Results for “corporate tax”

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Andrew Smithers, of the consultancy Smithers & Co, said in December that US profit margins were at a record level and had expanded in the past three years even as output fell.

“Margins have been as good as it gets,” says Graham Secker, European equity strategist at Morgan Stanley. He adds corporate profitability over the past 20 to 30 years has gained from factors such as technological advances, falling corporate tax rates, low funding costs and declining commodity prices.

Analysts at Citigroup say operating margins at S&P 500 companies are close to the highs of 2007, partly because of the fall in unit labour costs. “A reluctance to hire more employees as well as outsourcing to lower-cost alternatives have left management teams with lean and mean companies,” they say.

Some analysts remain optimistic about prospects for the US. Gerard Lane, equity strategist at Shore Capital, says: “Even though US margins are extended, they do not necessarily have to fall at the moment.

“As a long-term trend, these businesses are gaining more of their profits from overseas. It is only when unit labour costs at S&P companies start growing at more than 2 per cent a year that margins will start to fall.”

Here is more, from the FT.

Brad DeLong asks:

When would it be time to judge the Irish experiment in preemptive fiscal austerity to be a failure, Tyler?

The immediate question is whether Ireland had a choice in the first place.  When it comes to total external debt, private plus public, Ireland is in one of the most desperate situations.  (Be careful, though, some published figures include financial institutions to which the Irish government has no real liability and thus overstate Irish external debt by quite a bit).  Ireland doesn't have the same flexibility as do Germany and the United States, nothing close to that.  Read this article for an estimate of the change in primary fiscal balance required for Ireland; it's scary and doesn't indicate a lot of flexibility, which supports the conventional wisdom on Ireland, from the OECD, the European Commission, from Ireland itself, and arguably you add the IMF to that list as well. 

Furthermore, Ireland as a small, open economy experiences a relatively high degree of fiscal leakage.

By the way, you shouldn't simply assume that the initial fifteen plunge in gdp was due to fiscal caution; Ireland was after Iceland perhaps the most overextended country in the crisis.

Here's a Morgan Stanley analysis of Ireland, which basically suggests "it's complicated."  It also suggests a reasonable chance the current strategy will work out OK.  It is complicated, and the mere fact that spending is a component of national income accounts doesn't mean that more spending is always a good thing. 

Ireland in fact has done a negative fiscal stimulus.  Earlier, Ireland made the mistake of joining the Eurozone.  See also this study of Ireland, 1987-89, an earlier decisive and successful fiscal adjustment, in the days of the Irish Punt.  The Euro today makes matters harder for Ireland, yet that doesn't imply they have greater license to spend today, in fact it can imply the contrary.

Paul Krugman pointed out that the fiscally tighter Ireland did not have a better CDS price than the more wishy-washy Spain.  Yet Ireland has a bigger external debt problem, may be less protected by "too big to fail," is a smaller nation, and has less control over its destiny; the (roughly) equal price may reflect what is a superior Irish effort.  In any case, Spain is hardly a walking advertisement for not going the Irish route.

The Irish also hope that whatever output they "leave on the table" today, they can make up with Solow catch-up growth.

If you would like to read a brief on behalf of Irish stimulus, try this.  The author admits that Ireland would have to significantly raise corporate taxes, a former linchpin of its growth (whether you think that efficiency-enhancing or international rent-seeking, it is still true).  Is it worth it?  How much would such a policy damage Irish growth and credibility?

Kevin O'Rourke also has good but scattered writings on the topic of Irish stimulus.  His first preference is greater fiscal federalism within the EU.  Last month he also wrote that, lacking such a reform, Ireland had no choice.

This June, Irish consumer confidence hit a three-year high.  Here's one estimate that wages have been falling four to five percent a year, and will continue to fall, plus the Euro has been falling.  You could argue there has already been an adjustment in the twenty-five percent range.  None of that is proof of recovery, but there are some green shoots.  Here is the very latest report, indicating that economic growth may be resuming; admittedly it's just a forecast from the government.  Exports are showing growth and retail sales are rising slightly.

The Irish Times reports today: "For the first time in three years, there are now more reasons for hope than for despair.  This week a raft of indicators, when taken together, give grounds to believe that the foundations of a jobs-generating recovery are falling into place."

Do interpret that with extreme caution.  For various debates, follow The Irish Economy blog, including in the comments.

On these critical questions, in the pro-stimulus for Ireland posts, I don't see a level of detail which would rebut these quite mainstream, not-emanating-from-the-gamma-quadrant opinions — that the Irish did more or less the right thing in a very unpleasant situation. 

The Irish experiment remains an open book.  In the meantime, it's simply not true that the pre-emptive austerity advocates are committing some kind of economic malpractice.  Three years out from now, let's compare Ireland to the other PIIGS.

Despite all the deductions, loopholes and clever accountants the federal income tax is strongly progressive.  Moreover the federal tax system remains progressive even if you include the payroll tax, corporate taxes and excise taxes.  The chart below with data from the Congressional Budget Office, shows the effective tax rate by income class from all federal taxes. Effective tax rates are considerably higher on the rich than the poor.

The effective tax rate is higher on the rich and the rich
have more money – put these two things together and we can calculate who pays
for the federal government. The final
column in the table shows the share of the 2.4 trillion in federal tax
revenues that is paid for by each income category. The remarkable finding is that the rich and
especially the very rich bear by far the largest share of the federal tax
liability.  The top 10% of households by
income, for example, pay more than half of all federal taxes and the top 1% alone pay over a quarter of all federal taxes.

(Click the table if it is not clear.)

Dan — As erg noted, I argue that the anecdotal evidence points to
corporate tax arbitrage as a key explanation. But if you come across
the definative b-school explanation, do let me know. So ask Bill Gates,
or the big pharma CEOs with big profits in Ireland for the answer, not
old George Soros.

I’ll set aside my argument that investing in US dollar denominated
assets is actually very risky for a foreign investors looking to
maintain their real wealth in local currencies terms. The big current
account deficit and all. Not everyone agrees with it.

But I don’t think the US just is good at borrowing at low cost to
buy high yielding assets argument works that well. For a couple of
reasons. First, US returns abroad really aren’t that good. The shocking
thing is that reported foreign returns on their FDI are really bad —
less than they would have gotten holding long-term Treasuries
generally. It isn’t US skill, at least not skill at anything other than
taking foreign direct investors for a ride that shows up in the data
(now if FDI in the US doesn’t want to show profits in the US for tax
reasons, the story changes … ). Second, most US FDI is just not in
risky markets, nor are most US debt securities claims on risky places.
Most US FDI is in the UK. lots more is in Switzerland. Throw in Japan,
Canada and the Eurozone and you have a decent mental image of US assets
abroad. Read the CBO report on this topic. Or look at the data the IMF
has assembled on the sources of FDI in China (hint — it ain’t mostly
coming from the US). US investors also own foreign bonds — but they
are mostly the securities issued in well developed markets that are
almost as liquid as our own. UK, Japan, Canada, eurozone and the like.

We have lent tons of money to the Caymans too; I bet the Caymans
also invests a lot in the US …. hhmmm? Maybe some b-school prof can
help us out there. Or tax attorney.

Brad DeLong writes:

There is a bigger, unmentioned reason to be against private accounts. Ten years down the road or so, there will be pressure on Congress to allow people to borrow against their private accounts, or to withdraw them to buy a house, or to use them to meet unexpected medical expenses. Congress will bow to that pressure–it’s their money, after all. And in the end a lot of people will hit 70 having drained their Social Security private account dry. The rest of us will then have to decide whether to let them starve on the street, or tax ourselves a second time to give them Social Security benefits. As Dick Schmalensee says, “You have to ask yourself not just, ‘Is this good policy?’ but ‘Will this still be good policy after Congress does its worst to it?'” The Medicare drug benefit and the corporate tax boondoggle are powerful evidence that the Bush administration holds no leashes to use to control what this Congress does to policy proposals, while lobbyists can make this Congress roll over and beg.

Brad also takes on whether the government could finance the transition to a more private system by borrowing (also read Bruce Webb’s comment, number two in the list). After all, government debt would be higher but government long-term implicit obligations are lower. Would this simply be a wash? (Arnold Kling believes “yes”). I am skeptical. When it comes to government, measured nominal flows tend to be sticky. So say our government increases its borrowing today but lowers its SSA obligations for tomorrow. Even if the transaction can balance without a current increase in interest rates, the increased rate of borrowing (or taxation) will tend to stick in the long run. Plus there is a time consistency problem. If the new debt is placed smoothly, government has an incentive, ex post, to accept some new unfunded liabilities for the future. Knowing this in advance, the bond market will be suspicious about the new debt offering.

What should we do? Here is my previous post on social security privatization.