Changing seasons

The signs are everywhere. Fresh apricots are no longer available at the local farmers' markets. The weather is less hot and more comfortable - a fact that is nonetheless dispiriting (though not as much as the departed apricots) because one knows where it is headed. And I have taught my first class, which I thought went fine although it always takes a few sessions to establish rapport and rhythm.

Back in NYC

I spent the last few days at an academic conference in Woodstock, VT. Best way to describe the local ambience is to note that even a gas station convenience store had microbrewery wheat beers and fresh whole-grain breads from a local gourmet bakery. I forgot to check for the whimsically named local brand of fresh dark-roasted whole coffee beans, but maybe it was behind the chai.

Big thought for the day

Getting older is like managing the retreat of an Army unit. You know you have to give ground and will eventually lose everything. But in the meantime you want to retreat as slowly as possible, keeping it orderly and preventing a rout. Anywhere you can stand and fight for a while you should if the odds are good enough.

Hence my giving up on squash a year ago but deciding to keep up tennis. After ten months of being unable to play a match I am back on the courts competing, but it takes a lot of exercise, stretching, and rehab to keep the odds of continuing (for decades?) reasonably good.


Then there is our eldest cat Shadow (age 17), for whom the retreat is considerably more advanced. Having already lost his teeth and developed an over-active thyroid that, despite surgery (!), still over-produces enough hormones to kill him if we weren't giving him a pill twice daily plus special food, he now appears to have developed chronic kidney disease. This requires injecting him in the back with fluids once a day, at least for now, I gather simply to slow the ongoing process that might take as long as a couple of years (though then again it might be a lot less). And it requires a change in diet that, I gather, involves retreat on managing the thyroid problem as the kidney issue is more acute.

Despite all the extremely nice cats in the world you can find in shelters that evidently are not finding homes, Shadow is about as good an argument for animal cloning as I have yet met. We adopted him when the men's clothing store he lived in was closing and he started following me around the store when I came back to pick up my garments. Placid, mellow, sweet-tempered, loves people, likes other cats - he makes me proud to be a fellow mammal.

Here he is enjoying the sun, which he may not get to do for much longer.

Krugman on the U.S. corporate tax rate

There's been a lot of focus in tax policy circles on the contention that the U.S. corporate rate is too high, leading to one or more of the following claimed ill effects: (1) competitive disadvantage to U.S. companies abroad (which might or might not affect U.S. national welfare), (2) reduced investment in the U.S., including the inbound, and/or (3) the shifting of reported taxable income, and thus tax revenues, out of the U.S. to other countries with lower rates. It's clear that the U.S. corporate rate, 35%, is these days a bit of an outlier on the high side.

But is that the number that matters? Paul Krugman thinks not:

"Now, the thing you have to realize about corporate taxes is that the statutory rate — the rate you pay after [being] allowed deductions and all that — means very little. That’s because corporations have lots of potential deductions — and can hire the very best accountants to find them, and lawyers to justify them. So any time you see a table that compares the nasty 35% US rate with other countries, you know you’re being snowed.

"A much better indicator is the amount of taxes corporations actually pay. From OECD data (behind a paywall, I think, unfortunately), I get the following for percentage of GDP paid in corporate taxes in some major economies, in 2005:

Canada 3.5
US 3.1
Japan 4.3
France 2.8
Germany 1.7
UK 3.4."

Point taken about the statutory rate standing alone. But that's not to say that Krugman's preferred indicator is any better, or indeed as good. For starters, one has to ask how much economic activity in a given country, relative to GDP, is run through corporations, rather than other forms. Does the U.S. have a greater tendency for business activity to run through partnerships, etcetera? In other words, the correct denominator of the fraction is not necessarily national GDP. For a first cut it's corporate economic activity, though even that isn't quite right because you have to think about the consequences of shifting activity around into or out of corporate solution (and how that's taxed).

Not to mention that the second, shareholder level of tax is important to the assessment as well, although that raises further complications that I won't get into here.

Also, if we are mainly concerned about incentive effects, efficiency, and net U.S. national economic welfare, rather than distribution - and I think that is the main long-term issue here, as I'll explain in a moment - then it's not the average but the marginal U.S. corporate tax rate that we care about. So, insofar as companies can play games to save some tax inframarginally, but can't get to zero or boost up their sheltering when they make more profits, it's possible that they would be paying closer to 35% than to their average rates at the margin. I'm not asserting this, but merely noting that it's possible and that the data Krugman cites don't address it.

But is this a distribution issue, not one of efficiency? Krugman presumably thinks so, and he has a point. Taking as given the level of corporate investment et al, which reflects expectations about effective tax rates, if we then in practice lower or raise the overall corporate effective rate the winners or losers are probably corporate shareholders, who on average are relatively affluent. This is the transition incidence of an unanticipated change in the level of the corporate tax. Thus, corporate shareholders would presumably win (all else equal) from lowering the corporate rate to 25%, given that such a change (though being debated) presumably is not, at this point, considered anywhere close to certain. But if we are talking about a stable equilibrium level of effective taxation of corporate income, then it all depends on the incidence of this tax - which economists increasingly believe, in the open economy era, falls largely on labor rather than capital. (See my forthcoming corporate tax book with the Urban Institute Press, "The U.S. Corporate Tax - What Is It and Where Is It Headed?" - due out in early 2009 - for a fuller discussion of these points.)

If John McCain had written John Lennon's songs

"All we are saying is give war a chance."

"War is the answer
You've gotta let it, you've gotta let it grow."

"War is real, real is war
War is feeling, feeling war
War is wanting to make war."

"Peace is over, if you want it
Peace is over now."

Guiltier pleasures

OK, I admit it. I have been watching and enjoying Project Runway lately. It's especially helpful when I need to get through a bunch of exercises designed to prevent recurrence of any of the six main injuries that have cost me substantial tennis-playing time in recent years. But with the convenience of Tivo I would probably watch it for a season or two in any event.

This past Monday night, however, I sank to depths previously unimagined by watching the Bravo reality show "Date My Ex - Jo and Slade" while running through my exercises. (OK, let's be honest - I've actually tuned in, for half to three-quarters of the program, on each of the last 2 Mondays.)

For sleaziness, stupidity, triviality, excruciating vapidity, and idiotic contrivance, "Date My Ex - Jo and Slade" is truly off the charts. It's pathetic. I don't see how any self-respecting, even moderately intelligent and discriminating person could watch it.

But self-respect is overrated, isn't it? And next Monday is already approaching.

Tempest in a teapot

Speaker Pelosi is saying that the GAO report that came out this week, indicating that two-thirds of all U.S. corporations pay no tax at all, "highlights the need to revisit tax reform to ensure that U.S. companies pay their fair share of taxes."

Now, I certainly agree about the need for tax reform, and for addressing corporate-level tax avoidance, but not based on the GAO report, which was truly a non-event. The fact that lots of corporations pay no taxes means next to nothing when lots of them may be small companies without significant profits. Even the fact that, according to the report, 25% of fairly large companies paid no taxes, while a bit more interesting, does not immediately make one excited given that we have recently had a bit of a recession.

The finding in the report that foreign-controlled U.S. corporations report lower profits than those that are U.S. owned is a bit interesting, and suggests (as the report notes) that the foreign companies may be using transfer pricing to shift profits out of the U.S. (Or perhaps they haven't been doing well here lately.) But I believe the comparison in the report is to U.S.-owned companies generally. A more interesting comparison would be to U.S.-owned multinationals, since they have roughly the same transfer pricing incentives and opportunities as the foreign firms. In other words, the key here may be multinational enterprise, not whether a company is treated as a U.S. resident or not.

Readers should also keep in mind that, insofar as transfer pricing is hurting U.S. revenues, one of its possible policy implications is that the U.S. corporate tax rate should be lower so the incentive to engage in it will be less. Tougher enforcement is also an option, but transfer pricing is notoriously difficult to do right - since there is no underlying there there - and it also leads to very costly compliance and litigation.

So let's have tax reform by all means (not that I expect it by any means), but intellectual honesty suggests not basing it on the GAO report's supposed findings.

Furman and Goolsbee on Obama's and McCain's tax and budget policies

In today's WSJ, lead Obama economists Jason Furman and Austan Goolsbee continue to use the Bush budget baseline (for reasons I understand but regret).

As readers can tell from my past posts, I disagree with plenty of what Obama is proposing, partly though not wholly because I have the luxury of not running a contested political campaign. But I certainly agree with the following paragraph in which Furman and Goolsbee address McCain:

"The McCain plan represents Bush economics on steroids. It has $3.4 trillion more in tax cuts than President Bush is proposing, largely directed at corporations and the most affluent. Sen. McCain would implement these cuts without proposing any meaningful steps to simplify taxes or eliminate distortions and loopholes. In addition, Sen. McCain has floated over $1 trillion in new spending increases but barely any specific spending cuts."

Okay, presumably unlike Obama, Furman, and Goolsbee, I would support McCain's proposed cut in the corporate tax rate to 25% if it were fully financed and accompanied by measures shifting more tax collection to owners and especially owner-employees. (See here, for example.)

But the most interesting bit for me in the above paragraph was the $1 trillion figure they offer concerning spending increases that McCain has floated. I am sure they have something specific in mind to back this up, although possibly the figure could be contested (most likely, on the ground that McCain shouldn't be treated as actually meaning what he said on the campaign trail). But the number surely does not include the costs for all the overseas military activity that McCain is eagerly planning. That stuff can add up (e.g., $2 trillion so far in Iraq).

McCain economist Doug Holtz-Eakin attempts to defend his side's relative budgetary integrity on the ground that they will cut spending vastly compared to the present path or Obama. Color me extremely skeptical. Taking into account the extensive military adventures that McCain, even if not actively planning, will nonetheless find himself irresistibly drawn into starting, the actual balance on projected spending may lie sharply in Obama's favor.

McCain betting odds

In light of the ignorant bellicosity that he's once again trumpeted in the face of the Georgia crisis (see here), I'd posit the following, if he becomes president:

--Over/under for the likely average number of wars we'll be engaged in at any given time during his presidency: 2.5.

--Likelihood of his using nuclear weapons: .3.

On the former, note that we're at 2 wars already (which he is reluctant to reduce to 1) and that he appears to want to fight Russia, China, Iran, and presumably Syria and North Korea.

On the latter, note that Cheney, his only Bush Administration near-twin for bellicosity (!!), reportedly pushed internally for the use of nuclear weapons against Iran. I wonder if the probability I offer is way too low.

The state we're in

The Washington Post has an article today entitled "Obama Tax Plan Would Balloon Deficit, Analysis Finds."

The key point: while Obama (with indisputable accuracy) denounces Bush's "reckless" economic policies that are "mortgaging our children's future on a mountain of debt," he is himself proposing tax changes that would add $3.4 trillion to the national debt, including interest, by 2018, as compared to present law (which has all those Bush tax cuts expiring after 2010).

So that it won't look so bad, Obama uses Bush's fiscal policy baseline, in which it is assumed that all of the tax cuts will be extended (and various other fiscally adverse policies adopted as well). Under the Bush baseline, Obama offers middle class tax cuts without increasing the national debt. (I.e., he finances his tax cuts by scaling back the ones Bush and McCain want to extend.)

Len Burman puts it well in the Post article: "Obama has criticized Bush for his fiscal irresponsibility, and now he's using Bush's baseline as a yardstick by which to measure fiscal responsibility."

Jason Furman, who is running Obama's economics shop and who obviously understands all this, defends using the Bush baseline as part of drawing a clear distinction with McCain, who plans to go way beyond the insane Bush baseline and add more than $5 trillion to the national debt over the next ten years.

And this in turn helps to show why the U.S. political and fiscal system are in such bad shape. As things stand, Obama is proposing unsustainable tax cuts (relative to the present law baseline). Yet he is being (a) trillions of dollars less irresponsible than McCain, and (b) attacked by the McCain campaign, based on repeated and shameless lies, as someone who is proposing to increase people's taxes. (The ads about the tax increase for people earning $42,000, recently exposed by independent fact checkers as having "multiple false and misleading claims," are simply par for the course.) So I'd have to agree that, with the bogus baseline and unsustainable tax cuts, Obama is nonetheless being about as fiscally responsible as it is politically feasible to be in a closely contested presidential campaign.

Gresham's law applies to baselines as well as money - the bad ones drive out the good. In the soundbite world of contemporary politics, you simply can't hold yourself to a more reasonable baseline and then try to explain the difference. No one understands, and no one cares.

This is why we are headed off a cliff - not because the fiscal situation is so bad (although it ain't good), but rather because the contemporary political environment makes rational problem-solving impossible.

And our system's pervasive and growing political failure is not limited to budgetary politics. Think gas prices and the McCain campaign's wildly dishonest use of the drilling "issue."

Not to sound old-fashioned, but to me our country's most serious problem is the decline of civic virtue, mainly on the right (where for many it's been replaced by Leninist ethics). The press and the public can't monitor Rove-style dishonesty and resulting destruction of rational dialogue about problems - you need people on each side who are reciprocally willing to limit it through a kind of cooperative quid pro quo. Instead we get chicken games that may end like the one in Rebel Without a Cause (only it will be the audience that goes off the cliff, not one of the drivers).

Right charge, wrong example

Obama is running an ad attacking McCain for proposing a $4 billion tax break for oil companies right when their profits are way up, and noting that McCain has just gotten $2 million in oil company executive campaign contributions.

I gather the $4 billion is computed simply by applying to the oil companies McCain's proposal to lower the corporate tax rate to 25 percent.

The actual story here is that McCain and/or the RNC got a huge flood of oil company campaign contributions (e.g., from 10 Hess Company executives each of whom gave the max) in the almost immediate aftermath of his flip-flop on offshore oil drilling. No doubt they are also grateful for his gas tax holiday demagoguery given the likelihood that they would pocket the benefit. But in fact their share of the corporate rate cut is not from a proposal that was aimed at them; rather, it's one applying more generally.

Presumably the ad uses the $4 billion figure taken from the general corporate rate cut proposal because the other items are harder to explain non-distractingly in a 30-second narrative.

A bit of an irony here for me is that I personally would favor the corporate rate cut if (a) fully financed so that it does not increase the fiscal gap and (b) accompanied by rules limiting the use of the corporate form as a low-rate tax shelter for high-income individuals (e.g., use of "reasonable compensation" rules to prevent under-payment of salary for tax purposes to high-bracket owner-employees). And I suspect I would oppose Obama's proposed windfall profits tax for oil companies, which the commercial also touts, if I knew more of the details - these tend to be gimmicky and not very good tax instruments.

The basic point of the commercial is important and correct, however, even if its policy content is questionable. McCain is in the tank (so to speak) for the oil companies in ways that lead him to make consciously dishonest proposals to benefit them, e.g., rationalizing the offshore oil drilling in terms of the price of gas when its effect on prices would be so deferred and trivial. And this is a relevant character issue, not just a policy issue.

David Gergen says the obvious

Gergen, not exactly a radical leftist, apparently said on TV this weekend: "When McCain's camp calls Obama "The Messiah" and "The One", he's really calling him "uppity." I'm from the South, and we understand what that means. That's code."

I'm not from the South and yet it's been totally obvious to me. This is the whole point of the "celebrity" dig. Why would McCain consider this a telling criticism, when we live in a celebrity culture, and when McCain himself, self-evidently, has long been a celebrity as well? Because, coming from him, it isn't "uppity." Indeed, not even "presumptuous" (another absurdly thin coding for the racial epithet).