#BecauseMath Economics Taxation Unemployment

Will low corporate taxes bring the jobs back?

Many promises have been made that any number of conservative policies will bring jobs back to America. In this post, we’ll examine the claim that lower corporate taxes will reduce offshoring of jobs by presenting a simple example.

Imagine a multinational company, Big Widget Inc. (BWI), can make widgets either in the United States or in Mexico. In Mexico, where environmental regulations are gentler and wages lower, BWI can make widgets for $90. In the United States, they can make widgets for $95. No matter where they manufacture them, they can sell widgets for $100 in the United States.

Now, in this fictional world, let’s imagine the corporate tax rate is the same 40% in both countries. How much tax will BWI pay and to whom? Answering this requires a short primer on transfer pricing. When a company does business in 2 countries, it has a separate affiliate organization in each country. When goods manufactured by BWI Mexico are imported by BWI America, BWI assigns a “price” for those goods as if BWI Mexico sold those goods to BWI America. The price is called the transfer price. Ideally, this price will match the price that two unaffiliated companies would agree on. The terminology here is “arms length.” The tax authority in each country tries to prevent companies from gaming the transfer price, but there’s some wiggle room here.

If the two countries have the same tax rate, then BWI doesn’t care what the transfer price is. But, the two countries do. If the transfer price is $90, then BWI Mexico recognizes zero profit in Mexico and the USA collects all the taxes. If the transfer price is $100, then BWI Mexico recognizes all of the profit and Mexico collects all the taxes. In either case, BWI pays 40% of it’s $10 profit, or $4.

But Republicans tell us that reducing that corporate tax rate will bring that manufacturing back to the USA. Let’s explore that.

Imagine America cut its corporate income tax to 10% while Mexico holds its tax rate at 40%. In this scenario, BWI wants to minimize the transfer price for widgets. If the transfer price is $90, BWI can recognize the whole $10 profit in the USA and pay just $1 (10%) on its US profit. That’s a nice windfall for BWI but a big loss in tax revenue for Mexico. Mexico will probably insist on a higher transfer price. Maybe $95. At that transfer price and those tax rates, would widget manufacturing return to America?

By importing widgets at a $95 transfer price, BWI can make a $5 profit in each country. Mexico charges a 40% tax on the $5 attributed to BMI Mexico and the US charges 10% on the profit attributed to BWI America, so BWI Mexico pays $2 in taxes (40% x $5), BWI America pays $0.50 and BWI keeps a $7.50 after tax profit. That’s certainly better than the $6 after tax profit before the rate cut. But will BWI be motivated to move manufacturing to the US? In America, they can manufacture widgets for $95 and sell them for $100 and make a $4 after tax profit. BWI will still import since $7.50 beats $4. In fact, even at a transfer price of $100, which forces all profit on imported widgets to be taxed at the high Mexican rate, BWI *still* makes higher after tax profit by importing. The transfer price has to be over $105 (forcing the BMI America to sell at a loss!) before manufacturing in the US generates higher profits (Try it!).

I, myself, don’t see much reason to believe lowering the tax rate will boost American manufacturing. But, there’s another effect of this strategy that’s even more distressing. The policy fight over the transfer price rearranges some political alliances. We can see this by examining the desires of each of several parties–the US government, the Mexican government, US manufacturers and US workers. Two parties have an interest in a low transfer price. The US government wants a low transfer price so that profit is recognized in the US and can be taxed there. Manufacturing firms also want a low transfer price since they can pay less tax overall by moving profits to the low-tax US.

There are two parties in favor of high transfer prices, too. The Mexican government wants a high transfer price to keep taxable profits in Mexico. The other party interested in a high transfer price is American workers. It was only a very high transfer price that made manufacturing in the US more attractive. So, US workers and their unions will push to keep the transfer price high in order to move manufacturing from Mexico to the US. The sudden drop in the US corporate tax rate aligns US corporations and the US government in opposition to the Mexican government and US workers. The reader is left to decide for themselves who they think will win this political fight–the combined forces of multinational firms and US legislators or the Mexican government and American workers. But you can probably guess what I would predict.

This gaming of the corporate tax rate has two sets of winners, both of them powerful. But none of them are you and me.

Elections Taxation

TWIS: Bernie Sanders is no Socialist!

The knives have come out. George Will has exposed the dark secrets we knew had to be lurking in Bernie Sanders’ closet. Here’s his attack piece in National Review. As an hoers d’ouevre, Will accuses Bernie of caucusing with Democrats (gasp!). And as if that wasn’t bad enough, he’s apparently not even a good enough socialist for Comrade Will. Socialism, says Will, used to mean “government ownership of the means of production.” Over  time, according to Will, this idea was diluted to mean simply taxing rich people more than poor people and providing programs that benefit poor people more than rich people. So, it turns out Bernie Sanders is not a Socialist in the comic conservative propaganda sense. He’s just a reasonable guy who has less faith than many people on the Right in the magical incantations whereby letting rich people keep all their money makes poor people richer.

This mealy-mouthed Socialism lite doesn’t work for Michele Malkin either, who can’t tell the difference between Hugo Chavez and Comrade Bernie. For Michele, policies like free college education can’t have any other motivation than “punishing” and “shaming” the “wealth-creators,” peace be upon them. Bernie’s moderate Euro-socialism is clearly not comfortable for conservatives. If word gets out that socialism just means taxing rich people to provide basic necessities to poor people, the fanged Jabberwock that drives conservatives to the polls will turn out to be sorta sensible, if slightly idealistic, policy. And so, Malkin reminds us in National Review that there’s but a razor thin distinction, hardly even worth mentioning, between breaking up the big banks and impaling hedge-fund managers on stakes.

Confronted by new and perplexing ideas, the impulse of the Stupid (and, if fact, all of us) is to retreat to the safety of simplistic categories and pithy platitudes. Ambiguity is not for the faint of heart. But therein lies safety and prosperity.

I’m With Stupid

HeyStupid is a socialist in the vein of Bernie Sanders and this might be a good opportunity to lay out my case for redistribution. Because I’m not running for any office, I can say what Democratic politicians (except Bernie Sanders) can’t: The current distribution of wealth is, to a large degree, not based on merit and therefore preserving it is not inherently moral. Let me rephrase. I reject the conservative notion that income is strongly correlated with superior character or work ethic.

That doesn’t seem to bother some conservatives. I’ve asked a few of my friends to evaluate the following scenario. Imagine that your paycheck, and in fact, everyone’s paycheck, was based, either partially or entirely, on a dice roll. You could change jobs if you want, but the result of this dice roll would follow you. In that scenario, I ask my conservative friends, would explicit wealth redistribution still be immoral. Imagine that fifty percent of your salary were determined this way. In that case, would you support taxing the very richest people at 50%? Most of them agree with me on this point. Then the question becomes, how much of peoples’ income can we reasonable attribute to their talent and work ethic? Even Greg Mankiw, reliable defender of the 1%, couldn’t see his way clear to assigning more than 22% of income variation to genetics. The rest was upbringing, family connections and plain, dumb luck. I don’t disagree with them that taking money from people that earned it by their efforts is bad. I just have a lower estimate of the fraction of wealth that is actually distributed according to merit.

I’d like to clarify that I don’t hate the rich. I don’t fault them for winning the socioeconomic lottery or for playing the game the very best they can. But I don’t like the game and I think it should be changed.

Now, some of my friends have no moral objection to redistribution. They have more practical concerns with redistribution. Mostly, they complain that high tax rates demotivate the wealthy. Why, after all, would they get out of bed and go to work at their very hard jobs if they didn’t make a whole lot of money? But this is trivial. The wealthy don’t go to work to make money. They go to work to make more money than someone else. Sure, you might initially have a few people that decide to hang it up and sail around the world rather than work for a paltry $2.4 million/year after taxes. But before long, no one would notice they had less than before because they’d be too busy worrying about having less than someone else. And off they’d go again.

In redistributing wealth, we are bound to, in some cases, take money from deserving, hard-working people, and give it to undeserving, lazy people. It’s time we came to grips with this. However, since our starting point is monumentally unfair, I feel quite confident our new distribution could scarcely be worse than the one that exists now.

Class Economics Education Elections Health Care Taxation

More questions for 11-year-old Peggy Noonan

Peggy Noonan took pen in hand on the pages of the Wall Street Journal to tell us we should think like 11-year-olds in combating Ebola and impose a travel ban. Peggy doesn’t trust people with degrees in public health or medicine. People with degree in law and business should know how to combat infectious diseases.

That got me thinking about what other policy decisions we could leave up to children. If you have an 11-year-old, please give them this brief survey and mail it to Ms. Noonan.

1. What should we do with foreigners brought here as children?
a. criminalize and shun them (but tax them)
b. hug them

2. Which of these parties do you think will best represent Americans?















3. Do you think giving housing, food, and medical care to poor families:
a. Makes them get less done; or
b. Helps them get more done

4. What should we do with children whose parents don’t provide health insurance?
a. Give them health insurance
b. Not give them health insurance

5. To reduce gun violence does America need
a. More guns
b. Fewer guns

5. Our country has a lot of debt. What shall we do to pay it off?
a. Tax the wealthiest people
b. Take it from old people’s retirement

6. Which is worse?
a. Secretly selling weapons to a militant dictatorship (Iran); or
b. Asking for too much paperwork from charities with “Tea Party” in their name

7. Which do you think is the best use of our money?
a. Bombs
b. Schools

Today’s GOP manages to capture all of the ignorance of children without any of their compassion.

Economics Education Taxation Unemployment

5 Ways To Help the Poor That Beat Raising the Minimum Wage

There’s a lot of minimum wage denial out there. Some of it is well-informed. But if I could have one political wish, it would be that my Democratic friends would stop pretending like Economics 101 is a vast right-wing conspiracy. It should be taken for granted that the primary effect of raising the minimum wage is less employment for people at the bottom of the wage scale. Yes, I’ve seen the Krueger and Card study where the effects on employment cluster around zero, but I think this is evidence of my point. You see, a minimum wage puts money in the pockets of the people most likely to spend it tomorrow–the poor. So if that secondary effect helps the economy increasing employment, there must be some other factor pulling the effect back toward zero, right? The CBO’s assessment of a $10.10 minimum wage was that it would cost 500,000 jobs, but lift 900,000 people out of poverty.

There’s another reason to be suspicious of the federal minimum wage. It’s a cruelly blunt instrument. A $15 minimum wage might do nothing at all to employment in Seattle, but might cost many more jobs in rural Mississippi, where prevailing wages are substantially lower. Proponents of the minimum wage are always very excited to tax Walmart and McDonald’s–massively profitable multi-nationals. But most of the minimum wage increase is likely to be paid by businesses with 10 or fewer employees, many of which have razor-thin margins. The result there will be higher consumers prices and serious lay-offs and previously profitable businesses closing. Further, earners of the minimum wage are not all working parents. At least some minimum wage workers are middle-class teenagers, who, frankly, are getting their share of breaks as is. Almost half of minimum wage earners are between 16 and 24. I spent a lot of years working for minimum wage to earn date money, then going home to dinner and two loving, college-educated parents. That was a terrific experience, but is my upper-middle class teenage self really the most worthy recipient of wage assistance? Could we find ways to direct more of the benefits of wage assistance to the truly needy?

Now, imagine we could find other ways to help the poor make ends meet without simultaneously encouraging unemployment. Imagine these same programs could target the wealthiest people and corporations to pay for them and the poorest to receive the benefits. Terrific, right? Here are five:

Boost the Earned Income Tax Credit. While I don’t always agree with him, Milton Friedman is a man I greatly admire. Besides being a brilliant economist, he was, I think, the original compassionate conservative. His ideas on the benefits of a “negative income tax” are still extremely relevant. We owe the existence of a robust EITC partly to Friedman and he would be ashamed to see Republican efforts to dismantle this program and it’s sister, the Child Tax Credit. Both are methods of rewarding work while redistributing wealth with minimal distortion to markets. Unlike programs which can create a “poverty trap,” wherein at some income levels, you actually take home less money by working more, the EITC and CTC always reward earning income.

Invest in Poor Schools. This is a long term play to be sure, but it also has important positive short term effects. Schools that keep kids safe and feed them as well as educate them make life easier for the lower class parents who are trying to build a better life. This leads to more productive and stable workers who can then demand higher pay and better educated workers for the future.

Ditch mandatory minimum sentences for drug possession. ThisWeekInStupid is not an advocate for drug legalization, but neither do we see the logic in obligating judges to jail drug users who might do more good than harm for their families and communities at home.

Provide free, convenient English courses. This is just one example of ways to boost the skill-level of minimum wage workers. Workers who have good English literacy and basic computer and arithmetic skills are better able to know and insist on their rightful wages. And, as worker productivity grows, it lifts the whole of the economy.

Scale back right-to-work. Unions contribute to a whole host of positive changes in working conditions including raising wages. Right-to-work laws reduce the effectiveness of unions by allowing workers to free-ride, enjoying the benefits of union negotiations without paying in to the system. Freeriders result in less cooperation and worse results. However, ThisWeekInStupid thinks there are strong arguments that unions of government employees are less beneficial since government workers’ vote puts them on both sides of the negotiating table.

Raising the minimum wage is the laziest way to help the poor and not the most effective. In inflation adjusted dollars, even a $11.00 minimum wage would be the highest ever. Now, I’ll take a minimum wage over nothing, but I’d much rather pursue other angles first.



America Economics Obama Taxation

All those things you hope the GOP will do? They can’t do them

Ben Howe says today’s GOP is different from GOP circa 2006–that we should stop holding the budget-busting, war-mongering actions of Bush-era Republicans against today’s fiscally responsible, TEA party Republicans. This is not your father’s GOP. This idea is getting some traction. There is some wishful thinking out there that this time your vote for Republicans will mean smaller government despite the fact that the last Republican President to reduce either federal spending (adjusted for inflation and population) or the budget deficit was Eisenhower.

There’s a part of me that would like to believe in the sincerity of GOP rhetoric. I do worry about a government that allocates fully a quarter of everything produced in the country. But, I’m skeptical not just because the faces at the top of the GOP have not changed. I believe people can change. The problems is the incentives for GOP legislators have changed very little since 2006. When a politician (of any persuasion) pays lip service to a policy you like, it’s important to consider how the stake holders feel about it and how they’re liable to react politically. Here are three good conservative ideas which the GOP has no chance, or indeed intention, of accomplishing.

Raising the retirement age (or other Social Security fixes). You know and I know that it’s ridiculous to pretend people aren’t staying healthy longer or that Social Security isn’t approaching a precipice. Without any changes, the trust fund (i.e. the surplus accumulated by payments into Social Security, also the money loaned to the treasury to fund our government these 20 years) is predicted to be exhausted in 2033. At that point (or some time before), Social Security must either cut benefits by an average of 23% or begin collecting more money. To listen to them, you’d think the GOP were making this top priority. But today’s Republicans have no hope, or even inclination to make substantive changes to the Social Security. The reason for this is that Republican electoral success increasingly relies on strong majorities among retirees to compensate for their poor showing among younger age groups. The Democrats enjoy an advantage among registered voters in every age category except the over 65 crowd. Candidates on the Left who openly advocate raising the retirement age or trimming benefits regularly face attacks from the Right. Most of us remember Mitt Romney’s criticism of the President’s 700 billion dollar reduction in Medicare spending. The Washington Post highlighted more such attacks against Democratic candidates by Karl Rove’s American Crossroads. Until Republicans find a demographic to replace retirees, all Republican entitlement reform is dead on arrival. You heard it here first, when it comes to fixing Social Security, the GOP will sell you, hard-working taxpayer, out to their AARP base in a heartbeat.

Eliminating mortgage interest deductions. This is a great Republican idea. The mortgage interest deduction is a giveaway to home owners and shifts the tax burden to poorer renters. It drives up home prices, complicates tax filing and distorts the market unnecessarily. But the GOP can’t do it. They take too much money from the people most harmed by this policy. The third largest individual donor to Mitt Romney, post TEA party revolution candidate for President, was Texas real estate developer, Bob J. Perry. He gave $15 million to the Romney campaign. Real estate interests gave three times more money to the Romney campaign than to the Obama campaign. Aside from investment professionals, real estate was the industry most supportive of Romney’s candidacy. The National Association of Realtors is a powerful organization which spends $40 million on lobbying every year. They support candidates on both sides including GOP House Candidate Mia Love and Democratic Senate candidate Mary Landrieu. Until money no longer rules politics, the mortgage interest deduction is here to stay.

Reducing agricultural subsidies. No one but the recipients of farm subsidies thinks they’re a good idea. The Department of Agriculture directly pay about $19 billion each year to American farmers, large and small, in the form of subsidies to crop insurance premiums and direct crop price support. Recipients include Jon bon Jovi, Rockefeller heirs and 1500 residents of New York City. Subsidies to US farmers harm third world agrarian economies which could be lifting themselves out of poverty while providing cheaper groceries for American consumers. Countries around the world hold this up as an example of the US’s protectionist trade policy and our hypocrisy as we ask countries like China to open their markets to foreign goods. Cutting these subsidies gets some play on conservative talk radio and in conservative think tanks. But it’s a non-starter among Republicans who actually govern. President Obama’s 2014 budget includes some cuts to these which Republican lawmakers have resisted. The Republican Study Committee recently uninvited the influential conservative Heritage Foundation to its meetings over Heritage’s support for reducing farm payments. Again, Republicans have both a demographic and a fund-raising problem. They enjoy broad support from rural communities and states whose voters, even when they don’t receive subsidies themselves, identify with the image of the struggling Midwest farmer. It also brings in the dollars. Campaign contributions by agribusiness has increased five-fold since 1990 with 71% of contributions going to Republicans. An estimated $150 million is spent on lobbyists for agricultural industries every year. In 2007, facing reductions to farm subsidies spearheaded by Democrats, 3000 lobbyists flew to Washington and killed changes to the farm bill. The farm lobby has even helped write provisions that enable US farmers to trade with embargoed countries like Iran.

Don’t misunderstand me. Democrats also are crazy to oppose these sensible proposals and electing Democrats is only slightly more likely to make these reality. But they have other policy objectives that are both possible and sensible like immigration reform, expanded infrastructure spending and health care reform. In the GOP playbook, I see only stupid ideas (aggressive foreign policy, balanced budget amendments, etc.) or smart but impossible ideas like those above. A realist must confront the fact that America can expect more of 2003 from today’s GOP. What Republicans can do is start wars. It’s a thing they believe in and that their base can get behind. It plays well with their demographics and brings in campaign contributions from military contractors. As previously discussed, in Republicanland, the Law of Unintended Consequences doesn’t apply to foreign policy, so there’s very little downside.

Meet the new boss…



Tax those corporations?

The Left is excited about this idea. Corporate taxes used to generate a much larger share of taxes, but since the 1980s, corporations pay only about 10% of taxes. To the liberal mind, this is inexcusable. This is what liberals thinks corporations look like.

Greed is GoodFinding and taxing that guy is a notoriously hard problem. But, taxing corporations is not the way to do it. The reason is that people like Gordon Gekko do not own the majority of corporations. When you think of corporations, put this image in your mind instead.


Most of American corporations is owned by American retirees. Corporations and their profits are the thing that allows people to retire. American retirement plans were valued at $17.5 trillion last year. Some of this is in government bonds and other assets, but the entire value of the US stock market is only $20 trillion. The total wealth of the over 65 crowd in the US is about $33 trillion. Make no mistake, American retirees own this country. And that’s fine by me. They built it.

Now, picture your hard-working grandparents as I propose the following:

1. Don’t tax corporations

2. Tax dividends and capital gains exactly like income

3. Increase tax rates for high incomes

For your grandparents, this means they are taxed on the entirety of their corporate profits as if they were wages. If they get $40,000/year, they’ll pay very little in taxes. If they make $350,000, they’ll be taxed a lot. With a small bump to tax rates for high income, this could be a nicely progressive system.

Compare this with the current system. Today, Apple sells an iPad and makes a profit. The government takes 35%, then Apple disburses some to your grandparents and some to Gordon Gekko. On that dividend, Gekko pays a 15% individual income tax rate, but your Gran gets taxed as if her retirement disbursements were wages. For Gekko, that’s an overall tax rate of about 45% (1-0.65*0.85). But, if your grandparents make, for example, $100,000, they’ll end up paying a further 28% for a total tax rate of 53%. Terrible!

Of course, none of the above considers the reality of transfer pricing. In today’s world, Apple doesn’t pay nearly 35%. Instead, they transfer profits to an Ireland-based subsidiary and pay about 7% overall. Then the strategy is to wait patiently for Republicans to gain control of the Senate, when they’ll announce a “temporary” tax holiday for repatriated capital avoiding taxes altogether (but your Gran still pays her 28%). More about tax avoidance here. It’s time for a better system. Trying to tax the wealthy via corporate tax rates is like playing piano through boxing gloves. We don’t have the precision to tax the right people, and in the process, manage to create a whole lot of havoc in the markets.

So, the next time Bernie Sanders says (with indignation),

In 1952, 32% of all the revenue generated in this country came from large corporations. Today, just 9% of federal revenue comes from corporate America.

take a deep breath, compute how much of your own retirement is invested in “corporate America” and call your Gran.

Economics Taxation

This Week In Stupid: Electing Republicans shrinks the government

In 2003, I was a Republican and yet the idea of the Republicans controlling both houses of Congress and the Presidency made my blood run cold. At that time, George W. Bush had inherited a budget surplus. Liberals are fond of pointing this out claiming it as proof of the efficacy of Bill Clinton’s Presidency, but it was mostly due to the dot-com bubble revving up the economy. When the bubble burst in 2001, two things happened. First, expenses for things like unemployment payments rose suddenly. Second, tax revenue dropped as business started generating less revenue. But George W. had been elected on the promise of a tax cut to give Americans back the surplus. Would the Bush administration and the Republican Congress change course when facing budget deficits? In the midst of this debate, the Heritage Foundation published this gem of a rationalization for the deficit spending planned by Republicans. Their argument opposes completely the position of today’s conservatives: Deficit spending by governments has a very small effect on inflation.

Republicans bought this easy idea and spend they did. Not only did the GOP significantly cut taxes, but they began spending at an impressive pace by any standards. Bush pushed through the expansion of Medicare called Medicare Part D at an annual cost of $50 billion. They started two wars and dramatically increased spending for national security, creating the brand new Department of Homeland Security. That was all deficit spending.

The Gipper

Reagan is another fine example of a big spending Republican. Although Reagan is heralded as a champion of small government, the fact is that, during his tenure, the size of the federal budget expanded by more than a third, the number of government employees increased by the same amount and the deficit doubled. In the early 90s, the effects of a TRILLION DOLLAR deficit kept voters up nights. Further, even as the federal government expanded, less of that spending was transfers to states. Federal money for state education and health care programs was reduced. States increased their contribution to those programs, boosting spending even more.

What’s worse, Reagan, consistent critic of the stifling effects of government bureaucracy, actually (and dramatically) boosted government payrolls. In the Republican universe, this is the worst kind of government spending.

Now, I don’t fault Reagan. He followed exactly the path I (or Paul Krugman) would have in pulling the country out of a recession–borrow and spend. I, myself, would have spent less on big bombs and more on education, but I have the benefit of hindsight. Who knew the USSR would be kaput before his Vice President left office?

As an aside, many on the Right will lay the blame for this increase under Reagan at the feet of Democratic Congress at the time. I think that’s fine as long as they don’t simultaneously give Reagan credit for the recovery.

So, don’t buy it. Recent history demonstrates that Republicans are only critical of spending by Democrats. They know, just like you do, that spending during a recession is the right idea. They just wish they got to do it.

Class Taxation

Inversions and Rick Santorum

There’s been a recent rise in a tax-saving gimmick called “inversions.” An inversion is the purchase of a small international company by a large US-based company in order to transfer profits to another country with lower corporate taxes. After buying a smaller company based in a low-tax country, the large US-based company transfers patent ownership to, or borrows money from the smaller firm. Interest payments to the smaller company can be deducted from US-based income and interest received in a low-tax country is taxed at a lower rate. In the case of patents, the off-shore company can collect lucrative patent royalties while being taxed at a lower rate. The result of both is a lower overall tax rate for the company. It’s these kinds of strategies that allow large corporations like Boeing and GE to pay almost no taxes.

This is not a new phenomenon, but has stepped up in recent weeks with familiar companies like AbbVie and Walgreens contemplating such a move. So, the question is, why the sudden interest? Thisweekinstupid’s answer is that there’s a downside to hiding profits over seas. In order to pay those profits to share-holders as dividends, you have to bring that money back to the United States and in doing so, it will be taxed at US rates. This is why companies such as Apple and Google are accumulating large piles of cash in subsidiaries based in Ireland or the Cayman Islands. But what good does that cash do these companies? The answer is, not much. Periodically, you hear shareholders grumbling about these inaccessible profits, and calls for companies to “repatriate” the capital, pay the taxes, and give shareholders a dividend. So far, the companies have resisted. The critical question is why.

One possible answer is Republican electoral success. Companies are hoping that Republicans will, at some point, declare a tax discount or even a “holiday” for repatriated capital–that at some point in the future, Republicans will manage to shove through Congress, a law that (temporarily, probably) allows capital brought back to the US to be taxed at some lower rate. The last time this happened was in 2004. At that time, the argument was that this capital trapped in other countries could be used to revitalize the US economy. Yes, it not fair, we told ourselves, but if it’ll get American working again, we’ll do it. And so, we allowed foreign cash brought back to the United States to be taxed at just 5.75%, rather than the 35% corporate rate that the time.  The Congressional Research Service studied the effects of that policy and concluded that companies that repatriated capital did not hire more, did not devote more funds to research and development, but did give larger salaries and bonuses to CEOs and other high level executives. Even the conservative Heritage Foundation has dubbed that experiment a failure. And yet, in 2014, here’s Mitch McConnell calling for a “one-time” tax holiday to pay for highway repairs.

Now, ThisWeekInStupid is not stupid. We know that both parties are almost wholly-owned subsidiaries of corporations. But history seems to suggest that it’s most often Republicans who favor lower tax rates or tax holidays. Last election cycle, Rick Santorum mentioned this all around the country as part of his economic plan. There was a vast, untapped reservoir of money, he said, that could be channeled back into the US economy if we’d allow, just this once, another tax holiday. In recent years, the justification for an “extraordinary” measure like Santorum’s proposal has largely disappeared, but lower tax rates for corporations has been on the Republican agenda since Barry Goldwater and before.

It’s not accident that inversion mania coincides with improving Republican fortunes. The New York Times now gives the Republicans a 60% probability of controlling the Senate after the 2014 elections. With a 2016 Presidential election right around the corner, if you were a multinational corporation, now might be the time to start stockpiling your tax free profits in off-shore subsidiaries.

Now, perhaps paradoxically, ThisWeekInStupid is in favor of replacing our current system with very small corporate tax rates with dividends and capital gains taxed as ordinary income. This makes taxation of company profits more progressive since the dividends and capital gains of billionaires could be taxed at a higher rate than your granddad’s IRA or your family’s 10,000 nest egg. This would, of course, allow multinationals to avoid the taxes they would have paid under the current system unchanged. But, perhaps it’s best to reform the broken system in one swift stroke and let the capital flow to unhindered to where it’s most needed.

The key, in our opinion, is to avoid “extraordinary” measures. If it were made clear to companies and their stockholders that the same system will be in place for 30 years, you might see the boost in repatriation that McConnell and Santorum hope to create.

Economics Taxation

Tax the Dead!

Inheritance tax is, by far, my favorite tax. If you concede that there’s any reason for government spending, spending the money of people who don’t eat, work, spend money, recreate or procreate is the best scenario of all. Which is why I was surprised to read un-stupid Harvard economist Greg Mankiw defending massive inheritance in the New York Times.

The way Mankiw goes about it is also perplexing. He begins with the idea of “consumption smoothing.” I find this odd since consumption smoothing and a related concept, diminishing marginal utility, are powerful ideas for justifying heavy taxes on the rich and even brazen wealth redistribution. Mankiw explains it clearly

People get utility from consuming goods and services, but they also exhibit “diminishing marginal utility”: The more you are already consuming, the less benefit you get from the next increase in consumption. Your utility increases if you move from a one- to a two-bathroom home. It rises less if you move from a four- to a five-bathroom home.

An extension of this is that taking $1000 from a very wealthy person and giving it to a very poor person increases the overall happiness of the universe. To the rich man $1000 might mean an extra day in Vail with the family–a nice thing. To the poor man it might mean dental work, college tuition or not getting evicted–all quite essential things. So, taking that extra vacation day from the rich man to fix the poor man’s teeth is a net gain for the universe. So far Mankiw is off to a poor start in justifying massive, inter-generational wealth accumulation.

Zombie capital

A common response to this idea, and the one Mankiw employs, is that wealthy people, on average, use their money more wisely. That’s how they got so wealthy. Speaking about a collective average, rich people make better financial decisions. They watch their dollars carefully and hustle when those dollars need it. They have the skills to turn those dollars into more dollars, often by producing the things you and I need and want. Again, I’d like to be very clear that this is not the case 100% of the time. A serious discussion could be had about whether it’s even true most of the time. But I think a strong case can be made that “rich people” are a group selected for their ability to make the things and render the services people are willing to give the most money for. This is, however, not the discussion I want to have here. My point is much simpler.

Dead, wealthy people do not do any of those things.

They don’t make financial decisions. They don’t invest or hustle or manage or innovate. They haven’t any “sweat equity” left to give. So, the discussion here is about the children of wealthy people. The statement that people with wealthy parents are better users of money is a much more tenuous proposition. Mankiw himself does not shy away from this proposition and it’s here that he goes thoroughly off the reservation. His contention is that large accumulations of money are necessary for economic growth and that the poor do not accumulate capital because they count on “regression to the mean” improving the standard of living of their children. Because of diminishing marginal utility, they prefer to spend money on themselves immediately over saving it for their children who will most likely be richer.


Wrong on all counts. Firstly, many small accumulations of capital are every bit as effective as one large lump. A basket watched by 100 eyes is much safer. Many studies have shown that the collective wisdom of many individuals is often more accurate and reliable than that of experts (isn’t this your line, free marketeers?). One tremendous point of progress in our financial system is the democratization of finance. Ironically, even as middle-class incomes have stagnated and financial instruments have become more opaque, the ability of ordinary folk to participate in markets has grown. Today, anyone with $500 can invest in a wide variety of equities and derivatives cheaply and quickly. Most recently, we’ve seen pooled “small money” beginning to replace “angel” money and venture capital on peer lending sites and kickstarter. Employee-owned businesses are making a comeback as well. Small money is the future. What we need is more investor education on how to make your small money work for you. Ours would be a much healthier economy if more people were investing small amounts.

With all thy getting, get understanding

Next, when you count investments in human capital, the poor are great savers. Education is a capital investment. And the poor and middle class do it with abandon. I’ve watched families mortgage to the hilt to land in the right school district or to make outrageous tuition payments. It’s even clearer when you include all of the unpaid labor that goes into raising and education children. This exchange of money and time for human capital is every bit as valid as the investments of the super-rich. Even families raising children at a subsistence level are providing a necessary future resource to the economy. The poor tend to have more children and they make less money, so they spend a much larger fraction of their wealth on tomorrow’s workforce. The question I would rather have heard Mankiw address is whether our national investment portfolio includes too much or too little of these human capital investments.

The first sign of under-investment in workers and education would be a wide gap between employment rates for skilled and unskilled workers. In 2013, workers with just a high school diploma are unemployed at a rate of 7.5%. In that same year, just 2% of workers with a professional or doctorate degree were unemployed. Adding to this, the under-educated make up a much larger fraction of the unused potential workforce on disability or in prison who are not counted in the unemployment statistics. Given the importance of education in our information economy, there’s a strong case to be made that the ways the poor spend their money (on raising and educating children) are exactly what our economy needs more of and that their tax burden should be reduced to boost long-term growth.

I think what Mankiw is trying to say is that inheritance taxes discourage saving by taxing those most prone to save (at least in the sense of saving actual dollars). It is important to pay attention to how public policy affects individuals’ decisions to save or consume. However, there are many ways to encourage saving and not many of them are as disgusting as giving someone tens of millions of dollars because of the circumstances of her birth. If we’re interested in encouraging saving and investment over consumption, why not take a page from our gentle socialist friends across the pond? In UK, everyone is allowed the equivalent of $16,000 per year in tax-free capital gains. This means that most of the working middle class do not pay any tax on their investment income in their younger years since most of their income is wages. Talk about an incentive to save! Why not pay for at least some of this via a heavy tax on inheritances and “let each receive accord to her merits”?

The inheritance tax has almost no downside. It is, in every way superior to every other tax I can think of. Tax the dead. They don’t even vote!

Economics Education Taxation

Why your otherwise smart professor is a socialist

I saw a video the other day from the American Enterprise Institute about the morality of capitalism. Capitalism, to paraphrase, clears access to the satisfaction that comes from achieving something. Being given the same thing brings us far less happiness. Government, then, takes something from someone to whom it brings a lot of joy and gives it to someone to whom it brings very little. Further, it removes the motivation for those receiving welfare to seek the joy of production and achievement. Yuck! How can we be so heartless?

It occurred to me as I was watching that, while I’ve achieved many things in my life, the American Enterprise Institute might scoff that them.  You see, I work for big companies or worse, universities, where I do research that never makes the New York Times and won’t be featured in a product next year–or next decade. Even the work I do for private companies is often funded by public grants given either to my company or to our customers. Like the villains in the video, I’m often not pleasing “customers” so much as the government committees who review grant applications.

Gittin’ ‘er done, collectively

When I achieve things, I share credit with thousands of people. Can this collective achievement be as satisfying or valuable as the individual achievement described in the video? Your professor and I think so. We are used to being a small cog in an absolutely enormous machine and we recognize that some things can only be done this way. My grandfather had a tiny role in the early flights of the Space Shuttle–a very big deal that improves your life whenever you turn on your GPS or check the weather report. But if you listed the contributors to that project, Grandpa would surely be buried somewhere in the back with the dolly grip and craft services. He didn’t mind that at all. Whether it’s better play a small part in our mission to space or a large part in a Jamba Juice franchise can certainly be debated.

These collective works we’re about are far-reaching and critically important. One day we’ll announce cold fusion and a cure for cancer, saving the planet and literally millions of lives. Someone who put together the last piece of the puzzle will be on the cover of Time. But behind her, there’ll be legions of scientists who will sit back in their easy chairs with a self-satisfied grin, knowing they’ve done good work and ever so glad they didn’t take their uncle’s advice to drop this ivory tower nonsense and become a day trader.