis fester with half-measures, the worse damage this will do to European society in the end.

You see how it works? First come the most outrageous and authoritarian actions. And then, as the predictable debacle takes place, certain individuals whose fates are tied to larger rash gambits begin to worry for various reasons about their individual reputations and credibility.

Obviously, we are at this point when it comes to the euro and even the EU. As the debacle continues to unfold, there will surely be others who feel compelled to separate themselves from the unfolding catastrophe.

So think of these elite confessionals as a kind of market indicator, to be considered alongside of other evidence. They can be useful this way.

We've been writing a good deal about the Wall Street Party, and have been watching the mainstream press for these sorts of indicators – mainstream analysts and academics sounding the warning about Wall Street and markets generally.

While there are various unburdening, we haven't yet observed the kind of doomsday commentary that we consider significant. That doesn't mean it won't come. Surely it will.

Conclusion

So ... in the case of the Wall Street Party, there may be gains aplenty before the punch bowl departs. Not so much for the EU ...

A Trend to Note: Over One-Third of Adults Unemployed

A Trend to Note: Over One-Third of Adults Unemployed

Capital Partners Staff Report - January 23, 2014

Wall Street adviser: Actual unemployment is 37.2%, 'misery index' worst in 40 years ... Don't believe the happy talk coming out of the White House, Federal Reserve and Treasury Department when it comes to the real unemployment rate and the true "Misery Index." – Washington Examiner

From the political class: There's nothing wrong with the US economy that the coming recovery won't fix.

Analysis: David John Marotta is not afraid to say what most of the mainstream media will not whisper: That the US is in a depression not a recession.

·       What else would you call nearly 40 percent of adults unemployed?

·       And if these are the statistics, then what are the YOUTH numbers? Fifty percent? Sixty percent?

Marotta, we should add, is more emphatic than we are when it comes to such numbers. We've put forth two numbers regarding the current rolling economic catastrophe.

First, we estimated that central banks would print about US$100 trillion over time to try to stave off the rolling insolvency of Western democracies. We'll stick to this estimate, though perhaps we'll have to revise it upwards. Depends on how many of those US$16 trillion dollar money-printing weekends Ben Bernanke has – and now Janet Yellen.

Second, we have on numerous occasions mentioned that the US fedgov's estimates of unemployment are woefully underestimated. What is seven percent or so for fedgov is more like 20 percent for Shadowstats and, in our interpretation, somewhere around 30 percent or more.

But Marotta thinks it is nearly 40 percent! Who is this guy? A crank? Doesn't seem so.

Here ... his profile from Forbes, for whom he writes:

David John Marotta

I'm the president of Marotta Wealth Management, a fee-only comprehensive financial planning practice in Charlottesville, Virginia. My parents started their own firm during the early days of NAPFA. One of the best parts of my education was mentoring under my father, George Marotta, who I consider a financial Rembrandt. I grew up amongst my father's work at the Hoover Institution alongside Milton Friedman, Edward Teller, Thomas Sowell, and other great research fellows there. We have developed our own principles of freedom investing to guide many of our strategic investment decisions.

My own background teaching Computer Science brings a precision, discipline, and automation to the financial planning process. We give as much of this information away in our weekly column and daily financial blog as well as interviews, speaking events and radio appearances.

Sounds like Marotta might know what he's talking about. Here's more from the article:

In a memo to clients ... David John Marotta calculates the actual unemployment rate of those not working at a sky-high 37.2 percent, not the 6.7 percent advertised by the Fed, and the Misery Index at over 14, not the 8 claimed by the government.

Marotta, who recently advised those worried about an imploding economy to get a gun, said that the government isn't being honest in how it calculates those out of the workforce or inflation, the two numbers used to get the Misery Index figure.

"The unemployment rate only describes people who are currently working or looking for work," he said. That leaves out a ton more.

"Unemployment in its truest definition, meaning the portion of people who do not have any job, is 37.2 percent. This number obviously includes some people who are not or never plan to seek employment. But it does describe how many people are not able to, do not want to or cannot find a way to work. Policies that remove the barriers to employment, thus decreasing this number, are obviously beneficial," he and colleague Megan Russell in their new investors note from their offices in Charlottesville, Va.

They added that "officially-reported unemployment numbers decrease when enough time passes to discourage the unemployed from looking for work. A decrease is not necessarily beneficial; an increase is clearly detrimental."

... "Today, the Misery Index would be 7.54 using official numbers," they wrote. But if calculations tabulating the full national unemployment including discouraged workers, which is 10.2 percent, and the historical method of calculating inflation, which is now 4.5 percent, 'the current misery index is closer to 14.7, worse even than during the Ford administration.

We have some differences of opinion here, but we surely agree broadly with Marotta's analysis. We do like to differentiate between those who wish to work and those who don't. So perhaps 30-plus percent of "formerly working adults" is still a relatively accurate number.

There are other possibilities that occur to us, however. We would tend to believe that this 30-40 percent is attenuated by the gray market for barter and under-the-table employment.

It is said that something like US$2 trillion is generated but not accounted for by US fedgov. That's not much less than the US$3.5 trillion that the US takes in taxes every year. Thus, one could argue the underground economy is nearly as big as the above-ground one.

This as much as anything shows the worthlessness of the mainstream media – and the business media in particular. Almost all of the coverage of US business is tilted toward above-ground businesses. But it sounds like the underground economy is nearly as large. It's just hardly ever written about.

Here's a final point regarding Marotta. He obviously comes from a free-market background, and he's gained enormous publicity, just as Peter Schiff has, by speaking out about the phoniness of mainstream economic analysis. Over time, others in Marotta's profession will surely take notice.

Conclusion

Taken together, these two trends mean more truth-telling, not less, over time. And that's a trend worth watching.

View From The Left: Arguing about Benghazi was waste of time

View From The Left: Arguing about Benghazi was waste of time

By David Ignatius is a columnist for the Washington Post. With editorial comments

The Senate Intelligence Committee made headlines last week by reporting that the 2012 attack in Benghazi was preventable. But frankly, we knew that.

The deeper message of the bipartisan report was that Republicans in Congress wasted a year arguing about what turned out to be mostly phony issues.

[not true, he is assuming you are uninformed]

The GOP’s Benghazi obsession was the weird backdrop for foreign-policy debate through much of last year. Sen. Lindsey Graham used it as a pretext for blocking administration nominations. Rep. Darrell Issa used the issue to impugn the integrity and independence of a review conducted by retired Adm. Mike Mullen and former ambassador Tom Pickering.

[Another untruth - examine the public comments by the two mention and you will not find one word to support the assertion]

Driving the Republican jihad was a claim, first reported in October 2012 by Fox News, that CIA personnel had wanted to respond more quickly to the Benghazi attack but were ordered to “stand down,” perhaps by political higher-ups. Although this claim was promptly rebutted by CIA officials, it was repeated by Fox at least 85 times, according to a review by the liberal advocacy group Media Matters. This barrage fueled Republican charges that the Democrats were engaging in a cover-up.

[The report did not clear the stand down issue (Google the subject).  Further, note the inflammatory use of "Republican jihad "- gives you clear insight into the bias behind the article]

The Senate Intelligence Committee report addressed this inflammatory charge head-on: “The committee explored claims that there was a ‘stand down’ order given to the security team at the annex. Although some members of the security team expressed frustration that they were unable to respond more quickly to the mission compound, the committee found no evidence of intentional delay or obstruction by the chief of (the CIA) base or any other party.” [Gregory Hicks, the deputy chief of mission in Libya, testified that a small Special Forces team was set to go to the rescue of the consulate, but was ordered twice to "stand down." This contradicts the assertion by the Pentagon no "stand down" orders were issued. Who issued the stand-down order? Why?]

The Senate panel also rejected the insinuation, made repeatedly by Republicans, that the Obama administration failed to scramble available military assets that could have defended the Benghazi annex and saved the lives of the four American victims. “There were no U.S. military resources in position to intervene in short order in Benghazi,” the report says flatly. “The committee has reviewed the allegations that U.S. personnel ... prevented the mounting of any military relief effort during the attacks, but the committee has not found any of these allegations to be substantiated.”

[See above note]

These are bipartisan findings, mind you, endorsed by the panel’s Republican members as well as Democrats. GOP members offered some zingers in their additional minority views, but the Democrats rightly credited their colleagues for standing up to the right-wing spin machine: “We worked together on a bipartisan basis to dispel the many factual inaccuracies and conspiracy theories related to the Benghazi attacks.”

[The committee determined that the U.S. military command in Africa didn’t know about the CIA annex and that the Pentagon didn’t have the resources in place to defend the diplomatic compound in an emergency.  “The attacks were preventable, based on extensive intelligence reporting on the terrorist activity in Libya — to include prior threats and attacks against Western targets — and given the known security shortfalls at the U.S. Mission,” the panel said in a statement.]

The Obama administration’s supposed cover-up on Benghazi became a crusade for leading Republicans. A low point came when Issa’s Committee on Oversight and Reform issued a report last September questioning “the independence and integrity of the review” by the Mullen-Pickering group. These were extraordinary charges to make against a former chairman of the Joint Chiefs of Staff and a former ambassador to six countries – especially since Issa didn’t present any conclusive evidence to back up his allegations.

[The bipartisan report lays out more than a dozen findings regarding the assaults on Sept. 11 and 12, 2012, on a diplomatic compound and a CIA annex in the Libyan city of Benghazi. It says the State Department failed to increase security at its diplomatic mission despite warnings and faults intelligence agencies for not sharing information about the existence of the CIA outpost with the U.S. military.]

The Republican tirades about Benghazi were unfortunate not just because they were based on erroneous speculation but because they distracted policymakers from the real challenge of framing coherent policy in the Middle East. Sometimes, it seemed as if Benghazi finger-pointing was the only issue that leading Republicans cared about. In fact, the Senate committee’s report echoes many of the themes of the earlier report by the Accountability Review Board, which noted “systemic failures and leadership and management deficiencies.” Warnings about deteriorating conditions in Benghazi were ignored; proposals to add additional security there were rejected; even as evidence mounted of al-Qaeda’s growing power in Benghazi, the State Department failed to respond adequately.
[In his own words, Ignatius refutes his own argument - this is an absence of leadership and competence at the top]

The Senate report makes clear that some important security mistakes were made by ambassador Christopher Stevens, the courageous but sometimes incautious diplomat who was among those who died in the attack.

Perhaps the silliest aspect of the Benghazi affair was the focus on the errant “talking points” prepared for Congress, which cited incorrect intelligence about “spontaneous demonstrations” in Benghazi that wasn’t corrected by the CIA until a week after the points were delivered on Sunday talk shows by Susan Rice, then-U.N. ambassador. Rice is still under a cloud because she repeated the CIA’s “points” prepared at Congress’ insistence.

[Gregory Hicks, then the deputy chief of mission in Libya, told the House Oversight Committee that he'd told Secretary of State Hillary Clinton during the attack that it was being carried out by terrorists, so his "jaw dropped" when he heard U.N. Ambassador Susan Rice on TV blaming protests against a YouTube video that offended Muslims.]

Next time, the Senate report notes, the intelligence community should just tell Congress what facts are unclassified – and let the legislators do the talking.

[Not a bad idea.  "In the immediate aftermath of the attacks, the [Intelligence Community] received numerous reports, both classified and unclassified, which provided contradictory accounts that there were demonstrations at the Temporary Mission Facility. In some cases, these intelligence reports-which were disseminated widely in the Intelligence Community--contained references to press reports on protests that were simply copied into intelligence products.]

This is what political hacks pretending to journalist do.  They take source information and produce plausible lies.  Beware of these beast!