Results for “corporate tax”

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A few of you have written me to ask what I think of Paul Krugman’s recent posts on tax reform and evaluating it by gnp rather than gdp, the latter being an emphasis in the GOP literature.  Paul notes correct that a lower corporate rate will attract foreign investment, and the returns to that investment, by definition, will not accrue to American citizens.  So far, so good.

Paul reproduces the following graph for the Czech Republic, ratio of gnp to gdp:

If the GOP literature focuses on gdp, it is fine enough to criticize it on that basis.  What worries me, however, is that the corrective doesn’t go nearly far enough.  Gnp isn’t the right standard either, nor is gnp/gdp, rather it is welfare, either nationally or globally.

From that gdp/gdp ratio graph, you might come away with a grim view of life in the Czech Republic, but consider this cheerier picture of consumption, which nearly triples over a twenty year period:

Pretty awesome.  And under the standard story of the Czech economy, investment from abroad, most of all from Germany, has helped drive those gains.  Germany invested more, that boosted wages, improved the local political economy, and transferred some technology and entrepreneurial skills.  It is standard international economics, or for that matter Solow model, that capital-rich, lower-return economies should invest in their poorer peripheries (which is not to say it always works out that way).

It’s entirely fair to note that Czech household debt to gdp has risen to about thirty percent.  Still, in the U.S. it is about eighty percent, so the Czechs are not in dire straits just yet.  Private debt to gdp seems to run about 136 percent, compared to about 200 percent in the U.S.

Of course, this still could end up as a bad deal for the Czechs.  They might waste their foreign investment, the accompanying wage gains, the associated external benefits, and end up having to snap back their consumption and see their whole country owned by Germany, China, and others.  But that’s not the baseline case.  The default assumption is that these are gains from trade like other such gains, in this case gains from trading with foreigners who wish to invest.  They are not lesser gains or gains to somehow be subtracted from the overall calculus.

Here is a useful point of contrast.  Let’s say I advocated high taxes on foreign trade, on the grounds that “half of the gains from those trades are shared with foreigners,” and therefore we ought to, post-tariff, trade more with fellow citizens, so that only Americans get those gains.  We all know why that argument generally is wrong, noting there are some second best cases where tariffs can improve welfare.  It’s still wrong when the trades involve foreign investments.

So it is misleading to induce people to mentally downgrade foreign investment as a source of welfare gains.  I get that Krugman doesn’t quite say that, but that is the impression his discussion and diagram produces on the unwary.  Technically, he might only be criticizing the Republicans internally, using their own gdp standard.  The actual produced impression is to cause people to doubt that a lot of foreign capital inflow fully counts as a gain from trade.

America of course is in a quite different position than is the Czech Republic.  But the gains from foreign investment into the United States also ought not to be downgraded, either explicitly or by implied presumption.

Paul Krugman says a mix of “never” and “certainly not now” (my paraphrases, not actual quotations from him).  Here is one bit:

On environment, a similar turn took place a bit later.  The use of markets and price incentives to fight pollution was, initially, a conservative idea condemned by some on the left.  But liberals eventually took it on board — while cap-and-trade became a dirty word on the right.  Crude slogans — government bad! — plus subservience to corporate interests trump analysis.

I believe this is pretty far from the reality, here are a few points:

1. Conservative intellectuals never have turned against the idea of a carbon tax, as evidenced by Greg Mankiw’s leadership of the Pigou Club.  Cap-and-trade is somewhat less popular, but that is probably the correct point of view, given the time consistency problems with governments that increase the supply of permits, as has happened in Europe.

2. Water economics is a big part of environmental economics.  “Raise the price” and “define property rights better” remain central ideas in that field, commanding a lot of attention.  David Zetland is one recent exemplar of these ideas.

3. The idea that there can be too much environmental regulation in many particular cases remains a central contribution, often associated with the Right.  Of course this view is compatible with much tougher restrictions on carbon or other forms of air pollution.

4. The idea of properly applying “value of life” analysis to regulation, and seeking greater consistency (let’s save lives in cheaper rather than more expensive ways), remains a significant and undervalued insight.

5. Some of the key work on valuing biodiversity has come from Chicago-related methods, though I do not know the political affiliations of the authors.

6. Matthew Kahn, one of the leading environmental economists today, I would consider broadly in the classical liberal tradition.  He recently published an important book on air pollution in China.

6. Jonathan H. Adler is a significant ongoing contributor to environmental law and economics.  Or try the work of Terry Anderson.

7. Applying property rights analysis to animal herds, animal ownership, and the tragedy of the commons remains a significant conservative idea.  You will note throughout I don’t like calling these “conservative” ideas, they are simply good ideas or bad ideas.  Still, in the broader sociological sense you hear these ideas from conservatives and libertarians fairly often.

8. There is plenty of recent work on the political economy of the administrative state, and whether it generates abuses of the rule of law or bad incentives.

9. I could go on, with perhaps Vernon Smith”s recent work on peak-load pricing for electric utilities being next in line.  Or pro-green, pro-nuclear analysis often comes from the Right.

10. Overall, “schools of thought” have been dwindling in economics, and so it might seem that the golden ages of various ideologies or schools of thought lie well behind us.  But if we focus on the ideas and their influence, rather than whether carriers of those ideas bear particular political labels, the influence of Chicago, UCLA, cost-benefit, and Montana/PERC ideas in environmental economics never has been stronger.  In that sense the golden age is right now.

Addendum: Here is a better Krugman piece on the history of thought, though I would note that capital movements were integrated into the price-specie-flow mechanism in the 18th century and fully by the time of Henry Thornton.

Here is a long post on those topics, worth a careful read and it contains many good points.  But, Nobel Prize in trade or not, I am not convinced by all of it.  On his first topic, I do not think a Trump administration will give us a pure VAT, rather I think the final outcome (if there is one), will indeed be more like a tax on (some) imports and various subsidies to exports; Jared Bernstein suggests the same.  On the second topic, given that the U.S. dollar is a global reserve currency, I don’t think it has to be the case for model-embedded reasons that “…reduced openness to trade should also inhibit capital flows”, though it is likely the case for broader political economy reasons (if they mess around with your trade, you are more afraid to invest your capital).  Krugman’s claim “…trade deficits are always a temporary phenomenon”, while technically correct, represents an odd, sudden conversion (reconversion?) to Don Boudreauxism, and a return to the kind of 2006 analysis/worries that predicted America would see a dollar crisis.  Yes, temporary along some time horizon.  But is the American trade deficit, which by now has persisted for decades, best and most usefully modeled as something due to flip because of an intertemporal budget constraint?  Maybe.  But maybe not, as that view has performed extremely poorly in predicting the value of the dollar.  (Most of all, it depends on the country, but it’s least likely to be true for America.  And what about “dark matter“?)  On most days, you’ll find more takers on the intertemporal budget constraint approach to macro over at Minnesota, and no I don’t think the “different models for different questions” trope gets one out of this box.  At the macro level, that constraint either kicks in or it doesn’t.  Finally, toward the end of the post there is an overestimate of how much an implied dollar depreciation is likely to persist in the forward rate in a manner that would limit investment from abroad.  For the USD, predicted movements as embedded in the futures or forward rate are generally quite small relative to movements due to “news”; of course the same isn’t always true for Argentina and other disaster-prone countries.

Here are comments from Brad DeLong.