Too Kind

David R. Henderson is exactly right in his title but way too kind in his WSJ Op-Ed entitled A War On The Rich Won’t Help The Poor that analyzes the Oxfam report Reward Work Not Wealth.  David starts out with a dichotomy that he shows a counter example of later:

There are two ways to close the gap. The first is to concentrate on making the poor better off. Mostly that has happened, thanks to liberalized international trade and reduced costs for shipping goods. Just as Walmart and Amazon have cut costs for Americans, the introduction of container shipping crushed transportation costs for the world. The second way to reduce inequality is to make the rich worse off. Any guess which method Oxfam’s report emphasizes? “Governments should use regulation and taxation to radically reduce levels of extreme wealth,” the authors conclude.

The problem is that he has accepted the Oxfam starting point that inequality is the problem.  Inequality is not the problem and Oxfam is (or perhaps no longer is) an antipoverty organization as David describes it.  The Oxfam report uses the catch phrase, “Even It Up.”  The first might not close the gap as David demonstrates:

Say that wages in a developing country rose by 10%, and in the U.S. by only 1%. For a family in the poor country earning $2,000, that would mean an extra $200. But for a family in the U.S. making $50,000, it would equate to $500. In other words, income inequality would increase, even though wages grew 10 times as fast for the poor family.

The second way has no assurance that it will close the gap either.  Eating the rich, or some variant of it, will likely have a negative impact on the poor.  Will the gap, however measured, be reduced or increased?  It should not matter because making the poor worse off is a bad idea.  Go check out Venezuela.  We are sure there are studies of various plans to punish the rich but we doubt they are definitive.  The solution is to work on poverty by encouraging markets, rule of law, free trade, allowing GMOs, and so on.  Income inequality is uninteresting and unimportant.  Don’t get sucked into it.

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Quasi-Experimental Results

Some results are in on the quasi-experiment designed by the GOP.  The recently passed tax reform bill coincides with an Apple announcement in the WSJ that it:

would make a one-time tax payment of $38 billion on profits accumulated overseas and ramp up its spending in the U.S., as it seeks to emphasize its contributions to the American economy after years of taking criticism for outsourcing manufacturing to China.

An interesting part of the coverage is the difference between the WSJ reporting and the WSJ editorial page.  Here is more of the WSJ reporting cited above:

Apple said its one-time tax payment was the result of recent changes to U.S. tax law, under which companies must pay a one-time tax of 15.5% on overseas profits held in cash and other liquid assets. Profits held in other forms will be taxed at 8%. The company said in November that it had earmarked $36 billion to cover deferred taxes on its $252.3 billion in overseas cash holdings, assuming that it would eventually pay U.S. taxes on a portion of it by bringing it home.  [Emphasis added]

The news gives the new tax rate rather than the reduction, which would seem to be the interesting part, and suggests that the profits would have come home eventually anyway.  The details are not complete here but it looks like the news folks are confusing financial accounting and tax accounting.  The WSJ editorial page has a different take:

Apple said Wednesday that it will pay $38 billion in taxes on the $250 billion or so in cash the company holds overseas; that’s a lot of money for Social Security checks and food stamps. Apple also said it would invest or spend on purchases some $350 billion in the U.S. over five years and add 20,000 jobs.

Apple’s windfall for the U.S. Treasury is the result of the reform bill’s 15.5% “deemed” tax rate on profits previously earned overseas whether or not they are returned to the U.S. The old system featured a one-two punch of taxation abroad and than again at home at a punishing 35% rate if the money was repatriated.

Apple had no plans to return the money to the U.S. under that regime, and ditto for many other companies that together have some $2.5 trillion abroad. Republicans broke this logjam by lowering the top rate and creating a permanent system that taxes income where it’s earned. Now Apple can put this cash to whatever the company deems the highest use, without arbitrage from tax policy.

We can’t live out the other option of high corporate taxes and there is only one Apple so we can’t randomly assign anything.  We can’t make any statistical statements and there is some possibility of arguing cause and effect because it is only a quasi-experiment.  The results, however, seem robust to us because of the previous statements of corporate officials and the proximity of the tax change and the results.

Reviving Basket Cases

Mugabe is out in Zimbabwe.  It is not the worst economic and political basket case in the world but there is a great opportunity for its citizens and the world to improve.  Zimbabwe actually moved up in the last year or two as Heritage moved them up to a score of 44 (of 100) that lifts them into the repressive category.  Freedom House kindly puts them into the Partially Free category with a score of 32 of 100.  We have seen this description of the problems of newly found freedom for Zimbabwe in several places.  Here it comes from Neo-neocon:

“In the past we could never criticize the president,” said Felex Share, a political reporter, in the hours before Mugabe’s resignation. “Right now, we can touch anything.”

How will Zimbabwe deal with its opportunity?  What will the world do?  A better question is: What can the world do?  Answer: It can’t do much compared to Zimbabwe because only they can change the culture of corruption and so on that is causing the problem.

It is hard to change as the quote says and Douglas North described more generally.  Cambodia is in the news and we use it as an example.  It was hell on earth during the Khmer Rouge regime in the late 70s.  It is better now but it still only scores 59.5 from Heritage which is still just in the mostly unfree category while Freedom House scores them at 31 and categorizes them as unfree.  Much of Eastern Europe did much better after the fall of Communism but they were not in the Cambodia/Zimbabwe category before freedom returned and they had a capitalistic past to return to.  They also had freedom next door (or reunification for East and West Germany) and that helped too.

We hope that Zimbabwe propers.  We know that some critical elements like rule of law and the basic elements of capitalism are necessary for improvement but the citizens of Zimbabwe need to choose the path themselves because that is the only way to get them to follow it.  We hope you choose capitalism and hope the world makes it easy to do so.

We hope there will be opportunities to remediate additional basket cases like (but not limited to) Venezuela, Cuba, and North Korea in the near future.  Perhaps we can learn something in Zimbabwe that will help us and them.

Good Luck Zimbabwe

It appears that Zimbabwe has ousted the tyrant Robert Mugabe and his first lady Grace who has ruled and ruined the country over the last 37 years.  Right now Zimbabwe ranks 175 out of 180 countries on Heritage’s Index of Economic Freedom.  Here is a quote from Heritage:

Zimbabwe’s economy is characterized by instability and volatility, both of which are hallmarks of excessive government interference and mismanagement. Massive corruption and disastrous economic policies have plunged Zimbabwe into poverty. The government’s near bankruptcy has triggered large protests over unpaid civil service wages and a continuing economic crisis.

We wish Zimbabwe well.  We recognize how difficult it will be to make headway after 37 years of misrule. If they are reading we want to remind them that capitalism works and socialism doesn’t.  As evidence, three of the five countries below them are Venezuela, Cuba, and North Korea.  Good luck.

Reviving An Old Slur

The “news” industry has rediscovered an old slur: Trickle-Down Economics (TDE).  Catherine Rampell is on the editorial page

Sidebar: We know we made fun of Kevin Williamson for stooping to take on Catherine but she is just part of this post.

She is saying things like this:

Of course, Republican lawmakers and administration officials promise that these corporate giveaways will really, truly, honest-to-goodness primarily benefit us regular humans, especially humans in the middle class.

That’s because, they claim, corporate tax cuts will unleash a wave of business investment and therefore economic growth, most of which will trickle down to the little people-people.

Well, heroes one thing Kevin Hassett, The Donald’s chair of the Council of Economic Advisors, said (from Larry Kudlow):

“Economists who have studied the effects of taxes over time have discovered a consensus,” he said. “Lower marginal tax rates and a broader base increase the rate of economic growth and well-being.”

Here is Kevin on CNBC:

The new report from Hassett, out Monday morning, projects that reducing the corporate tax rate to 20 percent will result in a windfall for U.S. workers. He predicted average U.S. household income would increase at least $4,000 a year but could rise as much as $9,000 annually.

It is an interesting question of the incidence of corporate taxes.  What percentage falls on owners and workers?  Catherine is suggesting that 100 percent falls on owners.  That seems unlikely.  It seems even more unlikely that the owners will decide to put all that money in their mattresses.

Taking up almost all of the above the fold back page of the 11/18 La Crosse Tribune  is an associated press (AP) story (yes it is an editorial pretending it is a news story) that we can’t find on the Internet.  The headline is: Giving Trickle-Down Another Try.  Here the AP is going for a triple slur.  They get Reagan, Trump, economics all in one headline.  It gives the Tax Policy Center the highly coveted “nonpartisan” designation.  [Perhaps they are just wrong and not partisan.] It blames the W’s 2001-3 tax cuts for the Great Recession and notes that W’s expansion was one of the weakest.  Hmmm, which President, we wonder, had the weakest?

If you would like a more detailed discussion of the slur check out Thomas Sowell from 2012.

Catherine and the AP seem desperate to make slurs and throw stuff against the wall and hope that something sticks.  To get the success of the Reagan tax cuts from The Donald’s tax cuts we need to couple it with deregulation and good central banking.  There seems to be good news on deregulation.  The Donald doesn’t fill us with confidence and we worry about trade but he is our best chance.

 

What Is Audacious Tax Reform?

David M. Snick at the WSJ suggests we should apply the Warren Miller standard, go big or go home, to GOP tax proposals.  In David’s word, proposals should be audacious.  We are not convinced but here is our plan to meet that standard:

The Graetz Plan to reduce payroll and income taxes while adding VAT plus
Eliminate tariffs, death tax, corporate tax and gas tax and replace with carbon tax.

David is afraid that the current political situation will lead to

Fearing this outcome, Republican leaders are being tempted to play small ball. They might suggest modestly lowering the corporate tax rate. They might propose allowing full expensing of business investment, to be scaled back after several years. To help the middle class? They’ll throw in a modest hike to the standard deduction. Anything to get something done.

Not as audacious as our proposal and not our favorite choices but we would be delighted.  David thinks it is small ball.  What does he suggest?

Republicans shouldn’t play small ball. Their goal should be a tax-reform plan that will create robust economic growth, which in turn will help heal a bitterly divided nation.

Yup, we are on board for robust economic growth.  The key to robust economic growth is productivity.  So what does David suggest?

 At minimum, the standard deduction should be tripled. But reformers also need to think creatively. Tax reform, entitlement reform and health-care reform cannot be considered in isolation. Working families need relief across the board.

So his only two suggestions are: be audacious and triple the standard deduction?  We guess.  And even David recognizes that increasing the standard deduction will have little impact on because, as he says:

People who earn less than $50,000 a year pay an average effective income-tax rate of 4.3%.

So a thousand dollars in deductions nets them $43.  Increasing the standard deduction does nothing for growth and little for low income folks.  As David says and everyone recognizes, payroll tax is a bigger deal than income tax for folks in the lower quintiles of income.  See the Graetz Plan for one possible idea.

Then David invokes Reagan to suggest we favor Main Street over Wall Street.  We don’t know what David means by that as applied to tax policy.  We do know that Reagan understood that incentives matter and fought against those that denigrated his program as “trickle down economics“.  Sending a check to folks is the opposite of supporting robust economic growth.  Better incentives are the way to do that.  Substantially reducing or eliminating the corporate tax is the best way to support robust economic growth.  We are not sure if it qualifies as audacious.

Capital Investment And Growth

Recently we were discussing Reihan’s assertion (look it up it is really recent) that we should go for immediate expensing for capital expenditures rather than lowering corporate rates because capital expenditures are the path to productivity.  We were unconvinced because we see the path to productivity including software and R&D which are already immediately expensed.

Today we found a WSJ article by James Mackintosh that suggests some support for our vision.

Sidebar: We at first used argument rather than vision.  We changed it to vision because, as we said at the time, we have no data to provide.  It just makes sense to us that buildings and equipment are just part of the productivity story.  End Sidebar.

James is discussing the potential pitfalls of Amazon’s new headquarters.  As part of the background he reports:

The lesson from the long term is that companies with high capital spending tend to underperform. Kenneth French, a professor at the Tuck School of Business at Dartmouth College, calculates that shares in the 30% of U.S. companies with the lowest investment returned six times as much as those with the highest investment since 1963.

Along the way he gives examples of overspending including the 1840 British railway boom, peak oil, dot-com, and shipping.  In addition, James notes:

Investing in growth is more plausible. Academics have shown that higher R&D spending on average is followed by better stock performance than for companies with lower R&D spending.

James is far from conclusive on the subject but we continue to think that rates are more important than immediate expensing.  One reason is the evidence he provides on capital spending not leading to stock market price increases but R&D does.  Obviously, stock market prices and productivity are only weakly connected through profits.  It is not QED but it suggests some of the problems with capital spending.  It buttresses the basic argument that rates provide the incentive for profits and solve the problem with firms moving out of the country.  We have moved a little more strongly in favor of rate reductions over immediate expensing.