Archive for June, 2011

Health Care Odds & Ends

Posted by Michael F. Cannon

A few highlights from this week’s health care news:

  • Politico reports that Florida Gov. Rick Scott (R) is a former health insurance executive. (He was a hospital executive.)
  • Suzy Khimm writes that to fix the problems created by centralized planning of the health care sector, we need more centralized planning of the health care sector.
  • The Obama administration  blows the doors open on the colossal failure that are ObamaCare’s high-risk pools, but doesn’t bother to say where the  money is coming from.

How’s that Housing Stimulus Working Out for You?

Posted by Mark A. Calabria

Yesterday Case-Shiller released their monthly housing price index.  Surprise, it fell by 4.2% in the first quarter of 2011.  I’ve been predicting a decline of about 6% over the course of 2011 (might need to adjust that).  Of course, this should come as no surprise.  We’ve spent the last couple of years trying to re-create the bubble, with little success.  While there’s been a home-buyer tax credit, the largest stimulus has been extremely cheap credit on the part of the Federal Reserve.  The problem with all these subsidies is they ignore the fact that eventually the housing market will come back to fundamentals.  And those fundamentals are demographics and income.  You cannot over long periods of time sustain house price increases without increases in incomes.  Loose credit only gets you so far.  Prices have already fallen enough to pretty much wipe out the entire value of the home-buyer tax credit.

Even worse than putting off the inevitable correction, subsidies that maintain prices above construction costs result in additional supply being added to an already glutted market.  While housing starts are near historic lows – they are still positive.  And worse, they are higher in the very markets in which we don’t want more building.  That permitting activity is twice as high in Phoenix as in San Diego, despite being of similar size, illustrates the perverse incentives of trying to re-inflate the bubble via demand subsides.  In supply-constrained markets you simply maintain prices at unaffordable levels – San Diego is still 54% above its 2000 price level – while in easy-to-build markets you add to the glut – prices in Phoenix are now back to 2000 levels. 

House prices were always going to find their “true” bottom. The question was simply: did we want to get there right away, or drag out the process? Washington chose the course of dragging out the process, at considerable cost.  I believe dragging out the process has only further spooked potential buyers.  Any buyer today has to suspect that further price declines are possible.  We need to get to the point where the only direction is up.  We aren’t there yet.  Policymakers continue to ignore the basics of supply and demand.  Unfortunately the rest of us pay the price for their doing so.

Wednesday Links

Posted by George Scoville

With the Support of the Obama Administration, Paris-Based OECD Now Wants De Facto World Tax Organization as Part of Its Anti-Tax Competition Campaign

Posted by Daniel J. Mitchell

I’ve been battling the Organization for Economic Cooperation for years, ever since the Paris-based bureaucracy unveiled its “harmful tax competition” project in the late 1990s. Controlled by Europe’s high-tax welfare states, the OECD wants to prop up the fiscal systems of nations such as Greece and France by hindering the flow of jobs and capital to low-tax jurisdictions.

Guided by a radical theory know as Capital Export Neutrality, the OECD wants to impose global tax rules that would prevent taxpayers from ever having the ability to benefit from better tax law in other jurisdictions. This is why, for instance, the international bureaucrats are anxious to undermine national tax laws – such as America’s favorable treatment of bank deposits from overseas – that enable people to escape onerous tax regimes.

Bolstered by support from the Obama Administration, the OECD now is taking its campaign to the next level. At its Global Tax Forum in Bermuda, which ends later today, the bureaucrats unveiled a new scheme that effectively would result in the creation of something akin to a World Tax Organization.

The vehicle for this effort is a Multilateral Convention on Mutual Administrative Assistance in Tax Matters. This may sound dry and technical, but the OECD wants all nations to participate in this pact, which has existed for a couple of decades but was radically expanded last year to give high-tax governments sweeping new powers to impose bad tax law on income generated in low-tax jurisdictions.

But the real smoking gun is that the OECD has put itself in charge of the “co-ordinating body” that will have enormous powers to interpret the agreement, modify the pact, and resolve disputes – thus giving itself the ability to serve as judge, jury, and executioner.

This is a profoundly dangerous development with all sorts of very troubling implications. Since I’m in Bermuda trying to destabilize this effort, I don’t have time for extensive analysis, but here’s a press release from the Center for Freedom and Prosperity and here are some of my immediate concerns.

  1. Higher tax burdens. If high-tax governments succeed is imposing this Multilateral Convention (insert “World Tax Organization” whenever you see that term), tax competition will be undermined and politicians will respond by increasing tax burdens. This is why nations such as France have been pushing this scheme, of course, and why left-wing academics have long dreamed of this type of arrangement.
  2. Risk to human rights. Amazingly, the Multilateral Convention is open to repressive regimes, which then would have access to all sorts of sensitive and confidential taxpayer information. Already, the thuggish dictatorship of Azerbaijan has signed up, as well as the unstable nation of Moldova and the corrupt government of Mexico. The implications are grim, including the sale of private data to criminal gangs, the loss of sensitive information to hackers, and the direct misuse of American tax returns.
  3. Loss of sovereignty. For all intents and purposes, the Multilateral Convention outlaws certain pro-growth tax policies and discourages others. Equally worrisome, it creates a system allowing foreign tax collectors to cross borders. The Obama Administration has specifically acquiesced to this provision, so perhaps we will soon see corrupt Mexican tax authorities harassing businesses and individuals on American soil.
  4. Outlawing tax avoidance. The OECD historically has tried to portray its efforts as a fight against tax evasion, but the Multilateral Convention explicitly talks about “combating tax avoidance.” This should not be a surprise since the Capital Export Neutrality ideology is based on the notion that taxpayers should have zero ability to lower their tax burdens. This means we can fully expect an assault on all forms of tax planning, with American companies almost sure to be among the first to be in the OECD’s crosshairs.

The final insult to injury is that American taxpayers are the biggest funders of the OECD, providing nearly one-fourth of the bureaucracy’s bloated budget. So our tax dollars are being used by OECD bureaucrats (who receive tax-free salaries!) to dream up new ways of increasing our tax burdens. In case you need any additional reasons to despise this bureaucracy, here’s a video detailing its anti-free market activities.

 

And since I’m recycling some videos, here’s one explaining why tax competition is so important.

Are U.S. Corporate Taxes Low?

Posted by Chris Edwards

In a new column, Bruce Bartlett argues that U.S. corporate taxes are the lowest in the OECD, and therefore there is no need to reduce them. As usual, Bruce frames the debate as between sensible center-left economists like himself vs. crackpot Republicans. Yet on this issue, the great majority of serious tax scholars agree that a corporate tax rate cut is long overdue. Indeed, there is such broad agreement among experts that even the Obama White House is considering a corporate rate cut.

Bruce offers only weak and deceptive data in support of his views:

One would not know from the Republican document that corporate taxes are expected to raise just 1.3 percent of GDP in revenue this year, about a third of what it was in the 1950s.

This statistic does not show what Bruce pretends it shows. Corporate income taxes are paid by a subset of businesses called “C” corporations. But the share of total U.S. business income reported by C corporations has plunged in recent decades with the rise in other business structures, particularly LLCs and S corporations.

In a 2007 article in Tax Notes, PwC economist Peter Merrill showed that the share of total U.S. business income reported by C corporations fell from 71 percent in 1987 to just 49 percent by 2004. C corporations are less important business structures than they used to be, so it is to be expected that corporate taxes as a share of GDP has fallen.

Another way to see the relative decline in C corporations is to look at the ratio of C corporation revenues to GDP. In 1980, for example, C corporation revenues were more than two times larger than GDP ($6.1 trillion to $2.8 billion), but by 2008 C corporation revenues were only about 1.5 times larger than GDP ($22 trillion to $14 trillion). (Revenues from the IRS corporate report for those two years).

Bruce’s centerpiece is a table showing that U.S. corporate taxes as a share of GDP were 1.8 percent in 2008, a lower share than in other OECD countries. But the rise in LLCs and S corporations in the United States makes this table almost useless in furthering Bruce’s argument. C corporations may simply represent a smaller share of the overall economy in the United States than in other countries. To make his point, Bruce would need to show that taxes as a share of corporate profits are lower in the United States than elsewhere.

If taxes are low historically and in comparison with our global competitors, how are Republicans able to maintain that taxes are excessively high? They do so by ignoring the effective tax rate and concentrating solely on the statutory tax rate.

The effective tax rate Bruce refers to is the average effective rate, which is the rate he calculates in the faulty manner of taxes as a share of GDP. However, marginal effective rates are generally considered to be more important for international competitiveness. When Toyota is considering expanding its North American production at one of its U.S. or Canadian locations, it will look at the marginal effective tax rate in the two countries. And when it comes to marginal effective corporate tax rates, the United States has one of the highest rates in the world, according to a Cato study by tax scholars Jack Mintz and Duanjie Chen.

The economic importance of statutory tax rates is blown far out of proportion by Republicans looking for ways to make taxes look high when they are quite low.

Actually, statutory corporate tax rates are extremely important in the modern global economy because of the high mobility of corporate profits. In general, marginal effective tax rates drive real investment flows, but statutory corporate rates drive cross-border movements of reported income. Politicians frequently express their outrage at corporations pushing their profits offshore through transfer pricing and other techniques, but they could fix the problem anytime they wanted by slashing the uniquely high U.S. statutory corporate rate.   

This brings us back again to Bruce’s statistic that U.S. corporate taxes as a share of GDP are low at just 1.8 percent. Another reason that figure is low is that the high U.S. statutory rate is pushing reported income offshore through avoidance and evasion. If we cut the statutory corporate rate, the apparent low burden that Bruce points to would increase. This chart shows the inverse relationship between statutory corporate taxes and corporate taxes as a share of GDP.

By the way, if the importance of statutory corporate rates were “blown far out of proportion” as Bruce says, then why has every other advanced economy put so much effort into reducing its statutory rate over the last two decades? The answer is that liberal, centrist, and conservative governments around the world have understood that a country imposing a high statutory corporate rate shoots itself in the foot in today’s competitive world economy.

To sum up:

  • The U.S. has a low average effective corporate rate when measured incorrectly as a share of GDP, as Bruce does. The low rate results from the relative decline in C corporation business activity, the high U.S. statutory rate driving profits offshore, and the high U.S. marginal effective rate suppressing real investment.
  • The U.S. has one of the highest statutory corporate tax rates in the world. The high statutory rate drives reported income offshore, and it is also an important component of the marginal effective tax rate faced by companies.
  • The U.S. has one of the highest marginal effective corporate tax rates in the world according to some calculations, which likely reduces U.S. capital investment substantially. After all, “corporate taxes are the most harmful type of tax for economic growth,” according to the OECD.

 For more, see Global Tax Revolution.

Inflation Expert

Posted by Gerald P. O'Driscoll

Who knows more about inflation, Richard Galanti or Ben Bernanke? I maintain that, when it comes to the facts, Mr. Galanti knows more than the Fed chairman. Galanti is the CFO of Costco Wholesale Corp.

The Wall Street Journal reported last Thursday (May 26th) on a conference call with Mr. Galanti. He said “we saw quite a bit of inflationary pricing” in the 3rd quarter.

Price increases occurred in a broad range of products” dry dog food (3.5%). Detergents (10%+), plastic products (8-9%). Costco will “hold prices as long as we can.” When it can no longer, the consumer will face rising prices.

Costco is a good leading indicator of inflation at the retail level. It turns over inventory quickly, and is leading other retailers in restocking at higher prices. Costco offers a forward-looking view of consumer price inflation.

Meanwhile the Fed and its chairman, Ben Bernanke, rely on backward looking measures of inflation, like the CPI. That index, and the “core” component that excludes food and energy prices, overweight the depressed housing sector. And they are yesterday’s news.

For years, American consumers have benefitted from cheap imports from China and India. When those countries liberalized and opened up to global commerce, Americans got the benefit of the hard work and low wages of 2 ½ billion workers. The era of cheap labor is coming to an end, and with it the flood of imports that held down prices in the U.S. Especially in China, wage rates are rising rapidly.

Heretofore, the flood of dollars has chiefly affected asset prices and inflation in other countries. The flow through to U.S. consumer prices will now be quicker. You’ll experience it when you go to Costco to restock.

House Republicans Target Amtrak

Posted by Tad DeHaven

House Transportation Committee chairman John Mica (R-FL) and Rail Subcommittee Chairman Bill Shuster (R-PA) announced that they will draw up legislation that would kill Amtrak’s desire to develop and operate high-speed rail in the Northeast Corridor:

We plan introduce legislation to separate the Northeast Corridor from Amtrak, transfer it to a separate entity, and begin a competitive bidding process that would allow for a public-private partnership to design, build, operate, maintain, and finance high-speed service. Our plan would do so in a dramatically shorter time, in closer to 10 rather than 30 years, and at a fraction of the $117 billion cost proposed by Amtrak, while creating new jobs.

Randal O’Toole says that “Rail fans feel threatened by the proposal because they know that, if the Northeast Corridor is ever spun off as a private operation, support for Amtrak subsidies in the rest of the nation will dwindle.” Not surprisingly, Amtrak booster Sen. Frank Lautenberg (D-NJ) thinks that “privatizing” the Northeast Corridor is a bad idea:

Let’s not forget: Congress created Amtrak in 1970 because the private railroads could no longer sustain inter-city passenger service on their own,” he said. “When I was building my business, I learned firsthand — if you want to be successful tomorrow, you must begin laying the foundation today. The same principle applies here. If we want to leave our children and grandchildren a better country, we must make smart investments on their behalf — and that means investing in Amtrak.

Dumping more taxpayer dollars into Amtrak will “leave our children and grandchildren” with more debt — not a better country as Lautenberg absurdly claims. And as a Cato essay on Amtrak subsidies explains, it was decades of taxes and burdensome government regulations that sped the demise of private passenger rail:

Decades of taxes and burdensome government regulations sped the demise of private passenger rail. Railway companies pay income taxes and substantial property taxes, costs that are not borne by government-owned highways. And during World War II, the federal government imposed a special 15 percent excise tax on train tickets, which was not repealed until 1962.

The railroads were rapidly losing customers in the mid-20th century, but government regulators created hurdles to letting them shed services as quickly as demand was falling. Most state governments imposed regulatory restrictions on the discontinuance of train routes. And beginning in 1958, Congress handed the ICC nationwide power to restrict the discontinuance of train routes. Attempts by the railroads to eliminate unprofitable passenger routes were met with political resistance in Congress.

The ICC’s micromanagement of the railroads was damaging. It took the ICC a decade to approve the merger of the struggling Pennsylvania and New York Central railroads into the ill-fated Penn Central. By the 1960s, the railroads’ crucial freight operations were losing ground to trucks and needed to adjust their shipping rates in order to remain competitive. However, the ICC insisted on maintaining a suffocating regulatory rate structure, which reduced the ability of the railroads to adapt to market conditions.

The railroads were also burdened with unionized workforces, which raised labor costs and reduced the management flexibility of companies to respond to the rapidly changing marketplace. For example, even though the job of stoking the old steam engines had been eliminated, railroad unions fought for 35 years to keep firemen in diesel locomotives.

After a number of major railroads, including Penn Central, went bankrupt in the 1960s, Congress and President Richard Nixon stepped in to take unprofitable passenger rail off the hands of the struggling railroads by creating a new federal rail corporation, Amtrak. Pressure from passenger rail advocacy groups and labor unions also led to Amtrak’s creation.

I’m not ready to hop on board Mica and Shuster’s plans for a federal “public-private partnership,” especially since they can only say that their eventual plan will “reduce” and “potentially eliminate” the need for federal subsidies. I’d prefer true privatization and a “bottom-up” approach to transportation. Regardless, halting Amtrak’s high-speed rail dreams would be a step in the right direction.

Does Scholar Self-Interest Corrupt Policy Research?

Posted by Andrew J. Coulson

The New York Times recently ran a story portraying the Gates Foundation as the puppeteer of American education policy, bribing or bullying scholars and politicians into dancing as it desires. Rick Hess, of the American Enterprise Institute, feels that the story misrepresented his position on the potentially corrupting influence of foundations, making it sound as though he were referring to the Gates Foundation in particular when in fact he was referring to the impact of foundations generally.

Hess told the Times, among other things, that

As researchers, we have a reasonable self-preservation instinct. There can be an exquisite carefulness about how we’re going to say anything that could reflect badly on a foundation. We’re all implicated.

Next Monday, the Cato Institute will publish a study titled: “The Other Lottery: Are Philanthropists Backing the Best Charter Schools?” In it, I empirically answer the titular question by comparing the academic performance of California’s charter school networks to the level of grant funding they have received from donors over the past decade. The results tell us how much we should rely on the pairing of philanthropy and charter schools to identify and replicate the best educational models. Considerable care went into the data collection and regression model. As for the description of the findings, it’s as simple and precise as I could make it. I doubt it will be hailed as exquisite.