from The Great Degeneration by Niall Ferguson
Experts on economic competitiveness, like Michael Porter of Harvard Business School, define the term to include the ability of government to pass effective laws; the protection of physical and intellectual property rights and lack of corruption; the efficiency of the legal framework, including modest costs and swift adjudication; the ease of setting up a new business; and effective and predictable regulations. It is startling to find out how poorly the United States now fares when judged by these criteria. In a 2011 survey, Porter and his colleagues asked HBS alumni about 607 instances of decisions on whether or not to offshore operations. The United States retained the business in just 96 cases(16%) and lost it in all of the rest. Asked why they favored foreign locations, the respondents listed the areas where they saw the U.S. falling further behind the rest of the world. The top ten reasons included:
- The effectiveness of the political system
- The complexity of the tax code
- The efficiency of the legal frameworks
- Flexibility in hiring and firing
from The Wall Street Journal, Fred Barnes writes The No-Growth Democratic Party
In 1997 President Bill Clinton signed the Taxpayer Relief Act, cutting the tax rate on capital gains to 20% from 28%. Senate Democrats voted 37-8 in favor of the bill. House Democrats backed it 164-41. In 2015 Mr. Clinton’s wife, Democratic presidential front-runner Hillary Clinton, wants to raise the current 23.4% rate on capital gains, nearly doubling it for wealthy investors.
In 1982 Sen. Bill Bradley and House member Dick Gephardt, both Democrats, unveiled an ambitious tax-reform plan that would spur economic growth by eliminating loopholes, broadening the tax base and reducing the top rate on individual income to 30% from 50%. What Mr. Bradley and Mr. Gephardt started, President Reagan and Congress finished in 1986. A bipartisan tax-reform package was enacted, with a top rate of 28%.
Now Democrats have a new definition of tax reform. “They want to broaden the base and raise tax rates,” says Douglas Holtz-Eakin, the former head of the Congressional Budget Office. Rather than promote economic growth—a goal of Mr. Bradley and Mr. Gephardt—this approach is almost certain to hamper it. After nearly seven years of sluggish growth during the Obama era, the party seems to think that even an anemic 2% annual increase in GDP is too much.
From Robert Samuelson at The Washington Post, The coming middle-class tax increase
There is a broader message here. Both parties have constructed rationales for avoiding middle-class tax increases, which would be highly unpopular. It’s not that these rationales are illegitimate: The effect of tax policies on economic growth is clearly important; similarly, redistribution is a central function of the welfare state. But the resulting tax policies don’t come close to covering the real costs of government.
For all their soak-the-rich talk higher taxes on the rich will raise revenues minimally and will barely impact inequality. If they raise it too high production and investment – and its accompanying job and wage growth - suffer and the outcome is totally counterproductive.
With tax rates where they are lower rates, even with fewer deductions, will still leave lower revenues even when scored dynamically. There is the further risk, rarely addressed, that the voters and investors have such little confidence that the rates and the policy will remain unchanged for very long that they are less likely to respond to tax incentives in any long term way. They have become jaded at tax reform.
There is one other option that Samuelson omits: reduce payments from the welfare state to only those that truly need it. There are many benefits that are aimed at middle class tax payers. As the author noted there is no way that revenues can be significantly raised without the middle class paying a significant portion- one way or the other.
from the Wall Street Journal, The Corporate Tax Political Divide
‘Why is the tax code making it better for foreign companies to invest in the United States than U.S. companies?” That was the pungent question posed by Pfizer Chairman and CEO Ian Read in an interview last week with this newspaper. Washington has no good answer, and President Obama shows no inclination to reform the worst system of corporate income taxation in the industrialized world. So Mr. Read’s Pfizer, currently located in New York, is considering a merger with Dublin-based Allergan. Basing the combined company in Ireland would free up more cash for shareholders, employees and research.
And yes, moving the business overseas would ironically make it easier to invest in the United States, thanks to the insane tax burden the Treasury now applies when U.S. firms want to bring profits back from overseas and invest them at home.
Mr. Read was speaking in general terms and not discussing the particulars of the potential merger his firm is now discussing with Allergan, but he neatly explained the competitiveness problem faced by U.S. companies. He noted that after paying Irish corporate income taxes, a firm based there still retains roughly 88 cents on each dollar of profits, which it can choose to invest in the U.S.
But if a U.S. company makes the same dollar in Ireland and pays the same local tax to Irish authorities, its 88-cent after-tax profit gets whittled down to 65 cents if the money is invested in the U.S. That’s because the U.S. is one of a small handful of tax collectors worldwide that demands to be paid even after a domestic company has already paid the overseas territory where it made the money.
Economist John Cochrane
From John Cochrane at The Grumpy Economist, Economic Growth
This is part of a 10,000 word essay that is worth every second of the time it takes to read.
The central goal of a growth-oriented tax system is to raise the revenue needed to fund necessary government spending at minimal distortion to the economy, and in particular minimizing the sorts of distortions that impede the growth process.
A first objection comes from those who want to pair reform of the code with substantial rises in overall revenue. This has been the main stumbling block to tax reform under the Obama Administration.
Second, our tax code mixes raising revenue with a host of special provisions designed to encourage specific activities and transfer income to specific groups or businesses. Objections come from those who what to preserve one or another subsidy, deduction, or exemption.
Third, our tax code mixes raising revenue with efforts to redistribute resources across income and various demographic classes.
The result is paralysis. The answer lies in separating the arguments. One could go so far as to separate the actual legislation.
First, we should discuss the structure of the tax code separately from the proper level of revenues. Let us agree that we will eliminate deductions and exemptions and have three brackets. Start with a revenue-neutral code. But agree that we can separately and much more frequently adjust the rates, which adjust the overall level of revenues.
Second, we should separate the tax code from the subsidy and redistribution code. Let us agree, the tax code serves to raise revenue at minimal distortion. All other economic policy goes into the subsidy code. And subsidies should be on-budget and explicit. So, you want a subsidy for home mortgage interest payments? Sure, let’s talk about it. But it will be an on-budget expense — we will send checks to home buyers if we do it. You want to give $7,500 to each purchaser of electric cars? Sure, let’s talk about it. But it will be an on-budget expense. We will send $7,500 checks to electric car purchasers if we do it.