Results for “corporate tax”

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Mr. Blinder’s answer is not protectionism…he accepts the economic logic that U.S. trade with large low-wage countries like India and China will make all of them richer — eventually.  He acknowledges that trade can create jobs in the U.S. and bolster productivity growth.  But he says the harm done when some lose jobs and others get them will be far more painful and disruptive than trade advocates acknowledge.  He wants government to do far more for displaced workers than the few months of retraining it offers today.  He thinks the U.S. education system must be revamped so it prepares workers for jobs that can’t easily go overseas, and is contemplating changes to the tax code that would reward companies that produce jobs that stay in the U.S.

Here is the article.  Arnold Kling says technological progress will be more important than trade.  I think that China is due for a crack-up and India will soon bump up against its horrible legal and educational systems.  I saw that economists are listed as among the most threatened groups, but I doubt if the United States can look forward to the liberation of so much talented and witty labor.  I also think that corporate welfare is a bad idea, and that universities should not train everyone to be a small town divorce lawyer.  Teaching reading and writing would be a good start.

When our economists start preaching that we should look to economists and higher educators to predict the new, growing economic sectors, I again think that the Chinese are not the major problem.

A loyal MR reader asks:

What are your thoughts on the new dynamic optimal public finance policy models being built and simulated?  Will they yield any new insights applicable for the real world, or are they a fad?

Real insights maybe, real measurements for sure.  I take this paper by Mankiw to be a paradigmatic example.  Through this body of literature we learn, or confirm our previous intuitions, that:

1. Cutting U.S. income tax rates is not, in general, self-financing.  We also get a rough idea of how much revenue we can make up in the long run.

2. Many forms of corporate and capital income taxation are, in the long or even medium run, inefficient.

3. Ideally we should move to a consumption tax.  (NB: Moving outside the models, I am scared that this kind of tax reform will just turn into another tax increase.  We’ll add a VAT to income taxation rather than shift to the VAT.  Yikes.)

These results are the bread and butter of applied public finance.  You can complain all you want about the assumptions, the artificiality, and the use of intuition to throw out unacceptable calibrations, but at the end of the day there is not a better way to do the work. 

A fad, perhaps, but there is nothing wrong with that.  The Beatles were a fad too.

By the way, here is an interesting paper on a different frontier in public finance, namely field experiments.

#10 in a series of 50.

Google is walking down this path:

The ambitious founders of Google…have set up a philanthropy, giving it seed money of about $1 billion and a mandate to tackle poverty, disease and global warming.  But unlike most charities, this one will be for-profit, allowing it to fund start-up companies, form partnerships with venture capitalists and even lobby Congress.  It will also pay taxes.

One of its maiden projects reflects the philanthropy’s nontraditional approach.  According to people briefed on the program, the organization, called Google.org, plans to develop an ultra-fuel-efficient plug-in hybrid car engine that runs on ethanol, electricity and gasoline.

Here is the full story, and look for more of this model in the future.  As wealth grows, and many large benevolent ventures do not need to fundraise, their will opt for more flexible organizational forms.  Of course if these activities turn a profit, Google shareholders can take the profits home as dividends.  So some of these activities will be normal corporate investments, dressed up as "for-profit charity" for public relations purposes.  Here is Eric Posner on for-profit charities.

The lead article in the August 2006 Journal of Political Economy offers the following abstract:

We solve each household’s optimal saving decisions using a life cycle model that incorporates uncertain lifetimes, uninsurable earning and medical expenses, progressive taxation, government transfers, and pension and social security benefits.  With optimal decision rules, we compare, household by household, wealth predictions from the life cycle model using a nationally representative sample.  We find, making use of household-specific earnings histories, that the model accounts for more than 80 percent of the 1992 cross-sectional variation in wealth.  Fewer than 20 percent of households have less wealth than their optimal targets, and the wealth deficit of those who are undersaving is generally small.

In other words, most Americans are saving enough for their retirements.  The authors (John Karl Scholz, Ananth Seshardi, and Surachai Khiatrakun) stress that their data cover only the early 90s, although if anything they believe this biases their estimates downwards by missing out on later capital gains.  Here is the paper.

Notes: This result does not deny that America may face coming demographic problems for funding social programs, most of all Medicare.  But next time you read that "the U.S. savings rate is zero," think back on this blog post and on that paper.

Here from an earlier post are Tyler’s ideas for a second term. Good ideas all. Keep your fingers crossed.

1. Eliminate all farm subsidies, tariffs, quotas and price supports.

2. Tell Western Europe it is paying for its own defense from now on.

3. Admit that the Medicare drug prescription bill was a mistake. Repeal it, and consider a revenue-neutral benefit that does not discriminate against prescription drugs. Introduce means-testing for Medicare to stop that program from bankrupting us. I would rather cut this benefit than repeal the tax cuts [tax shifts, correctly, though spending discipline could turn them into real tax cuts.] The long-run benefits of greater capital accumulation remain significant.

4. Negotiate bilateral free trade agreements as rapidly as possible. Start with Japan, the second largest economy in the world.

5. Strengthen America’s commitment to science. This will have implications for educational policy, immigration policy, and regulatory policy. Don’t restrict stem cell research. Hope that science comes up with affordable and politically sustainable solutions for global warming and clean energy independence. You might have libertarian objections to science subsidies, but the realistic alternative today is more government intervention.

6. Strengthen early warning systems against infectious diseases. Increase research into cures, vaccines, immunity, and the like. We don’t want the world to lose fifty million people to avian flu or some other malady.

7. Take in more immigrants, but demand higher levels of skills and education. At the very least, take in any revenue-positive immigrant.

8. Abolish the Department of Education.

9. Abolish the Department of Energy.

10. Repeal all corporate welfare.

11. Repeal the corporate income tax. Repeal the Alternative Minimum Tax. Admittedly these are “ifs,” depending on fiscal considerations.

12. Get on TV and tell the nation that a free economy is a critical source of our strength. Tell them you mean it, and then mean it. Economic growth is the greatest long-run gift we can give to the world.

Employment is an increasingly lagging indicator, here is more data. Growth and productivity are humming along, but employment as a percentage of population fails to impress. Consider a few reasons why this might be:

1. Productivity growth is high, so employers are disinclined to hire more workers. The workers they already have are producing plenty. This explanation, of course, requires that firms have some market power, so they can’t sell all they want at prevailing market prices. There is then little point in hiring more workers, even if wages were to fall, because the extra output would be hard to sell at a good price. Of course if real demand were rising or otherwise robust, high productivity could cause firms to hire more workers rather than fewer.

This all may lead some of my astute readers to wonder what coordination failure is preventing Say’s Law from holding in this context. Does not supply create its own demand, at least barring a massive increase in the demand to hold money? Read Alex for more on this one.

2. The data may overstate the puzzle in the first place.

3. Maybe we are mismeasuring employment by focusing too much on the payroll survey and not enough on the household survey. But just try mentioning this one, and Brad DeLong will thwack you hard. Do note that Alan Greenspan agrees with Brad. The two measures are often quite different, but I have to go with the payroll survey here.

4. Health care costs per worker are extremely high. True, but this has been the case for some time.

5. Some parts of the Bush tax plan have induced firms to substitute capital expenditures for labor. And in the short run, capital and labor may be more substitutable, and less complementary, than in times past. Information technology can substitute for unskilled labor more than before.

6. Bush introduced a “tax cut for the rich,” rather than undertaking fiscal stimulus of the traditional Keynesian kind; read Brad on this one. I am less sanguine about traditional fiscal policy, plus this doesn’t explain why labor market recovery has been so slow, even if it might have been more rapid under different conditions.

7. Firms are outsourcing jobs overseas. The ever-excellent Daniel Drezner debunks this one, though I am not quite ready to assign it measure zero in effect.

8. For some unknown sociological or economic reason, workers are getting discouraged from seeking work more easily than in times past. They leave the labor force, which keeps the percentage of employed low but the unemployment rate low as well. I don’t rule this out, but I don’t have a contending hypothesis here either.

9. Firms are/were uncertain about terrorism, Iraq, corporate scandals, new information technologies, and sectoral shifts. Rather than locking in with hires, they will hold back and wait. But why would this affect labor more adversely than investment or stock prices?

10. Downward stickiness of wages. OK, this is what classical economics would lead you to expect, but in reality wages have become less sticky over time.

The bottom line: The conventional wisdom will opt for some combination of one and nine. Four, five, seven, and eight may explain further pieces of the puzzle. But I would sooner call the whole thing a continuing mystery. Note that most of these hypotheses imply that the economy can still become quite a bit better yet. Either Bush or Kerry will get credit for this, without deserving the plaudits.

Addendum: Arnold Kling adds to the mix.