Results for “corporate tax” 261 found
Floating exchange rates and tariffs
Not long ago I mentioned that a joint export subsidy and import tax would be offset by an appreciation of the real exchange rate. It’s worth pondering whether such results are the same for fixed and floating rates.
In the simplest model, the choice of exchange rate doesn’t matter. The real terms of trade adjust to the subsidy/tax mix under either regime, with the same final equilibrium.
That said, you might think that goods prices in international trade are nominally sticky in a way that exchange rates are not. Indeed you would be right, noting we don’t have a completely clear idea how much delivery lags and service quality changes sub in for some of (not all) the real price movements.
But there is a subtler difference as well. In a world of floating exchange rates, terms of trade move around more, in real terms, than if exchange rates were fixed. Call it noise, bubbles, or whatever, but sometimes nominal exchange rates have a “mind of their own,” and real exchange rates move much of the way with them.
For that reason, companies that engage in international trade have to be more robust to possible “taxes” — which include unfavorable exchange rate movements — than under the fixed rate regime. As a quick shorthand, I would say those companies need to have more market power to put up with the exchange rate volatility, though you can give the required corporate properties a few different twists, typically involving fixed costs, sunk costs, option values and the like rather than just market power in its simplest conception (it’s complicated.)
In other words, floating exchange rates, especially when there is a historical experience of ongoing real exchange rate volatility, will mean companies are more tariff-robust.
This is one reason why the Trump protectionist talk, while it is 110% bad, and bad for American foreign policy as well, and bad for uncertainty, and bad bad bad bad bad, and sometimes connected to bad bad bad people as well (did I say bad? It’s BAD!), won’t quite have the negative economic impact that many people think.
Think back to the mid-80s, when the USD went from 3.45 Deutschmarks to 1.7 Deutschmarks in what, less than two years’ time? That was the equivalent of a huge tax on Mercedes-Benz as an exporting firm. Did Mercedes like that? No. Did they manage? Well, mostly, sort of. Of course they had a fair amount of market power at the time, they would have less today.
A five percent tariff, relative to the built-in adjustments possible in light of changes in floating exchange rates, is for the most part manageable, at least on narrow economic grounds. Much of that five percent ends up as a tax on the monopoly profits of exporters. You can google and read up on “exchange rate pass-through.”
You will note that some of this argument draws on earlier research by Paul Krugman, though I am not suggesting he necessarily agrees with my application or interpretation; here are his recent remarks.
The foreign policy and presidential signaling and uncertainty-related issues, not the narrow economics, are still the main problem with a five or ten percent trade tax, and they are reason not to go down this route. But it is worth being clear on the economics. The oversimplified statement of the neglected insight here is “floating exchange movements tax trade all the time.”
Saturday assorted links
1. Me on Trump and Carrier on NPR.
2. What does profit repatriation really mean?
3. Is the internet ruining or improving TV?
4. Simmons and Gladwell on the future of football.
5. A very good tweet storm about books and reading.
6. “The average time from enquiry to order is 11 years, and the longest commission in the foundry’s history took 100 years to produce.“
Airport Privatization
Airports in the United States need investment and improvements in operations efficiency and are thus ripe for privatization. Privatization is not a radical concept, around the world today many airports are run by private corporations or in public-private partnerships. In their latest report, The Ownership of Europe’s Airports, the Airports Council International writes:
Today, over 40% of European airports have at least some private shareholders – and these airports handle the lion’s share of air traffic. This year, about 3 out of every 4 passenger journeys will be through one of these airports…it is only a matter of time before fully publically-owned airports become a minority in the EU.
Moreover, even the public airports are typically structured as corporations that must pay their own way:
[Europe’s] airports – be they public or private – are to be run as businesses in their own right, strongly incentivised to continuously improve and underpinned by the principle that users pay a reasonable price to cover the cost of providing the facilities and services that they benefit from. There is no denying the tangible benefits that this approach has brought the EU – significant volumes of investment in necessary infrastructure, higher service quality levels, and a commercial acumen which allows airport operators to diversify revenue streams and minimise the costs that users have to pay – all of which are fundamental requirements to boost air connectivity.
The biggest restriction on airport privatization is that if a state or local government sells an airport it must use all of the proceeds to fund airport infrastructure–which makes the procedure pointless from their point of view. As I mentioned earlier, there is an Airport Privatization Pilot Program (APPP) which lifts this restriction but only if 65% of the air carriers serving the airport agree to the privatization. The APP is also slow and includes other restrictions. The Congressional Research Service has a good run down.
[Restrictions] include the need for 65% of air carriers serving the airport to approve a lease or sale of the airport; restrictions on increases in airport rates and charges that exceed the rate of increase of the Consumer Price Index (CPI), and a requirement that a private operator comply with grant assurances made by the previous public sector operator to obtain AIP [Federal] grants. In addition, after privatization the airport will be eligible for AIP formula grants to cover only 70% of the cost of improvements, versus the normal 75%- 90% federal share for AIP projects at publicly owned airports. This serves as a disincentive to privatize an airport, because it will receive less federal money after privatization.
The airlines are lukewarm on privatization. Although they would benefit from better operational efficiency, they are big recipients of the explicit and implicit subsidies and they use their effective control over airports to limit competition.
The main danger of privatization is that of monopoly power–it wouldn’t be a good idea to sell all of a city’s airports to the same corporation, for example. Thus, privatization should be accompanied by steps to increase competition. There are over 5000 non-commercial airports in the United States and some of the “National” General Aviation Airports already serve international flights (mainly corporate jets) and could be expanded to allow more commercial traffic.
Privatization should not be thought of as just a transfer of ownership but rather as a changing of the rules of the game to allow for many more private airports.
Addendum: Michael Sargent at Heritage has a useful and detailed plan. Robert Poole and Chris Edwards from Cato offer a good overview.
Why has it taken so long for a China crash to arrive?
This is an underdiscussed question, and it is the topic of my latest Bloomberg column. Here is one part of the argument:
Unlike the U.S., China is full of large, state-owned enterprises. That gives the Chinese government the ability to manipulate a large stock of asset wealth. The U.S. government is more dependent on flows of revenue from taxation and the private sector.
When bad economic news arrives, the Chinese government can instruct the companies it owns to spend wealth to keep workers employed. Think of this as using the companies to conduct fiscal policy rather than laying off workers, building another bridge or erecting another steel plant. Whereas Western economies take an immediate hit to income in bad times, the Chinese have been converting this into a hit to wealth, insulating themselves from major downturns.
That can be useful, but it also can be abused. Indeed, China has ended up with too few bankruptcies and significant excess capacity and lots of low-performing firms.
One problem comes when the stocks of corporate wealth are nearly exhausted, or perhaps sooner when managers of state-owned companies rebel against this policy and demand alternatives. Another problem is that too many low-productivity firms survive. So when the dramatic Chinese recession finally does come, it will be without the protective buffers of wealth that the U.S. had during its financial crisis.
The wealth vs. income distinction still does not receive enough attention in macro. There is much more at the link. I also consider under what conditions China might avoid a crack-up altogether, namely if the forces of catch-up keep on validating the ongoing malinvestments. Forecasting China is more like judging a race than just identifying a bubble. Note that “At least by traditional metrics, the Chinese system has showed signs of trouble and excess capacity at least since 2006.”
Saturday assorted links
1. Review of the new Richard Posner biography.
3. The blind astronomer of Nova Scotia.
And this:
A couple of months ago, Patrick Collison came to me with another crazy idea. He said Stripe wanted to make “simple incorporation as a service”, so that any entrepreneur worldwide could have a corporate entity and a bank account spun up about as easily as they could get an EC2 server.
This idea is crazy. I’ve incorporated four companies and opened business bank accounts for all of them. The most recent required over a hundred pages of documentation and six weeks of negotiation to assuage a risk department’s concerns about foreign tech entrepreneurs. (Thanks, Bitcoin.) You’re not supposed to be able to do this.
Stripe did it. With crazy speed: the project was in beta within 11 weeks of conception. It can take that long to form a single company in much of the world. Stripe solved the problem like an engineer: establishing one company requires an annoying amount of form-filling so instead of buckling down and doing it you just make a company-establishing web application and abstract away form-filling for all time.
And they’re crazily ambitious about where it ends up: not simply incorporating companies, but eating all of the crufty back office work which distracts Internet businesses from getting more real products into the hands of real customers. Payments, contracts, invoices, bookkeeping, incorporation, taxes, etc etc, all things you have to do even if what you’re actually doing is selling bingo cards to elementary schoolteachers.
Crazy! But stay tuned…
*The Nordic Gender Equality Paradox*
That is the new and quite interesting book by Nima Sanandaji. The main point is that there are plenty of Nordic women in politics, or on company boards, but few CEOs or senior managers. In fact the OECD country with the highest share of women as senior managers is the United States, coming in at 43 percent compared to 31 percent in the Nordics. More generally, countries with more equal gender norms do not have a higher share of women in senior management positions. Within Europe, Bulgaria does best and other than Cyprus, Denmark and Sweden do the worst in this regard.
One reason for the poor Nordic performance at higher corporate levels is high taxes, which limits the amount of household services supplied through markets. If it is harder to hire someone to do the chores, that makes it harder for women to invest the time to climb the career ladder. Generous maternity leave policies may encourage women to take off “too much” time, or at least this is suggested by the author. A history of communism is also strongly correlated with women rising to the top in business and management; this may stem from a mix of relatively egalitarian customs and a more general mixing up of status relations in recent times and a turnover of elites.
I don’t find this book to be the final word, and I would have liked a more formal econometric treatment. It is nonetheless a consistently interesting take which revises a lot of the stereotypes many people have about the Nordic countries as being so absolutely wonderful for gender egalitarianism in every regard.
Here is the book’s website, from Timbro (a very good group), I don’t yet see it on Amazon.
Why Germany doesn’t like negative interest rates
The business models of German financial institutions depend critically on the presence of positive nominal interest rates. The International Monetary Fund noted in its latest Financial Stability Report that the pre-tax profits of German and Portuguese banks are most affected by negative rates.
German life insurers are also vulnerable. They have to guarantee a minimum rate of return, which is now 1.25 per cent a year. This is hard to do when the yield of the 10-year German government bond is only 0.13 per cent. Germany and Sweden are the two EU countries where life insurers face the biggest gap between market rates and guaranteed rates. To achieve the promised returns, the insurers have to take on more risk, for example by buying corporate bonds or tranches of complex financial products. If, or rather when, the next financial crisis arrives and triggers a change in the valuation of these assets, we may find that sections of the German financial sector are insolvent.
Of the German banks, the Sparkassen and the mutual savings banks are most affected. They are classic savings and loans outlets in that they lend locally and fund themselves through savings. Credit demand is more or less fixed. So when savings exceed loans, as they now do in Germany, the banks deposit their surplus with the ECB at negative rates — known as “penalty rates” in Germany. They cannot offset the losses by cutting interest rates on savings accounts because of the zero lower bound. Savers would switch from accounts to cash in safe deposit boxes.
That is from the always superb Wolfgang Münchnau at the FT. Regulatory and federalistic issues are another and underdiscussed reason why the eurozone is not an optimal currency area.
Was it wrong to hack and leak the Panama Papers?
Let’s say a group of criminal defense lawyers kept a database of their confidential conversations with their clients. That would include clients charged with murder, robbery, DUI, drug abuse, and so on. In turn, a hacker would break into that database and post the information from those conversations on Wikileaks. Of course a lot of those conversations would appear to be incriminating because — let’s face it — most of the people who require defense attorneys on criminal charges are in fact guilty. When asked why the hack was committed, the hacker would say “Most of those people are guilty. I want to make sure they do not escape punishment.”
How many of us would approve of that behavior? Keep in mind the hacker is spreading the information not only to prosecutors but to the entire world, and outside of any process sanctioned by the rule of law. The hacker is not backed by the serving of any criminal charges or judge-served warrants.
Yet somehow many of us approve when the victims are wealthy and higher status, as is the case with the Panama Papers. Furthermore most of those individuals probably did nothing illegal, but rather they were trying to minimize their tax burden through (mostly) legal shell corporations. Admittedly, very often the underlying tax laws should be changed, just as we should repeal the deduction for mortgage interest too. But in the meantime we are not justified in stealing information about those people, even if some of them are evil and powerful, as is indeed the case for homeowners too.
Once again, politics isn’t about policy, it is about which groups should rise and fall in relative status. And many people believe the wealthy should fall in status, and so they will entertain the morality of all crimes and threats against them. These revelations will of course lead to some subsequent cases of blackmail, against Chinese officials for one group.
I had tweeted “Are your views on privacy and #PanamaPapers consistent? Just asking…” and my goodness what a response, positive and negative. Most interesting of all, many people had never pondered the question before. Somehow “good things” such as “privacy” and “transparency” cannot stand in such conflict because all good things, like all bad things, must come together.
Here is a good Kaddim Shubber discussion on FT Alphaville.
Here is Veronique de Rugy on the Panama Papers.
Here is Ray Lopez on the same:
1. There’s a tension between US and foreign law firms and FATCA (United States Foreign Account Tax Compliance Act (FATCA) has the objective of reducing tax evasion by American taxpayers with foreign accounts). This is because law firms are exempt from reporting on clients past crimes, not future crimes, however, money laundering is considered a future crime. When a known criminal is setting up an offshore account with the help of a law firm, is the law firm an accessory to money laundering or not? The better view is they are not: it’s up to the client to report any offshore account to the government, and not the law firm’s responsibility. That’s the better view, but see point #2, which rebuts this.
2. There’s a tension between client confidentiality and tax treaties. Check this out: https://www.lawsociety.org.nz/practice-resources/practice-briefings/FATCA-and-New-Zealand-Law-Firms.pdf In New Zealand, which is probably representative of others, a passive non-financial foreign entity–which almost always will be a law firm trust account holding money from a client–has a duty under FATCA to report on the client to the US government (“know your customer” is the buzz phrase banks use, which as you know already are required to ‘spy’ on their customers).
Both points 1, 2 are relevant for the conduct of the law firm of Mossack Fonseca. Except for the alleged destruction of evidence by them, I don’t see them doing anything that bad (by law firm standards; remember, any law firm of decent size has former crooks as clients, and for a firm in Panama I would say that’s not the exception but the rule!)
From the comments, here is Kai:
I practice law in cross-border banking and finance in China. I am puzzled by how non-professionals in this field view offshore jurisdictions as categorically related to criminal activity, embezzlement and corruption, etc.
Almost all cross-border transactions involve offshore jurisdictions at some level. For instance most companies listed on the HK stock exchange are incorporated in the Cayman Islands. Anything to do with Bermuda, Cayman, BVI, etc. in cross border transactions is very, very mundane.
According to the papers, Xi Jinping has relatives who are owners of offshore companies. How is that any sort of evidence of wrongdoing by them (much less of Xi Jinping)? I doubt anyone can provide an intelligent answer.
Maybe yes, maybe no, but I don’t see that the people rendering judgment know more about it than he does.
Trump, the Republican Party, and the logic of bailouts
As the possible nomination of Trump approaches, many Republicans are worried about the Party crashing. That could occur through convention warfare, a Trump nomination and an electoral disaster, or a non-Trump nomination and an electoral disaster. Maybe all of the above!
And what is wrong with the Party crashing? (Please, dear reader, consider this question from a logistic rather than a partisan point of view.) The Party contains information. Relationships. Procedures and processes and established patterns of cooperation. A well-known brand name. Organizational capital is lost if those connections are blown up and then go away. It would cost a good deal to rebuild them, whether through a new third party or through a reconstitution of the Republican Party in some new guise.
Large blocs of voters are in essence needed to help cover those fixed costs. If you tell too many voters to go away, however that might be done, the fixed costs can’t be paid the next time around and a new organization must be created, backed by some other, partially-overlapping group of voters. So during “bad times” Republicans still may wish to keep the Republican Party afloat, especially if they believe it is a viable concern over the longer haul.
This, by the way, is the same logic behind bank and corporate bailouts If the afflicted company is allowed to go under, a lot of organizational capital will be lost in what otherwise might be viable enterprises. (I am not suggesting those bailouts have zero cost, or are necessarily good, only that there is some associated benefit.)
So if you are a Republican, and considering supporting Donald Trump “for the sake of the party.” you are in essence considering whether a bailout of the Party is a good idea. Except instead of bailing out a private company with your taxes, or guaranteed credit, you are bailing out a political party with your …[fill in the blank]…
I believe that many of the people who usually claim to oppose bailouts will favor this one.
I have high hopes for Stripe Atlas
Stripe Atlas [is] a new product the company unveiled this week at Mobile World Congress in Barcelona. It aims to make it easier for entrepreneurs to set up small businesses in the United States. If all goes according to Stripe’s plan, Atlas could let start-up founders sidestep some of the bureaucratic hurdles that often hamper building a new business.
Determining eligibility requires little more than filling out a form. After that, Stripe will incorporate an entrepreneur’s company as a business entity in Delaware, and provide the entrepreneur with a United States bank account and Stripe merchant account to accept payments globally.
The target audience is all of the entrepreneurs outside the United States who want access to the country’s well-developed banking infrastructure and business services. Stripe is particularly interested in attracting entrepreneurs from Africa, Latin America, the Middle East and parts of Asia, among other regions.
…Eligible entrepreneurs will also be offered access to basic tax and legal consulting and business services from partners like PricewaterhouseCoopers, and will receive free credit to run their online business on the Amazon Web Services hosting platform.
Atlas is to begin on Wednesday in an invitation-only beta test; entrepreneurs can apply for the program through Stripe or one of the 50-plus start-up accelerator programs that the company has teamed up with globally. The beta program’s cost is $500.
Here is the Mike Isaac NYT article.
On what grounds will Keynesians reject Marco Rubio’s fiscal policy?
I am myself of the belief that we are fairly close to full employment, with full employment likely on the way, and our growth problems stem from the supply-side, not from the demand-side in the Keynesian sense, at least not circa 2015. For those reasons, I am skeptical of any plan to cut taxes without offsetting spending cuts or some other kind of offsetting fiscal adjustment (how about selling off some federal land?).
But on what grounds should the prevailing Keynesian approach reject the fiscal policies of Marco Rubio? In the context of discussing Rubio, Paul Krugman writes:
So now we have candidates proposing “wildly unaffordable” tax cuts.
But what’s wrong with that? In most demand-side liquidity trap and secular stagnation models, there is a shortage of safe assets and that is a major problem which requires remedy. Rubio’s plan, as I understand it, would raise the budget deficit and by a lot because it is unlikely to prove self-financing in the Lafferian sense. By current Keynesian views, that should be a feature not a bug.
You might rather the deficit be increased by cutting taxes for the middle class, or by building productive infrastructure, but still the Rubio plan would be better than just sitting tight and doing nothing.
Furthermore the wealthy will take their new surplus of funds and invest most of it and maybe spend some of it too. That boosts aggregate demand, and…if you think the multiplier still is high…well, you can see where this is heading.
Are we all ready to turn “C + I + G” into a mere “C + G”? I hope not.
And while the Fed is legally constrained from buying corporate bonds and other non-zero-ROR assets, wealthy people most certainly are not, so they could spend their Rubio tax cuts on equity, venture capital, and the like. In essence we would be using wealthy people, and fiscal policy, to make asset swaps which the central bank cannot. So liquidity trap arguments should not make this tax cut impotent and arguably they should necessitate it all the more. You might even (heaven forbid) wish to target the tax cut toward the wealthy, if they are the most likely to take cash and buy relatively risky assets with it. Right?
So by the standards of the current New Old Keynesianism, what exactly is wrong with Marco Rubio’s fiscal plan? Except that some other plan might be better yet. Inquiring minds wish to know.
Marketing Pork
Here is a great little story by Danny Vinik from Politico’s The Agenda on how so-called marketing boards are surreptitiously turned into lobbying boards.
Industries with a large number of producers find it difficult to organize collectively because of the free rider problem. Mostly, that’s a good thing because it prevents cartels. Collective action, however, could also be used to perform research or marketing that’s good for the industry as a whole but too expensive for any small subset of producers. In theory, therefore, some type of collective action could be beneficial and in agriculture governments have created checkoff programs which force producers to pay a tax to fund collective goods.
Checkoffs exist for dairy farmers, mushroom producers, and even popcorn processors. Critics say they violate economic freedom and distort the market; big corporate farmers, they allege, easily find ways to influence the boards and siphon the money off to push their own causes.
“In one sense, it’s a classic case of the larger producers are the more powerful political forces within these organizations,” said Dan Glickman, the Agriculture Secretary at the end of the Clinton administration who largely supports checkoff programs.
For the unhappy hog farmers, the current problem started with the 1985 Pork Law, when Congress set up the National Pork Board and required all farmers to contribute. Today, hog farmers must hand over 40 cents out of every $100 in revenue from pork sales. The board uses the money, totaling nearly $100 million a year, to conduct research and promote the pork industry, but is not allowed to lobby.
But as Adam Smith said “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Quite so. And in this case by creating a National Pork Board the government is providing the meeting hall and paying for the conversation. According to the law, the money from the checkoff program isn’t supposed to go for lobbying but here is where the story gets interesting.
You may recall the slogan, “Pork: The Other White Meat.” The slogan hasn’t been used for years but the National Pork Board still pays $3 million a year every year for the rights. Why would the Pork Board pay millions for an unused slogan? The key is who they are paying. The slogan is owned by National Pork Producers Council. The NPPC is a lobby group and you won’t be surprised to know that it is closely connected with the NPB (having once even shared offices).
…critics say the two groups have never been as separate as the law calls for, and now are essentially colluding through a deal that lets the Pork Board funnel money to the NPCC by assigning an absurdly inflated value to the “other white meat” slogan; the money then goes to promote the NPPC’s lobbying agenda.
A neat trick. The story is also a good object lesson in Mancur Olson’s thesis about how special interest groups grow in power over time, slowly choking off innovation as they cartelize the economy.
Who benefits most from Uber?
The consumers, most of all. But how about amongst the workers? I think you have to slot French taxi drivers under “don’t benefit.” And otherwise? That is the topic of my latest New York Times column for The Upshot:
On the positive side, the so-called sharing economy allows workers to use their time more flexibly. Drivers can earn money without working full time, and without having to wait around at taxi stands for the next passenger. The workers can use their newly acquired spare time for other purposes, including studying for college, teaching themselves programming or simultaneously offering themselves out for different sharing services: If no one wants a ride, go help someone with repairs around the house.
In short, these developments benefit those workers who are willing and able to turn their spare time to productive uses. These workers tend to be self-starters and people who are good at shifting roles quickly. Think of them as disciplined and ambitious task switchers. That describes a lot of people, but of course, it isn’t everybody.
That’s where some of the problems come in. Uber drivers are much more likely to have a college degree than are taxi drivers or chauffeurs, according to the Hall and Krueger study. It found striking differences between the two groups: 48 percent of Uber drivers have a college degree or higher, whereas that figure is only 18 percent for taxi drivers and chauffeurs.
Only some workers benefit when each hour, or each 15-minute gap, is up for sale. One way to put the general principle is this: The more efficient market technologies become, the more important are human capabilities and backgrounds in determining who prospers and who does not.
The piece offers other ideas of interest, including about education. For instance, corporate investments in worker training may decline as the likelihood of freelance work rises. That too favors self-starters, who can learn on their own. Do read the whole thing.
Do government benefits for the poor subsidize large employers?
Adam Ozimek has a very good post on that topic, here is one of his final bits:
…many of these programs, including Medicaid and food stamps, are means-tested. That means as you earn more the programs become less generous, and as a result can generate extremely high marginal tax rates for low-income workers. This will reduce labor supply and create the exact opposite effect that “corporate subsidy” critics claim.
Unfortunately, there is little basis to claim that most public assistance programs benefit employers. This is unfortunate because such subsidies would incentivize firms to hire more low-income workers.
Do read the whole thing.
Assorted links
1. An impressive display of, um…Big Data (pdf), addressing how suppliers discriminate against customers in Singapore. There is also an NBER version, but I don’t see it on their site at this moment.
2. The religion that is Iceland.
3. “…the greatest work of journalism from the nineteenth century.”
4. The Hospital is no Place for a Heart Attack. And few from the EU side like the Greek debt swap idea.
5. Best films of the decade? Winter Sleep should be added to the list immediately, it is Ceylan’s masterpiece. That, along with Uncle Boonmee, should be very close to the top.
7. Timothy Taylor on the new corporate income tax proposals.