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October 23, 2016

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Specifically, at Harvard Business School, and they're putting an awful lot of weight on opinions polled from their alumni as far as corrective measures go. I can't say the piece struck me as particularly interesting, let alone surprising.

I enjoyed the article. This one, too, is interesting, about Europe.

It's interesting to note, though, that the Harvard article and study was probably not taking account the latest excellent economic news.

The post-financial crisis stimulus, the bail-outs, etc., all of those things have been bringing us back. Figuring out how to accelerate that, or at least keep it going is all to the good.

Sorry, Russell. I was not overly impressed. It struck me as a study by elites on how to make elites better off...specifically talk about federal budget "sustainability" corporate "tax reform" and "streamlined regulations" all code words for The Washington Consensus.

Perhaps it is that consensus that is the problem.

I found this article much more thought provoking when it comes to thinking about what we, as a nation, should be about.

Regards,

For those of us blinkered by the high heat of current bitter partisanship, take a look at some past elections, and smile. We got through it.

1800

1828

bobbyp, I agree that some of the initiatives seemed like "the usual", but one of the key points was infrastructure, which could easily have been a bipartisan Congressional priority. But because Republicans were desperate for Obama to fail, even this common sense, universally accepted, absolutely necessary policy wasn't pursued. Marty's people deserve a huge boo on this one.

I agree with sapient about the need for infrastructure spending, but don't know if Marty disagrees. Republicans were and are obstructionists. Obama came in wanting to make deals with center right Republicans and I think he would have willing thrown the left under the bus to get them, but for better or worse, there were no such Republicans to be found. They were only interested in making sure Obama was a failure.

And bobbyp, the first half of the 19th century was not ultimately a happy success story for American muddling through. The election of 1800-- sure, happy ending. But everything in the generation before the Civil War was prelude.

I suppose we should be grateful that we don't currently have a general of Jackson's stature who is ambitious to be president.

We dodged a bullet with MacArthur. And Eisenhower was enough of a moderate (although the Little Rock school board might not have used that term) that it wasn't a problem. But since then? Nobody prominent enough to be a serious candidate.

"The election of 1800"

different times. The USA was young and weak, with European superpowers sniffing around for influence, and fear that whoever was in power might sell out the country, or get sucked into a side of the European war.

yes, the article discusses a survey of Harvard B school grads. So, yes, they are likely to skew toward a particular point of view. Which might not even be *my* particular point of view.

That said, in spite of being a cabal of capitalists, they likely still have something of interest to say.

there were a few things that i found interesting in the piece:

I was surprised that the majority opinion seemed to be that we are on track to become kind of mediocre, economically. Certainly if considered in terms of what our potential is.

I was also surprised that the majority point of view included a call for government engagement - including the feds - in getting where we need to be. Including but not limited to investment in infrastructure.

And I was basically pleased to see a recognition of, and concern about, increasing inequality among that particular cohort.

And I was basically pleased to see a recognition of, and concern about, increasing inequality among that particular cohort.

Harvard Business students are interestingly diverse these days. They're people, people who have achieved things before they got there.

Certainly investment in our future via infrastructure spending today would be a great thing...but a concerted effort would require either deficit spending or raising taxes, policies resolutely opposed by the GOP.*

Our elites have traditionally embraced "activist" federal government...cf Hamilton, Clay, Webster, the Adamses, the Roosevelts, Kennedys. That Harvard elites today embrace similar views should not come as a surprise.

But we may indeed be on the way to economic mediocrity as we grant a greater share of our wealth to the financial sector, see Kevin Phillips, "Wealth and Democracy", for example.

*In theory only. When in power the GOP have shown they could care less about deficits as long as the wealthy are coddled.

Very good Europe article, sapient.
A more pragmatic Europe might well have avoided the Brexit vote going the way it did, too.

*In theory only. When in power the GOP have shown they could care less about deficits as long as the wealthy are coddled.

Ummm, yeah.

Petraeus (particularly) and McChrystal were almost prominent enough before they imploded.
Couple of bullets dodged there, I think.

(Imagine if one of them had avoided scandal & was now the nominee rather than Trump...)

The election of 1800-- sure, happy ending

Donald, I never meant to imply any such thing. I point out only that there have been much more rancorous national contests in the past with bitter disputes about issues that we look back on today and wonder wtf?

Plus, I enjoyed both essays immensely.

But we may indeed be on the way to economic mediocrity as we grant a greater share of our wealth to the financial sector, see Kevin Phillips, "Wealth and Democracy", for example.

The solution to this is rather simple. Tax the rich. The financial sector can do what they do (as long as they're regulated enough not to explode the economy). I don't care whether they get rich. Just tax them.

Sapient,

Yup...Stiglitz pretty much nails it. Good read.

I don't care whether they get rich.

When they obtain great wealth due to public policy favoring them or granting them monopoly profits, I care deeply. Simply taxing them is not a universal solution. It is also problematic that a high tax policy would be adopted under such circumstances.

For their own, and our, benefit....we need to take those toys away from them.

I have no problem if someone gets rich because they are providing a desirable good or service, and doing so better than anyone else. Even if "desirable" doesn't conform to what I, personally, would desire.

But if they are getting rich because they are simply better at exploiting obscure provisions of the tax code? It's not clear that they have earned their riches.

Thanks, Nigel.

When they obtain great wealth due to public policy favoring them or granting them monopoly profits, I care deeply.

Sure, but "public policy" does a lot of work here. I'm for scrutinizing monopolies, but not to check people's wealth. What we need to do is 1) try to make everyone in our society reasonably comfortable, and 2) diminish the relationship between wealth and political power.

I'm not sure we can evaluate who "earns" money. It's been obvious to me over many years of working in different fields that what people "earn" doesn't ever really equal how "valuable" people's work is.

At this point, I'm reminded of this observation.

https://www.washingtonpost.com/news/wonk/wp/2016/07/07/alton-sterling-eric-garner-and-the-double-standard-of-the-side-hustle/

In cities where short-term rentals remain technically illegal, we don't typically think of Airbnb hosts as operating in a black market. Nor do we consider Uber drivers skirting the law — making, for instance, illegal airport runs — to be "hustling." But the kind of parallel activities Dash cites have been heavily criminalized, with the further help of anti-loitering laws. Black children selling candy bars come to be treated as criminals.

Sure, but "public policy" does a lot of work here.

carried interest exemption?
high dollar monetary policy?
extreme intellectual property rights?
no competition with foreign drug prices?
right to work laws?
abandonment by the Fed of its statutory obligation to promote full employment?
trade policies that protect doctors, dentists, lawyers?

I could go on, but do you get the picture? I would respond that your prescription to "tax the rich" (not that I am opposed to that) is doing a lot more work in comparison.

I could go on, but do you get the picture?

I thought we were talking about the financial sector.

Out of curiosity, who here is open to the idea of reducing corporate taxes, by which I mean, in the strictest sense, directly taxing corporations on their profits? I am. (And it has nothing to do with a ridiculous notion like "double taxation"!)

One thing from russell's link that jumped out at me, not because it was some big revelation, but because it simply rings true, was "We are long overdue for structural reform of the tax code, given how the global economy has changed over the last 30 years and how little we have done to keep up with those changes."

Corporations have options - more now than ever it seems - that living, breathing humans do not. And some of the options living, breathing humans do have are often not worth exercising, because living, breathing humans have other considerations that supersede things like avoiding taxes.

"Corporate tax reform" now equals a massive corporate tax cut. There is no way to reform the corporate/business tax code alone to get to the kind of low U.S. domestic corporate tax rate (say 20-25%) + a territorial system in a revenue neutral way.

To do that you would have to raise revenue elsewhere, which means raising individual income taxes, which McKinney tells me are also too high.

Could we eliminate corporate tax expenditures / favors and lower the corporate rate? Yes, but that only gets the rate down to something like 30% while creating massive corporate winners and losers depending on the industry (one analysis I looked at noted that the high-tech industry incur a big tax hike and the financial sector would get a big tax cut - this does not seem to me to be the direction we should be going in).

To do that you would have to raise revenue elsewhere, which means raising individual income taxes, which McKinney tells me are also too high.

Of course. If dividends were distributed on a pre-tax basis at the corporate level and corporate rates lowered, while marginal income-tax rates for individuals increased (or, more accurately, new high-income brackets with higher rates - and while we're at it, mush the 33% and 35% brackets together - what's up with the narrow range for 33%?), wouldn't it be doable?

Could we eliminate corporate tax expenditures / favors and lower the corporate rate? Yes, but that only gets the rate down to something like 30% while creating massive corporate winners and losers depending on the industry

I'd be curious to learn more about this. When you say massive winners and losers, would the losers be the industries who have been (unduly?) winning for years relative to other industries, meaning it would be a leveling of the playing field, or would things get even more out of whack?

I get that what's feasible politically isn't the same as what would work in theory, but I'm interested in exploring what would work in theory in a "king for a day" sort of way.

When you say massive winners and losers, would the losers be the industries who have been (unduly?) winning for years relative to other industries, meaning it would be a leveling of the playing field, or would things get even more out of whack?

The high-tech industry would be a big loser because one of the expenditures eliminated in the analysis would be the R&D credit. Thus, e.g., the computer & electronics industry would have a "net overall tax effect" of +33% (I'd have to look up what he means by "net overall tax effect"), whereas the securities/insurance/bank holding co industries would all receive a cut of 10% or more almost all of which is due to the proposed reduction in the top marginal corporate rate to 30%.

Maybe I overstated with "massive" but it's still a huge swing. Whether the R&D credit represents unduly winning is in the eye of the beholder, I guess, but people at the US Treasury department tell me that there are good economic reasons for providing an R&D credit for expenses that result in patents because of positive "spillover effects." It's also becoming more and more popular around the world with the rise of so-called "patent box" regimes.

From a "king for a day" perspective if you set a constraint that you would do corporate tax reform only and impose a revenue neutrality condition, IIRC if you eliminated all corporate tax expenditures (which include things like accelerated depreciation, the domestic production deduction, among various other things) you could get the US corporate rate down to something like 28%.

If dividends were distributed on a pre-tax basis at the corporate level and corporate rates lowered, while marginal income-tax rates for individuals increased (or, more accurately, new high-income brackets with higher rates - and while we're at it, mush the 33% and 35% brackets together - what's up with the narrow range for 33%?), wouldn't it be doable?

So make dividends deductible, lower the corporate rate, and increase rates on high earners? Don't think I'm qualified to opine on how that would work from a revenue neutrality standpoint. Complicating the picture is that a huge % of dividend paying stocks are held in tax-deferred accounts (401ks, IRA's, pension funds), so my guess is there's not a lot of revenue that would result from an increase in taxes on dividends received by high earners.

Corporations can pay tax here or somewhere else, depending on the talent level of the corp's lawyers and CPA's. Corps are incentivized to go elsewhere in order to save money. Get it? They go *elsewhere* to save money. Want them to stay here? Don't run them off. It's not difficult. If they leave, you are getting 35% of nothing. That is zero, all day long. If they stay, you get 15% (my choice for a tax rate) of whatever the taxable income is. Real money that the gov't will doubt spend wisely and to the benefit of all.

As for individual rates, my marginal rate is 43.4% (39.6 + 2.9 + .9). Plus self employment, imputed state income tax and real property taxes. All up, the foregoing got 39% of our gross income last year. Yes, I make a good living. I work 5.5 or more days a week, 10-12 hours a day most days. I don't make a million or more a year, but a very good living nonetheless. I retire in 3-5 years. At that time, we will live on roughly 12% of our current gross income, which is what we've saved after two kids through college, a wedding and paying off our house (a work in progress). A nice but hardly extravagant life. I make no apologies for saying I pay my fair share and then some.

HSH - here's the analysis I'm referring to on winners & losers. It's 5 years old and based on even older data, but I think it holds up as a general matter even if some of the specifics have changed.

I also liked this comment of the author's "Congress could raise individual taxes to pay for a corporate rate cut. But that would be about as politically appealing as reinstating the draft. To secure passage of the Tax Reform Act of 1986, Congress did the exact opposite: raised taxes on corporations to pay for tax cuts for individuals."

Hey you are still reading McKinney!

McK,

I know what imputed income is, etc., but what is "imputed state income tax?"


I thought TX had no state income tax.

Thanks.

Want them to stay here? Don't run them off. It's not difficult. If they leave, you are getting 35% of nothing. That is zero, all day long. If they stay, you get 15% (my choice for a tax rate) of whatever the taxable income is. Real money that the gov't will doubt spend wisely and to the benefit of all.

Well I can't argue with that math, but if you lowered the US corporate rate to 15% tomorrow there would still be a huge (although not as huge) incentive to "leave" because 15% > 0%, and right now the US tax code allows foreign headquartered multi-nationals to reduce US taxes on their US business via earnings stripping to 0 tax jurisdictions. That incentive is still there in a 15% rate world.

This like the 2004 repatriation "holiday" that allowed corporations to bring money "home" at a 5.25% rate rather than 35% - a much bigger difference than your proposed 15% and 35% - and yet only a small % of the overseas cash hoard was repatriated. Why? Because 5.25% is greater than 0, which is what those corporations were paying on a large portion of that overseas income despite the fact that the US purports to tax income on a worldwide basis.

I know what imputed income is, etc., but what is "imputed state income tax?"

My guess is that as a partner in a partnership that earns income in more than one state he owes taxes do those states, especially (and maybe only) if he traveled there for business.

The high-tech industry would be a big loser because one of the expenditures eliminated in the analysis would be the R&D credit.

Forgive my ignorance here. But isn't R&D a business expense? Or is there a credit on top of that?

Whether the R&D credit represents unduly winning is in the eye of the beholder, I guess, but people at the US Treasury department tell me that there are good economic reasons for providing an R&D credit for expenses that result in patents because of positive "spillover effects."

Patents or no, I, King Hairshirthedonist, probably wouldn't eliminate that particular credit. As eliminating credits/deductions go, I'd be looking more in the direction of things like the "CEO loophole," but I'm not well versed enough in taxation to get very deep into it on my own. I'm sure, just among those who frequent this blog, there are people who could suggest things I couldn't come up with. But I'm generally thinking of things that got into the tax code simply because someone lobbied for them, regardless of the actual merits in terms of promoting real growth and value creation.

Apparently, under certain specified conditions, those expenses do qualify for another level of credit against the tax obligation.

Ugh: Complicating the picture is that a huge % of dividend paying stocks are held in tax-deferred accounts (401ks, IRA's, pension funds), so my guess is there's not a lot of revenue that would result from an increase in taxes on dividends received by high earners.

Maybe not on dividends alone, but I was talking about rates on income in general.

McK: I don't make a million or more a year, but a very good living nonetheless.

If you make less than $1M/yr, you would largely unaffected under King Hairshirthedonist's tax regime. The top bracket we have now doesn't kick in until almost half that. (We've had this conversation before, and we always end up in near-agreement once we get into actual numbers.)

Yes you can both deduct the R&D expenses (e.g., salaries of scientists) and claim a credit for them, which in certain cases the tax rate on income benefiting from both the credit and deduction is actually negative.

right now the US tax code allows foreign headquartered multi-nationals to reduce US taxes on their US business via earnings stripping to 0 tax jurisdictions.

Currently, the US (unlike pretty much every other advanced economy) taxes its citizens on any money that they make andywhere in the world. It seems like our bright tax lawyers should be able to write some laws which would treat companies (including partnerships, etc.) which do business here in similar fashion.

I'm not sure that is a great idea, mind. Probably we should at least consider things like the portion of revenue earned here. But conceptually. It does at least suggests that dropping the corporate tax rate (and arguably initiating a simple race to the bottom) is not the only option.

and arguably initiating a simple race to the bottom

We already have that race and we're losing!!! See page 41 of this document, which is linked to in the article in russell's post:

the U.S. statutory tax rate, previously similar to that of peer countries, is now a clear outlier, 10 percentage points higher than the average OECD rate

wj: It seems like our bright tax lawyers should be able to write some laws which would treat companies (including partnerships, etc.) which do business here in similar fashion.

They don't even need to be bright! But guess which party is happy to let the status quo continue with US based corporations and the US tax base running out the door at every opportunity rather than pass simple legislation that would address earnings stripping in short order?

Complicating the picture is that a huge % of dividend paying stocks are held in tax-deferred accounts (401ks, IRA's, pension funds), so my guess is there's not a lot of revenue that would result from an increase in taxes on dividends received by high earners.

They are also held by many completely tax-exempt institutions - foundations, university endowments, and so on. The Gates Foundation, for example, has very large holdings of Microsoft stock.

Correct. So cutting the tax rate on dividends and capital gains flows mostly to individuals holding stocks outside of tax-deferred accounts. These people are generally not poor or even middle class.

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