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Joe Biden’s Fat Cooked-Goose Tax Plan

03 Saturday Apr 2021

Posted by Nuetzel in Fiscal policy, Taxes

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Biden Administration, CARES Act, corporate taxes, Double Taxation, infrastructure, Justin Wolfers, Loopholes, OECD, Offshoring, Pandemic, Pass-Through Income, Phil Kerpen, Renewable Energy Credits, Research and DEvelopment, Statutory Rates, Tax Foundation

I recently wrote on this blog about the damaging impact of corporate taxes on workers, consumers, and U.S. competitiveness. Phil Kerpen tweeted the chart above showing the dramatic reduction in the distribution of corporate tax rates across the world from 1980 through 2020. Yes, yes, Joe Biden’s posture as a fair and sensible leader aside, most countries place great emphasis on their treatment of business income and their standing relative to trading partners.

Kerpen’s tweet was a response to this tweet by economist Justin Wolfers:

Apparently, Wolfers wishes to emphasize that Biden’s plan, which raises the statutory corporate rate from 21% to 28%, does not take the rate up to the level of the pre-Trump era. Fair enough, but compare Wolfers’ chart with Kerpen’s (from the Tax Foundation) and note that it would still put the U.S. in the upper part of the international distribution without even considering the increment from state corporate tax rates. Also note that the U.S. was near the top of the distribution in 1980, 2000, and 2010. In fact, the U.S. had the fourth highest corporate tax rate in the world in 2017, before Trump’s tax package took effect. Perhaps Biden’s proposed rate won’t be the fourth highest in the world, but it will certainly worsen incentives for domestic U.S. investment, the outlook for wage growth, and consumer prices.

And in the same thread, Wolfers said this:

That’s certainly true, but let’s talk about those “loopholes”. First, much of U.S. corporate income is “passed though” to the returns of individual owners, so corporate taxes understate the true rate of tax paid on corporate income. Let’s also remember that the corporate tax represents a double taxation of income, and as a matter of tax efficiency it would be beneficial to consolidate these taxes on individual returns.

Beyond those consideration, the repeal of any corporate tax deduction or credit would have its own set of pros and cons. As long as there is a separate tax on corporate income, there is an economic rationale for most so-called “loopholes”. Does Wolfers refer to research and development tax credits? Maybe he means deductions on certain forms of compensation, though it’s hard to rationalize treating any form of employee compensation as income taxable to the business. Then there are the massive tax subsidies extended for investments in renewable energy. Well, good for Wolfers if that last one is his gripe! The CARES Act of 2020 allowed publicly-traded companies to use losses in 2020( presumably induced by the pandemic) to offset income in prior years, rather than carrying them forward. Did Wolfers believe that to be inappropriate? I might object to that too, to the extent that the measure allows declining firms to use COVID to cloak inefficiencies. Does he mean the offshoring of income to avoid U.S. corporate taxes? Might that be related to relative tax rates?

In any case, Wolfers can’t possibly imagine that the U.S. is the only country allowing a variety of expenses to be deducted against corporate income, or credits against tax bills for various activities. So, a comparison of statutory tax rates is probably a good place to start in assessing the competitive thrust of tax policy. But effective tax rates can reveal much more about the full impact of tax policy. In 2011, a study showed that the U.S. had the second highest effective corporate tax rate in the world. Today, among developed countries, the OECD puts the U.S. roughly in the middle of the pack, close to Germany but higher than Canada, Mexico and Japan, and lower than the UK. This article from 2019 reaches the same conclusion, though the rankings and rates differ from the OECD’s calculations. So it’s not as if the U.S. is the only country to offer tax incentives, or “loopholes” in Wolfers’ preferred terminology.

The corporate tax hikes proposed by the Biden Administration are intended to fund the massive outlays in the so-called infrastucture bill, which of course has very little to do with real infrastructure. Both the tax and spending proposals are bad policy. So far, however, passage of the bill is not a given. Let’s hope all of the Republicans and at least one Democrat senator have the sense to vote it down, but I’m not optimistic. The best hope for resistance among Democrats is Joe Manchin of West Virginia, but even he has signaled his support. Biden’s appointment of Gayle Manchin to a key administration post couldn’t have hurt.

European Incomes Compare Favorably To Mississippi Delta

29 Thursday Oct 2015

Posted by Nuetzel in Europe, Social Democracy

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European economic growth, Euroscerosis, Income comparisons, Median Income, Mises Wire, Mississippi Delta, OECD, Social Democracy, State purchasing power

Europe-Romance-and-Economy

Europe is no utopia, not even Scandanavia, contrary to the fictional accounts of the American Left. Much of Europe is actually rather pinched by U.S. standards. This link from Mises Wire shows that median incomes in Sweden and Germany would place those countries among the poorest U.S. states. The comparisons at the link are based on OECD data from 2012. Here are some examples in terms of median income:

  • The U.K. is poorer than any U.S. state (Mississippi is at the bottom in the U.S.);
  • Sweden is poorer than all but 12 states;
  • Denmark is below all but 13 US states;
  • Germany is below all but 9 US states, and France is below Germany;
  • Only Luxembourg, Norway, and Switzerland would rank as high-income states, were they part of the U.S.

The results are even more striking after adjusting for purchasing power across individual states in the U.S.:

“… we find that Sweden’s median income ($27,167) is higher than only six states: Arkansas ($26,804), Louisiana ($25,643), Mississippi ($26,517), New Mexico ($26,762), New York ($26,152) and North Carolina ($26,819).

We find something similar when we look at Germany, but in Germany’s case, every single US state shows a higher median income than Germany. Germany’s median income is $25,528. Things look even worse for the United Kingdom which has a median income of $21,033, compared to $26,517 in Mississippi.“

Again, Luxembourg is the standout. It would rank as the second highest state in terms of real median disposable income, were it part of the U.S.

Europe certainly has its charms, not to mention its share of old wealth, but the contention that it is more “advanced” economically than the U.S. is laughable. This is not a new development, and economic growth in Europe has been dismal (and negative in a number of countries) over the past eight years. The notion that the socialist democrats of Europe have created a prosperity that the U.S. should envy is a myth.

Negative Net Taxes For Most Is Not A Good Sign

18 Tuesday Nov 2014

Posted by Nuetzel in Uncategorized

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Carpe Diem, CBO, Corporate tax, Cronyism, Inequality, Mark Perry, OECD, Progressive Taxes, rent seeking, Senate Budget Committee

IRS Spider

Carpe Diem (Mark Perry) reports on a new CBO study showing that nearly all net federal taxes (taxes net of transfer payments received) are paid by households in the highest income quintile. The fourth quintile pays a small, positive amount of net taxes, but the lowest 60% of  households pay negative net taxes, with average tax rates on market income plus transfers ranging from -13.7% for the middle income quintile to -35% for the lowest quintile. From Perry:

“The second-highest income quintile basically just barely covers its transfer payments, so it’s really the top 20% of “net payer” households that are financing transfer payments to the entire bottom 60% AND financing the non-financed operations of the entire federal government.”

A heavy concentration of taxes at one end of the income distribution is not a healthy development for a democracy when it comes to fiscal responsibility.

In a second post, Perry uses the same study to show that adjusting market income for net taxes reduces income inequality by almost 50%. Advocates for greater income equality always focus on market income alone because it tends to show a more dramatic gap between rich and poor. This distortion understates the extent to which policies already in place reduce income inequality and amplifies the unabating contention that more must be done. In addition, standard measures of income inequality tend to distort trends, as SCC has noted in the past.

At the same time, OECD data reveal that the U.S. has the most progressive tax system in the industrialized world. The author of the OECD post cited the data in testifying before the Senate Budget Committee:

“This prompted one Senator to point out that if the richest 10% of taxpayers earn the most of any OECD country, shouldn’t it make sense that they bear the largest tax burden of any country?”

The Senator’s premise was false, as there are countries with higher or similar income shares earned by the top decile, but the tax burden on that decile in the U.S. is the highest. In addition, the U.S. has the highest corporate tax rate in the industrialized world, a point on which SCC has posted before.

The ongoing debate over inequality is counterproductive. Calls for higher taxes will certainly do nothing to encourage economic growth and job creation. Quite the opposite. And inequality, in principle, is not in any way synonymous with decreasing standards of living. However, I certainly agree that inequality can be harmful when it is induced by rent-seeking activity and cronyism, which become a way of life with growth in the public sector.

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