A Less Bad Idea?

David Neumark is trying to sell a new minimum wage idea in the WSJ.  First let’s talk about a strange headline and sub-headline.  The header is:

Let The Taxpayers Pay The Minimum Wage

That makes some sense.  If taxpayers are foolish enough to want to increase the minimum wage then they ought to foot the bill.  Fair enough.

The sub-headline is:

Employers shouldn’t bear the brunt of redistributive policy.

Well, at best employers share the brunt of a silly policy with employees.  We’re not convinced that David’s idea is less bad enough to support.  That is, sometimes you support a policy or a candidate because the alternative is so bad that less bad is way better.  We don’t see that higher taxes or bigger deficits are good ideas.

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Responsible Spending

Yesterday we continued our support for a carbon tax to replace the current federal gas tax.  Our back of the envelope estimate was that a carbon tax of about $20 per ton would be equivalent to the current federal gas tax of $0.184.  Of course, because the left would love to have a carbon tax we agreed with Holman W. Jenkins, jr. that the right is in a good position to negotiate.  The responsible spending should include other tax cuts.

Here is how the negotiations start.  Transportation emits about 28 percent of US carbon and motor vehicles are about 83 percent of that so a revenue neutral replacement of the gas tax would be a carbon tax of roughly $5 per ton.  The negotiation space is what can we get for the additional carbon tax of about $15 that would gas prices unchanged.  Our confidence in the GOP in negotiating for the right is limited but this is one they should be able to get a reasonable deal.  It won’t be perfect and some folks will be worried about introducing a new tax but we think it is worth the risk.  That is how we see politics working.  You rarely get something for nothing.  Here we could get much for some mild uneasiness.

 

 

Price And Perceptions Matter

One of our favorites, both for her name and her writing, is Mary Anastasia O’Grady.  She writes about the Americas for the WSJ.  Often it is South and Central America but recently she took the Trudeau Administration in Canada to task:

Canadian Prime Minister Justin Trudeau’s Liberal government announced last month it will reduce a carbon tax on industry that is set to go into effect next year.

We support an carbon tax in the US.  Has this change our thinking?  No.  We still support a carbon tax that replaces the gas tax at an equivalent rate.  Canada has a  higher gas tax than the US.  The average Canadian tax is C$0.958 or $0.73.  The average in the US is $.04944.  Justin has proposed a new carbon tax without, it appears, eliminating the gas tax as we would:

The initial carbon-tax proposal, which takes effect next year, promised to levy companies on 30% of their emissions at 10 Canadian dollars (US$7.66) a metric ton, rising to C$50 a metric ton in 2022.  [It appears that the final tax is on all carbon emissions.]

So the tax goes from C$3 (C$10 * 30%) to C$50.  That is a big percentage increase over four years but does it matter?  It takes a little over 110 gallons of gas to create a metric ton of carbon.  To make the computations simple, let’s call it 100 gallons and then the cost per gallon is C$.03 and C$0.50 and, the federal government will be awash in cash when the tax is fully implemented.  Governments awash in cash need to find activities to spend it.

The problems are that Justin and friends are increasing taxes and regulations at the same time The Donald is generally, yes tariffs are a problem, making the US more attractive to investment.  Fifty bucks a ton is a pretty big tax.

We still support eliminating the federal gas tax ($0.184) and replacing it with an equivalent carbon tax.  That would be about 110 * $0.184 or about $20 a ton.  It would leave the price of gas unchanged while making incentives right.  Yes, we know that in Australia a carbon tax of AUD 23 caused a firestorm and was repealed.  We still think the trade-off makes sense.

It would also be revenue positive.  Will the US federal government find a way to use it responsibly?  We think it is possible.

 

Good Company On Carbon Tax

Holman W. Jenkins, Jr. writes Fuel-milage Rules Are No Help To The Climate at the WSJ.  As always, read the whole thing.  It ties together two of our pet topics: regulations and taxes.  We recently gave our lukewarm support for The Donald revising his predecessor’s Corporate Average Fuel Economy rules (CAFE).  We preferred eliminating them entirely but recognized that The Donald would make them less negative.  Holman also recognizes the negative political impact on our ability to make climate improvements:

But don’t the fuel-economy rules at least have symbolic value by showing the U.S. leading on global warming? If, in return for zero climate benefit, American consumers and auto makers shoulder hundreds of billions of dollars in inefficiency-producing, consumer-dissatisfying costs, how does this encourage the body politic to be more receptive to further climate policies? It doesn’t.

We have supported replacing the current gas tax with a carbon tax because it is much broader it would raise revenues and get incentives right.  Holman is taking a New York Times Magazine screed to task while he recognizes that the carbon tax is a useful tool for climate change that could appeal to both sides of the aisle:

If the Times is looking for a folly, this is it. The green movement’s resort to hysterical exaggeration and vilifying skeptics buried any hope of enacting the one policy that is nearly universally endorsed by economists, that could be a model of cost-effective self-help to other countries, that could be enacted in a revenue-neutral way that would actually have been pro-growth.

A carbon tax remains a red cape to many conservatives [not us] but, in fact, would represent a relatively innocuous adjustment to the tax code. It could solve political problems for conservatives (who want a tax code friendlier to work, savings and investment) as well as for liberals (who want action on climate change).

Well said.  We are not sure on the number of conservatives against a carbon tax.  Some are loudly against but we are unsure on numbers.  Some of the green movement is equally loud about a large carbon tax.  We are with Holman and have the exact solution: eliminate the gas tax and replace it with an equivalent carbon tax.  Everybody should be happy for a moment.  Then they need to decide what to do with the revenue-positive impact of taxing more transactions at an equal rate.  Tax relief, infrastructure, and entitlements all need work. Our first step (after eliminating the gas tax) would be to tie eliminating CAFE to passing the carbon tax.

Politics is about deciding when to compromise.  Holman has pointed out a great opportunity of both sides.  Why not take advantage of it?

 

Economic Insight

We don’t know Kevin Williamson’s full resume but he often refers to his English major math.  Yet he has an impressive ability to express economic concepts clearly.  Recently, Kevin was at his best on NRO (and, of course, you should read it all):

A trade deficit is nothing like a budget deficit. Each year’s federal budget deficit adds to the total debt owed by the federal government. Trade deficits don’t do that, which is one reason why “trade deficit” is not a very useful term. A trade deficit is just a bookkeeping entry, not a debt that has to be paid. Countries don’t trade — people do. Americans are no more harmed by the trade deficit with Germany than you are by your trade deficit with Kroger [that is a retailer in case you are not in the 34 states they operate in].

To be clear, you are not harmed because you can get better or cheaper stuff from Kroger (and Wal-Mart, Amazon, etc) than you can produce yourself.  Kevin gives great details about actual tariffs and goes on to identify the real problems that are produced in a trade war:

[The Donald] now proposes to spend $12 billion to bail out U.S. farmers hurt by his batty trade war. That figure will grow if the trade war continues.

The Donald is way wrong in his trade war because it harms everyone.  Elsewhere he has done much to improve economic freedom but he is absolutely wrong here.

Corporate Welfare

Jimmy Quinn at NRO is upset about corporate welfare.  We are too but he doesn’t do much to convince us that the Foxconn deal is a bad deal for Wisconsin.  We would prefer that he gave us the details on Foxconn before discussing Amazon’s search and other issues.  Here is what he says about the Wisconsin deal:

Here’s the bottom line: If the jobs target of 13,000 is met, Wisconsin taxpayers will pay $219,000 per job. If only 3,000 jobs are created, they will pay $587,000 per job in the form of a $1.7 billion tax credit. And these are conservative estimates, leaving out the additional tens of millions of dollars that will go toward the infrastructure improvements necessary to accommodate Foxconn’s new plant.

The second part of the paragraph is a distraction because infrastructure is going to be the responsibility of governments.  We are supportive of the first part of the paragraph because we support what Jimmy identifies as the New Hampshire model: low taxes for every organization and no special privileges.  There are two problems with Jimmy’s analysis.

First, what is the nature of the tax credit?  Presumably, it is a special purpose tax credit that we would likely oppose.  We want to know the details.  Don’t worry, we will be doing some research in the future.

Second, there is a problem with the time frame.  Jimmy says that the deal lasts until 2043 or 25 years.  Thus, the large sum is over 25 years and the cost per job is for 25 years of jobs.  A cost of $9,000 (roughly) per job year is much less scary.

Much more interesting is the possibility of federal tax reform.  Jimmy says that the next push for tax reform will treat state incentives as income.  It makes sense as the backbone of taxable income is all income from whatever source.  We’re supportive of Jimmy’s opposition to corporate welfare but he needs to give us details and alternatives to evaluate Foxconn.

Corporations, sates, and municipalities should be free to act but they should do so in the sunshine.  Voters should know what the deal is and if the corporate income should be properly accounted for.

Sidebar: For example, if the corporation was exempt from income tax on the state level there would be no need to adjust.  The corporation would not get that deduction and pay federal taxes as appropriate.  End Sidebar.

We are against corporate welfare but it is up to the voters.  Educating those voters about the problems is tricky but if New Hampshire can do it then we can hold out hope.  We need to do a better job than Jimmy.

 

 

 

 

ECONOMY & BUSINESS

The Foxconn Plant Is a Bad Deal for Wisconsin Taxpayers

Wisconsin Governor Scott Walker (left), President Donald Trump, and Foxconn chairman Terry Gou at a groundbreaking ceremony in Mount Pleasant, Wisc., June 28, 2018. (Kevin Lamarque/Reuters)

State and local governments genuflect before the corporate altar.It was a nice photo-op: the president of the United States, the speaker of the House, the governor of Wisconsin, and the CEO of Foxconn, a Taiwanese manufacturing company, breaking ground on a new plant that could potentially bring some 13,000 jobs to Wisconsin. President Trump used the ceremony last Thursday to celebrate what he hails as an American manufacturing renaissance: “So we’re open for business. Made in the USA. It’s all happening, and it’s happening very, very quickly. We’ve created 3.4 million jobs since the election, including over 300,000 manufacturing jobs.”

But the Foxconn deal is a condemnable example of corporate welfare in its most egregious form.

A look at the numbers is illustrative. All told, Wisconsin could end up delivering $3 billion in tax credits to Foxconn. Even if Foxconn’s arrival results in thousands of new jobs over the next several years, it will open a gaping fiscal hole that will be filled only in 2043, when the state recoups the money spent on these tax breaks.

Here’s the bottom line: If the jobs target of 13,000 is met, Wisconsin taxpayers will pay $219,000 per job. If only 3,000 jobs are created, they will pay $587,000 per job in the form of a $1.7 billion tax credit. And these are conservative estimates, leaving out the additional tens of millions of dollars that will go toward the infrastructure improvements necessary to accommodate Foxconn’s new plant. The ill-conceived incentives are the core of an all-around terrible arrangement. Who wins? The politicians. Who loses? Fiscal sanity and those footing the bill for political pet projects.

Unfortunately, Foxconn is one among many cases of state and local governments making massive concessions to corporations in exchange for benefits that are easily outweighed by the costs. States and cities dole out billions of dollars every year to attract businesses through cash grants, tax breaks, and new infrastructure.

The search for Amazon’s second headquarters (HQ2), for instance, has left around 230 state and local governments genuflecting before the altar of the Seattle-based tech deity, offering tributes amounting, in several cases, to billions of dollars. The offers are truly extravagant. Various proposals include land giveaways (Stonecrest, Ga.), Amazon input in city-planning initiatives (Fresno, Calif.), and municipal funding for employees to expedite Amazon projects (Boston).

States and municipalities want the jobs and prestige that come with hosting these companies; politicians want the votes that accompany the credit for attracting these companies. It’s a simple function of the wrong incentives run amok.

Aaron Renn, a senior fellow at the Manhattan Institute, explains: “Like Amazon HQ2, whenever there is a major facility like [the Foxconn plant] . . . it is really difficult for states to resist playing the game.” According to Renn, the incentive structure is such that decision makers will either face criticism for aggressively pursuing contracts at great cost, or for failing to secure them. Wisconsin governor Scott Walker would have faced criticism regardless of the decision he made, Renn says.

Economic-development agencies of state governments exacerbate the problem. By using certain metrics to measure success — such as jobs created by government programs — these agencies incentivize state officials to pursue low-benefit, high-cost deals at great expense to the state and its taxpayers.

Nathan Jensen, a professor at the University of Texas and the co-author of Incentives to Pander, makes a version of this argument based on research spanning the United States and several other countries. Astonishingly, he says, most studies find that approximately three-fourths of companies benefitting from special incentives make their decisions before securing tax breaks. Most of the time, these packages aim to influence a decision that has already been made.

Asked about Amazon’s country-wide search for a new headquarters, Jensen sticks to his thesis. “I think they already have a pretty good idea of what they’re doing,” he says. The company has a need for highly-educated workers, and will therefore already prefer a city where many already live or to where they would be willing to move. The whole thing is “a bit of theater,” according to Jensen: “I would have been shocked if they didn’t have one to two places” at the top of their list “from the get-go.”

Most of the time, these benefit packages aim to influence a decision that has already been made.

For skeptics of these mega-deals, the Amazon HQ2 search marked a turning point. The blatant and reflexive rush to offer Amazon carve-outs proves just how willing many state and local governments are to trade tax dollars for job creation. New Jersey and Maryland are prepared to lavish Amazon with more than $7 billion in corporate goodies.

The cost of these kind of incentives is astoundingly high — there is little research that points to their success. And competition among states to lure in large companies can yield absurd results. Jensen writes about an ongoing bidding war between Kansas City, Mo., and Kansas City, Kan., that sees firms regularly cross the Missouri River to secure better benefits. In a recent episode, reinsurance firm Swiss Re moved from Kansas to Missouri — a journey of four miles. Last year Kansas state senator Tom Holland complained that state policies amount merely to “rearranging chairs on the patio.”

But there’s hope for reform. Included in the recent tax-reform law is a provision that treats some state incentives — such as infrastructure improvements and cash grants — as taxable corporate income. The next tax-reform push, which Trump says might come in October, should prioritize a measure treating state and local tax credits the same way. By taxing corporate incentives as income, the federal government can limit their abuse.

A Trump Trade Proposal To Support

James Freeman at Best of the Web on WSJ has news on a Trump trade proposal that we would support:

At the rancorous G7 meeting recently in Canada, Mr. Trump suggested tariff-free trade among the participants.

Of course, we recommend unilateral tariff disarmament.  We hope everyone agrees on this sensible proposal.  We’re pretty sure that it is so sensible that the parties will not be able to agree on it, in part because The Donald suggested it.  Too bad.