October 18, 2019

Economix: Of Loopholes and Potholes


Nancy Folbre is an economics professor at the University of Massachusetts Amherst.

How can we fill the federal budget hole? The political standoff has been largely defined as a debate over tax hikes versus spending cuts.

Today’s Economist

Perspectives from expert contributors.

Many Democrats want to close tax loopholes in order to increase revenue. Many Republicans believe that government spending should be cut because it hurts the economy, rather than helping it — digging potholes, as it were, rather than fixing them.

But many tax loopholes for big business are potholes for the rest of us. Closing and filling them would cut spending and improve economic efficiency.

Special provisions in the tax code often provide specific subsidies to distinct groups. Such tax expenditures have the same effect as spending programs.

The word “loophole” implies an opportunity for clever manipulation that leads to unintended results. While some loopholes fit this description, others represent explicit efforts to provide special benefits, reflecting greater political priorities and intense lobbying efforts.

As Senator Russell Long of Louisiana once put it, a tax loophole is “something that benefits the other guy; if it benefits you, it’s tax reform.”

Corporate tax policies in the United States provide significant benefits to shareholders, at considerable cost to everyone else.

Our statutory corporate tax rate, at 35 percent, looks high relative to those of other countries. But the many deductions, credits and other special breaks mean that the effective rate (or taxes actually paid) is much lower — an estimated 13.4 percent of profits over the 2000-5 period, lower than the average for other major industrialized countries.

As my fellow blogger Bruce Bartlett noted, “The United States actually has the lowest corporate tax burden of any of the member nations of the Organization for Economic Cooperation and Development.”

The proliferation of special breaks helps explain why corporate taxes have declined over time as a percentage of gross domestic product and as a percentage of total federal tax revenues.

Robert McIntyre of Citizens for Tax Justice points out that tax expenditures for corporate and other businesses will cost about $364.5 billion in 2011. That’s about a billion dollars a day.

Many special corporate tax breaks also contribute to serious economic inefficiencies.

Corporations that invest overseas rather than within the United States enjoy a huge advantage in the form of deferred taxes on profits. Republican policy makers are now proposing a “tax holiday” or even total elimination of American taxes on offshore profits.

Such policies would further encourage corporations to relocate to countries with the lowest tax rates and avoid contributing to social investments in health, education and environmental protection.

There also is good reason to believe that increased “offshoring” will reduce employment growth.

Some companies, especially those that rely heavily on intellectual property rights like patents, can simply shift their profits to offshore tax havens. Small business owners who cannot easily engage in such practices are rightfully indignant.

Other members of the business community are also speaking out. A Caterpillar executive recently filed suit against his company (the world’s largest construction equipment manufacturer), asserting that he was demoted for criticizing the company’s tax minimization strategy.

Everyone concerned about environmental sustainability should take a close look at corporate tax loopholes. The United States, like most other industrialized countries, continues to provide billions of dollars of special tax subsidies for fossil fuel industries that contribute to global warming.

Nuclear power is also on the dole. Without public subsidies, including limits on economic liability in the event of an accident, it would not be economically viable.

If only we could throw these loopholes into the potholes and have a real discussion of tax reform, instead of getting buried by partisan obsession with the ratio of overall tax increases to spending cuts.

Article source: http://feeds.nytimes.com/click.phdo?i=a91222576f77bf41b1f59757097922e8

Economix: Nurturing Start-Ups and Small Businesses Around the World, Part 1

In almost every developed country, small companies dominate the business landscape. But in many ways America, the great land of entrepreneurship and opportunity, actually has a weaker small-business presence than most.

A new report on entrepreneurship from the Organization for Economic Cooperation and Development finds that the smallest businesses — those with fewer than 10 employees — account for almost all of the businesses in most developed countries. The United States is on the low end of the distribution, though, with only about three-quarters of its businesses being so tiny.

DESCRIPTIONOrganization for Economic Cooperation and Development

The United States also finds that its biggest companies contribute a much larger share of the country’s exports than is the case in other developed nations. In the United States, companies with more than 250 employees account for 75 percent of the country’s exports; in many European countries, big businesses contribute less than half of national exports.

DESCRIPTIONOrganization for Economic Cooperation and Development

A more direct measure of entrepreneurship might be the share of workers who are self-employed. Compared to other developed countries, the United States figures are poor to middling, for both native-born and the huddled masses coming from abroad. Greece has the highest rate of self-employment for native-born citizens, and Poland has far and away the highest self-employment rate for foreigners.

DESCRIPTIONOrganization for Economic Cooperation and Development

In a separate post I’ll look at how countries fare on creating a climate that is amenable to start-up businesses, looking at the regulatory environment, availability of venture capital and other factors.

Article source: http://feeds.nytimes.com/click.phdo?i=c532f10108fcd1be5d68a33fe38a5115

Draghi Receives Warm Welcome in Germany

Invited by the economy council of the governing Christian Democratic Union party, Mr. Draghi warned at an economics conference about the perils of inflation as the world recovered from the global financial crisis.

His remarks won repeated applause from nearly 1,000 audience members, most of them company executives who have been critical of Chancellor Angela Merkel’s economic policies.

Mr. Draghi, governor of the Italian central bank, was nominated this month at a meeting of euro zone finance ministers to succeed Jean-Claude Trichet as European Central Bank president in October, when Mr. Trichet’s term ends. Mr. Draghi will need to be endorsed by European Union leaders, but that is considered a formality.

His candidacy has been the subject of strident commentary in the German news media, which has asserted that a banker from a south European country would be unsuited for a job that demanded fiscal and monetary discipline.

Even Mrs. Merkel, who was one of the government leaders in the euro zone countries to withhold support from Mr. Draghi at the early stages of his candidacy, only recently spoke out in favor of him.

Mr. Draghi’s advisers said it was not certain that he and Mrs. Merkel would meet because of scheduling conflicts. Mr. Draghi was to return to Italy late Wednesday afternoon. Mrs. Merkel, in Paris for meetings at the Organization for Economic Cooperation and Development, was to return to Berlin on Wednesday night to address the same conference.

During his 20-minute keynote address, Mr. Draghi said the recovery of the world economy was continuing, with overall gross domestic product expected to expand 4.4 percent this year, and 6.5 percent in emerging countries.

“However, the crisis is not over,” he warned. “While global growth has been gathering robustness, it is very uneven.”

Turning to the euro zone countries, Mr. Draghi said it was crucial in a monetary union that each member country satisfy three conditions: price stability, fiscal discipline and national economic policies conducive to growth.

The first condition “was and is ensured by the E.C.B,” Mr. Draghi said, “but in some countries, we do not have the second and the third. The primary responsibility for a response to a lack of confidence must be national.”

Underscoring the interdependence of euro zone countries, he noted that the sovereign debt crisis of three countries — which he did not name — whose combined gross domestic product amounted to about 6 percent of the total euro zone G.D.P. held “the potential to have a big systemic impact.”

In a specific reference to German industrialists, he said that, “with the notable exception of Germany,” economic growth “remains feeble in the advanced countries, too slow to help redress seriously weakened fiscal balances and unemployment rates.”

In emerging countries, Mr. Draghi said, “there are signs of overheating, with large capital inflows carrying a heightened potential for disruption. Commodity and oil prices have been under heavy upward pressure.”

Article source: http://feeds.nytimes.com/click.phdo?i=71e7fc893cb3da1b74ed9b22a9bd78df

Economix: Inequality Rising Across the Developed World

America isn’t the only rich country dealing with a rise in inequality. Most of the developed world is, too.

A new report from the Organization for Economic Cooperation and Development finds that most of its member countries have seen their richest citizens get much, much richer in the last few decades, leading to a widening income gap.

DESCRIPTIONSource: OECD Income Distribution and Poverty Database. Note: Data for mid-1980s refer to early 1990s for Czech Republic and Hungary.

Today, across developed countries, the average income of the richest 10 percent of the population is about nine times that of the poorest 10 percent, with much bigger multiples in Israel, Turkey, the United States, Chile and Mexico. In these last two countries, the income ratio is 27 to 1.

So what accounts for the growing gulf?

Changes in capital income — which primarily affects wealthier people — have contributed to rising inequality, although the impact has been relatively modest when compared to changes in labor income, the report says. As lower-paid workers have seen their incomes stagnate or even fall, the highest-paid workers have gotten steep raises.

Many factors have contributed to the rising labor income inequality. Globalization has had an impact, as rich countries have been sending more of their commodifiable, generally less-skilled jobs offshore, which has displaced many lower-paid workers in rich countries.

Besides outright layoffs, there have also been cuts in work hours (sometimes voluntary, sometimes not), disproportionately affecting lower-paid employees:

DESCRIPTIONSource: Organization for Economic Cooperation and Development. Note: Paid workers of working-age. Mid-2000s refer to 2000 for Belgium and France. Mid-1980s refer to early 1990s for Austria, Czech Republic, France, Greece, Hungary and Ireland.

Technological improvements have also disproportionately benefited the pay of high-skilled workers. Regulatory changes, like loosening protections for temporary (and less-skilled) workers and lower unemployment benefits, may have also had an effect.

The report notes that changing courtship patterns may also be contributing to the widening income gap.

Over the years people have become more and more likely to marry mates who have similar incomes. “Today, 40 percent of couples in which both partners work belong to the same or neighboring earnings deciles, compared with 33 percent some 20 years ago,” the report says.

Surely to some extent this has to do with more women having earnings, period, and therefore having more women’s earning matching what their husbands make. But in any case if poor marry poor and rich marry rich, that magnifies the income gap effect. After all, if poor married rich, the result would be more evenly distributed wealth.

Article source: http://feeds.nytimes.com/click.phdo?i=fd15e9e06e6ac134b02b5b4042b5534f

Economix: Burden of Supporting the Elderly

As part of its giant data release on Tuesday, the Organization for Economic Cooperation and Development has put together numbers on the old-age support ratio. That refers to the number of people who are of working age (20 to 64 years old) relative to the number of people over retirement age (older than 65).

One reason for America’s fiscal problems is that the population is aging, meaning that there are relatively many old people to care for and relatively few young workers to support them. (Immigrants are helping with this burden, though.)

The United States is by no means the most challenged in this regard:

DESCRIPTIONSource: Organization for Economic Cooperation and Development Countries in the first group are O.E.C.D. members.

The chart above shows that as of 2008, there were 4.7 working-age Americans for each retirement-age American, a figure projected to fall to 2.6 by 2050. Compare that to Japan, where the number was 2.8 in 2008, and will fall to about 1.2 by 2050.

Note also that China, for all the demographic issues arising from its one-child policy, is on about the same footing as the United States — an old-age support ratio of 7.9 to 1 in 2008 (actually, much better than that in the United States) and 2.4 in 2050.

Article source: http://feeds.nytimes.com/click.phdo?i=c8ed99dca35697a31997e21c754816fb