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.

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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.

Reihan’s Assertion

Reihan Salam has an interesting assertion about taxes and productivity in his Who Needs Advisory Boards in the 9/11 NRODT (The National Review magazine).  Reihan’s thoughtful article is worth a subscription.  First, let’s start with an assertion Reihan makes and provides data on:

Right now, our chief interest should be in boosting productivity growth.  From the end of the Second World War to the start of the Great Recession, real GDP per capita in the US has grown at 2.5 percent a year.  Since then it has grown at a mere 0.6 percent a year.

Yup, we totally agree.

Sidebar: Phil Gramm and Michael Solon at the WSJ frame the same issue slightly differently as bringing back three percent GDP growth.  The difference between the numbers reflects population growth.  We prefer Reihan’s formulation because it eliminates population growth.  Of course, the open-borders folks at the WSJ like it the other way. End Sidebar.

Taxation is an important issue in producing real GDP per capita growth.  Two of the possibilities are reducing the corporate tax rate or full expensing.  We prefer The Donald’s view of reducing the tax rates on all businesses not just corporations.  Full expensing mean that equipment et cetera can be expensed immediately for tax purposes rather than depreciated over time.

In discussing these options Reihan supports full expensing over lower rates because he thinks the former will be better for productivity.  In fact, he thinks the choice will have profound implications for America’s economic well-being because we should reward companies for investing in new equipment rather than reward companies for investments made ages ago.

The issue is: do depreciable assets drive productivity?  We don’t know the answer but our priors are that it does not.  We  agree that machinery is part of the equation but think that productivity is driven by R&D, software, and things that are already fully expensed.  It is a great question for grad students out there.  We would like to see the data.

Reihan brings up a problem for full expensing if we have a binary choice between full expensing and lower business tax rates.  US multinationals move operations and profits to current tax havens.  There the profits stay to avoid US taxes.  This leads to less investment in the US.  It is one of the reasons why we are for lower rates if it is a binary choice is between lower rates and full expensing.  Let the US be a tax haven.

We would like better data on what is best for productivity.  At the same time we cannot let perfect be the enemy of good.  As Reihan concludes, overhauling corporate [business] taxes could be an achievement for the ages.  We agree.  Our suggestion is to ignore personal taxes and get corporate taxes somewhere near right.

 

Bjorn For Something

Bjorn Lomborg is back at the WSJ telling us to be rational about climate change.  It is a timely message given what happens when a hurricane or two hits the US.  Steven Hayward has a great hurricane chart.  Here is an example of Bjorn being rational:

In this case, the science is unambiguous. Rising temperatures mean that malaria-carrying mosquitoes can become endemic in more places.

But looking mainly to global-warming policies means missing the most important levers of tackling malaria. Malaria is a consequence of poverty: The worst affected are those poorer households in rural areas with less ability to purchase mosquito nets and treatment. Focusing on what we could achieve in the future through global-warming policies takes our attention away from what we could accomplish today.

Do read the whole thing.  If you meet a zealot send him to see Bjorn.  Bjorn is a climate change believer but he recognizes economics too.  See his website.

One topic we like to discuss is binary choices.  You can see that Bjorn uses binary choices as argument.  As he explains in more detail after the quote above, you can fight malaria by fighting climate change or by malaria prevention.  Malaria prevention is much cheaper and much more effective at saving lives.  Bjorn doesn’t mention it but malaria prevention is much more certain to be effective and much more timely than trying to address malaria by addressing climate change.

Unfortunately, Bjorn doesn’t appear to be a US citizen so he would need to be appointed to any government post.  Fortunately, he is making sense.

A Nice University Story

We are preparing a post on the problems with universities but first here is one about a successful university program.  Competition among universities in each state means that students have choices and programs can have an identity.  The identity of  the University of Wisconsin-La Crosse (UWL) is about state-wide programs.  The identity of the Department of Accountancy is a 150-hour undergraduate program that emphasizes internships at public accounting firms.  Most of the internships are with firms that are not the Big Four.  All of the internships, with the possible exception of some with the federal government, are well paid.  Internships lead to connections with firms that lead to a variety of positive outcomes including scholarships for students.

Here is the story of McKenzie Hofmann, an accountancy major at the UWL:

So, when Hofmann started college, she heeded her mother’s advice and applied for as many scholarships as she could. Now entering her senior year, Hofmann has earned $13,000 total …

Today Hofmann is glad she switched majors and started on the accountancy path. After a full-time internship at a public accounting firm in the Twin Cities, Redpath and Company, spring semester, Hofmann was offered a full-time career with the firm. She’ll start after her December 2017 graduation.

It is a common success story at the accountancy program at UWL: scholarships, internships, and permanent employment.  So McKenzie made $13,000 from (tax free) scholarships and probably more on the internship but that’s taxable.  The program works for students that make it work.

Good News In Missouri

Dave Jamieson from the Huff Post reports good news from Missouri although he doesn’t think it is good news.  Missouri Republicans have prohibited localities from taking the minimum wage into their own hands.  Dave writes:

For low-wage earners in St. Louis itself, the new law will have a startling consequence: It will actually push the minimum wage back down, from the city-approved $10 per hour to the state-approved $7.70. The downgrade is slated to take effect on Aug. 28.

For someone earning the bare minimum, that’s a potential cut of 23 percent.

Obviously, for somebody earning zero the percentage increase can’t be computed.  It is great to see the GOP helping out the poor and unskilled by giving them the opportunity to create human capital.  Well done!

A conservative issue is whether the action of the Missouri GOP is proper.  What they did was:

[T]he state GOP recently passed what’s known as a statewide “preemption” law, forbidding localities from taking such matters into their own hands.

Much has been written about the relationship between the states and the federal government.  Not much has been written about the relationship between the states and localities.  Can the state of Missouri do this?  Is it wise to do it?  Our initial take is yes and yes but it may need more thinking.  At this point we see the right of the state to limit local actions such as property taxes so the minimum wage is another acceptable limitation.  We welcome more debate on this relationship.  The wisdom of the Missouri GOP in eliminating St. Louis’ increase of the minimum wage is obvious so there is no need to discuss that.

A Trip To The Dentist

The WSJ editorial on apprentices reminded us of last week’s trip to the dentist.  We support all manner of on-the-job training (OJT).  Formal education is an important part of building human capital but OJT is likely more important.  That’s why we were struck by this part of the editorial:

An especially odd objection is that apprenticeship training is a mistake because skills become out of date over time, especially later in one’s work life. But that’s a risk throughout the economy, and all the more reason to get young people skills to enter the job market now and build up savings for the future.

We agree with the first sentence that it is an odd objection but don’t see the second sentence as the answer to why.  Our current trip to the dentist compared to the one some years ago will explain why.

Some years ago our dentist had acquired technology that used a camera and what seemed to be CAD/CAM software (yup) to make a crown in-house.  It took lots of the dentist’s time but it was pretty cool to get the crown in one sitting.  Last week we went and got two crowns at once and the assistant did some of the CAD/CAM work.

Sidebar: We looked at the data on price changes in dental costs and were surprised by the continuing increases.  We wonder about the measurement of quality issues.  Some years ago we would have had four visits to the dentist to get two crowns and would have spent several weeks wearing those awful temporary crowns.  Although the crowns may not have increased in quality the service has.  End Sidebar.

The dentist or the CAD/CAM provider has trained the assistant to do some of the work.  The technology associated with work changes.  OJT is all of your life.  Accounting, dentistry, and welding will all change.  Some might even go away but if you continue to accumulate human capital you will find opportunities.  As the WSJ says in another editorial:

Lowering the cost of goods and services through automation allows capital—financial and human—to attack even harder problems. Wake me up when we run out of problems.

All manner of folks are solving problems.  Our dentist was able to save us three trips and a few weeks of discomfort.  Now the dental assistant is part of that.  Don’t neglect formal education because these things will eventually become part of it but we need to push OJT even more.