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The True Function of the Corporate Income Tax

From Holman Jenkins at The WSJ, Harmonize this Eurocrats, 

What about the undoubted problem of companies like Apple shielding their globally earned profits behind a small country’s friendly tax regime? There’s a remarkably sanitary solution: Get rid of the corporate income tax.

Companies receive their revenues from their customers and distribute them to their suppliers, investors and employees. Thus corporate taxes can be eliminated in complete comfort that the revenue will pop up elsewhere as taxable personal income or taxable consumption expenditure.

The only real function of a corporate income tax is non-transparency. Taxing a company is a way for politicians to pretend they are not taxing any actual voter to pay for programs that voters find desirable as long as they seem not to come with a price tag.

Drop the pretense that citizens don’t have to pay for the amenities they want, and real harmonization becomes possible: The harmonization of tax and spending priorities in the direction of efficiently fostering the clean, peaceful, orderly and civilized countries that productive citizens enjoy living in.

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The New Trusts

from The Great Regression in The National Review by Victor Davis Hanson

As a result of liberal hyper-wealth, the new trusts are given veritable media and political passes on their embrace of practices once seen as illiberal and self-serving, like excessive electronic monitoring of our daily lives, offshoring and outsourcing wealth, monopolizing, and giving lavishly to candidates for public office to win exemption from regulations and tax law. Just because a master of the universe wears jeans, sneakers, and a T-shirt and tips his hat to Solyndra, sanctuary cities, or Black Lives Matter, that does not mean that his telos is any different from that of a Gilded Age monopolist. Hillary is Wall Street’s hedge-fund heroine; she resonates with Big Money in a way not seen since Warren G. Harding.

Yet for some reason, Silicon Valley’s products are deemed exempt from liberal notions of consumer liability, although it might be as easy for a nanny-state regulator to insert a motion-activated shut-off device in a smart phone as it is to install a trigger lock on a gun or to reduce the tar content of a cigarette. It is a toss-up as to which is the more deleterious to teenagers’ health: three daily cigarettes, or six hours on the sofa addicted to a video-game console, or walking in a busy crosswalk hypnotized by a smart-phone screen.

We should not delude ourselves that because a cocooned scientific elite has made startling gains in consumerism and technology, that therefore we the public are any freer, more socially and politically advanced, or somehow more ethical human beings.

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The True Cost of Low Rates

From Barron’s Stephanie Pomboy: A Grim Outlook for the Economy, Stocks by Leslie Norton

In the past rates that were too high were the trigger (for a financial crisis). Not this time. No. 1, we have basically bankrupted corporate and state and local pensions by having rates at these repressive levels. If you lay on top of that a decline in equity prices, there will be a scramble to plug holes in pensions. Obviously if a state or local government has to divert funds to plugging its pension, it won’t build more roads. The corporate sector has the luxury of kicking the can down the road, and because their spending has been on buybacks, not plants and equipment, the economy would suffer less. For S&P 1500 companies, the pension deficit is roughly $560 billion, but for state and local governments, it’s $1.2 trillion. According to the Center for Retirement Research, if you used a more conservative discount rate, the unfunded liability would go to $4 trillion.

No. 2, you’re pushing consumers to the brink as they try to save enough for retirement at zero rates. You’re already seeing a reluctant return to credit-card usage, a clear sign of distress—they are charging what they previously paid with cash. The credit-card delinquency rate is picking up.

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Stifling Inflation and Productivity

From The Reasons Behind the Obama Non-Recovery by Robert Barro in The Wall Street Journal

The main U.S. policy used to counter the Great Recession was increased government transfer payments. Federal social benefits to persons as a ratio to GDP went from 8.7% in 2007 to 11.7% in 2010, then fell to 10.9% in 2015. The main increases applied to Medicaid, Medicare, Social Security (including disability) and food stamps, whereas unemployment insurance first rose then fell. Unfortunately, increased transfer payments do not promote productivity growth.

The 2007-08 financial crisis was also followed by vast monetary expansion involving increases in the balance sheets of the Federal Reserve and other central banks. The Fed’s expansion featured a dramatic rise in excess reserves, used to fund increased holdings of Treasury bonds and mortgage-backed securities. Remarkably, the strong monetary growth came without inflation.

The absence of inflation is surprising but may have occurred because weak opportunities for private investment motivated banks and other institutions to hold the Fed’s added obligations despite the negative real interest rates paid. In this scenario, the key factor is the flight to quality stimulated by the heightened perceived risk in private investment.


High monetary growth without inflation happened because:

  1. High friction costs stifled investment. Included is the accumulation and addition of regulations and the uncertainty; every increase in regulation and taxation is followed by calls for more.
  2. The combination of low interest rates and higher friction costs meant that the prudent use of the cheap money was stock buy back rather than increases in productive investment. Misguided corporate incentives that pay for increased shareholder value rather than higher productivity or better return on assets (as opposed to equity) exacerbated this trend.
  3. Low velocity of money. Related to the above, individuals reduced debt and curtailed both consumption and investment.  The individuals still have some control.


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Known and Unknown Risks


No government policy can remove the risk of investment; the best they can do is not add to the risks by adding uncertainty to the environment.

The reason that strangers from all over the country will congregate to a blackjack table at a casino is not to avoid risk.  They seek risk, but every player seated at the table knows the rules and the rules never change. Actually they seek reward, but are more than willing to accept the risk that rides with it.

They know that if the dealer is showing a six and the player shows a ten, then the prudent risk is to double down.  If the player draws a nine and the dealer draws a five and a queen, the player loses.  That is a risk the player willingly accepts.

But if the player displays 19 and the dealer ends up with 19 and instead of calling a draw takes your money because the rules changed this morning, then this table and the casino will start to empty.

We are more than willing to take a risk when the rules are fixed, but are not willing to do so when the rules are either a) not known or understood or b) constantly changing.

Taxes and regulations are friction costs that decrease the return on investment and therefore make marginal investments less prudent.  Higher friction costs reduce incentives to invest  but this is limited  as long as they are stable and known.  We can still make prudent investment decisions if we know in advance what the costs are.

But when we do not know what the rules are, if they are constantly changing, and if every elected fool keeps harping on their desire to increase friction costs further, then the rules are never known or trusted and investment is stifled far more than from the mere friction costs the government imposes.

“You did not build that” is a clear signal that you do not deserve the fruits of your investment and are therefore obligated to return more of your profits to the government.  “The rich need to pay their fair share” is the echo of Occupy Wall Street that seeks further confiscation of investment returns.

Because of this added uncertainty from the bully pulpits, even a drop in friction costs may not create the incentive it normally would if investors have no confidence that it will last.  The tax cuts of George Bush had an expiration date.  This muted their effect especially as the deadline approached and the Democrats took control of Congress.  Nobody had faith they would be renewed.

And because of this uncertainty there is a preference for liquidity.  Investors prefer a vehicle they can turn to cash quickly; preferable for about $9 and a click on their computer.  Systemic uncertainty is a drag on housing prices, and is compounded by the collapse in housing prices in recent memory.  It is also a drag on starting a business which can be even more difficult to sell.

The stock market increase is driven by a number of forces; the liquidity preference, regulations which favor larger public companies, low interest rates which is fueling stock buybacks, and the absence of better investment alternatives.  Unfortunately, the one driver that is missing is increasing productivity and the main reason is that the systemic uncertainty and the friction costs has stifled the capital investment that drives long term wage and economic growth.

The Keynesian demand stimulation of cheap money has not stimulated production and investments in productivity. The stimulus of cheap money is perhaps offset by the increase in systemic uncertainty and other friction costs.  The left blames the depth of the 2008 financial collapse and refers to the claim of Reinhart and Rogoff from This Time It’s Different that such severe financially centered corrections are slower to recover.  But perhaps they are slower to recover because the same polices are enacted that do not work.

And they offer for consideration that we may entering a structural change that is unable to match the productivity gains of previous eras. This is the theme of Robert Gordon’s The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War . It seems that periods of stagnation create demands for explanations that avoid the accountability of the policies enacted to address the problem.

Still, there is a point to be made that we may be in the throes of a structural shift, but these transitions are never understood until they are well established.  The desire and pretense of intellectuals and policy elites to manage them does not clarify or illuminate them.  If we are in the midst of such structural changes then central policies will more likely serve only to obscure and delay the efforts of the economy to adjust.

Perhaps instead of Reinhart and Rogoff and Gordon, the elite should meditate on the messages in Matt Ridley’s The Evolution of Everything where spontaneous order is explored or Deidre McCloskey’s Bourgeois Equality which explores the underlying cultural principles of ethics and virtues in their role that led to the stellar economic growth we have experienced in the last few hundred years.

Instead of explaining why growth eludes us we should examine the effects of the policies we have enacted and better understand what worked before.