Tax reform to reduce income inequality.

[JohnRoberts]

Simulating the Elimination of the U.S. Corporate Income Tax
Hans Fehr, Sabine Jokisch, Ashwin Kambhampati, Laurence J. Kotlikoff
NBER Working Paper No. 19757
Issued in December 2013
NBER Program(s):  CF
We simulate corporate tax reform in a single good, five-region (U.S., Europe, Japan, China, India) model, featuring skilled and unskilled labor, detailed region-specific demographics and fiscal policies. Eliminating the model’s U.S. corporate income tax produces rapid and dramatic increases in the model’s level of U.S. investment, output, and real wages, making the tax cut self-financing to a significant extent. Somewhat smaller gains arise from revenue-neutral base broadening, specifically cutting the corporate tax rate to 9 percent and eliminating tax loop-holes.

paper available for $5 here http://www.nber.org/papers/w19757

A simplified explanation here:

http://www.aei-ideas.org/2013/12/corporate-tax/

Stated differently, in our model, eliminating the U.S. corporate income tax has the potential to raise the welfare of all US gen-erations.

Is it too early to complain about the state of the Union address (maybe a little).

I expect more of the same class warfare, and use of government force to redistribute wealth. Unfortunately the government can not mandate outcomes, and will create even more negative consequences from putting their heavy thumb on the free market scale.

Corporations do not pay taxes, they pass those costs along to their customers, invest and hire less, and pay their employees less. Raising the minimum wage for MacDonald's will just speed up the adoption of robot burger flippers.

Eliminate the corporate tax, with all  it's BS loopholes will have the side effect of reducing crony capitalism and Big business advantage over small business. I doubt congress would be very receptive because there would be less lobbyists too.

or not.

JR

 

[Scodiddly]

Nobody in the mainstream media seems to take exception with the fact that a lot of money has moved from the middle and lower classes to the very top. I'd call that a rather extreme form of income redistribution, or perhaps class warfare.

 

[JohnRoberts]

Nobody in the mainstream media seems to take exception with the fact that a lot of money has moved from the middle and lower classes to the very top. I'd call that a rather extreme form of income redistribution, or perhaps class warfare.

This is not a zero sum fixed pie, that the wealthy are taking (pie) from the less wealthy. The pie is growing larger (more total wealth) and the wealthy are gaining more wealth faster than the poor. There are any number of reasons for this, a few obvious ones the wealthy are better educated and more capable of dealing with change.

I do not consider the mainstream media authoritative, or even a fair observer. I posted a stat a few weeks ago about the percentage of the entire world that has been lifted out of deep poverty, simultaneously with the US factory workers and unskilled laborers not improving their lot much at all.

It is the natural order for smarter, harder working people to do better. I wouldn't want to line in a world where this wasn't the case. During my brief tour in the military it did not strike me as much of a meritocracy.  :'(

I suspect this "income inequality" screed makes a very attractive political argument for the government using force to transfer wealth to people who externalize all the fault for their personal circumstance.

I posted the above academic paper from a bunch of real economists demonstrating how government could actually improve the economic outcome for typical workers. This may be counter intuitive but raising the minimum wage will just make less minimum wage jobs... reducing taxation on business will instead generate more investment and more good paying jobs.

This is not my theory, but I remain pretty confident that the current administration "helping" us all will just dig a deeper hole for us to be stuck in. Look at their record.  Ironically perhaps this administration's actions to try to turn around the economy by asset inflation, has helped guess who disproportionately? The wealthy started out with more assets, so inflating all assets made them even wealthier. I think his first term was very good to the wealthy. Kind of convenient for his arguments now, while I do not give him that much credit. 

But again... i do not want to argue politics (that's all politics is, argument without much solid factual basis). This economic paper shows how corporate tax policy hurts workers, investment and job creation. But congress profits from the complexity of tax policy to keep the lobbyists trying to win their favor. 

JR

PS I saw Bill Gates on an interview show and that is one smart dude... He is getting close to wiping out polio in the world but the Taliban in Pakistan are killing medical aid field workers.  He made some observations about world population growth  and suggests that we are near peak (world) birth rate so total world population will finally flatten out (in something like 40 years). The next century should get interesting. In the near term we (the US)  need immigration to keep our birth rate up, and we need to get education working better since we still have many skilled labor jobs that remain unfilled today, and this will just get worse.

 

[gyraf]

Problem with commonly used economic models is that their predictions are completely whacky - and that you probably can select a suitable model for any outcome that you'd fancy. But models are used anyway as a political steering tool, as the outspoken "expected" results has a high grade of self-fulfillment  ;D

Note that the models themselves are "selected" politically, and through economics-as-science lends credibility (or even un-avoidability) to any political agenda you need legitimized.

Economics is NOT a hard science, contrary to common belief and "marketing". Not even close.

Jakob E.

 

[living sounds]

I think the increase in overall buying power may often be overstated. Things that have are supposedly cheaper now are very often of inferior quality and have externalities built-in that will haunt humanity in the future. Food production today for example is largely a game of what you can get away with, in terms of the product itself as well as the environmental damage you leave for future generations. The short-life-cycles and lack of fixability of modern tech gear make them a lot more expensive if you consider larger time-frames. And commodities overall have not become less expensive either.

What has happened is that the super-rich and multi-nationals have used their influence and global infrastructure to get tailor-made-legislation, massive tax breaks and enriched themselves whereever possible by exploiting government assignments to their advantage.

The numbers clearly show this the reason for inequality, more tax breaks will make it works. You can look at a plethora of similar "studies" from the last 40-50 years predicting growth, employment and equality via tax breaks, offshoring etc., but it's actually all hogwash. Made by the super-rich and corporate special interests to further their own destructive agenda.

 

[JohnRoberts]

Problem with commonly used economic models is that their predictions are completely whacky - and that you probably can select a suitable model for any outcome that you'd fancy. But models are used anyway as a political steering tool, as the outspoken "expected" results has a high grade of self-fulfillment  ;D

Imperfect as it is very difficult to eliminate and isolate all variables to extract pure economic findings, but there are recent examples in the world where a country has lowered business taxes and seen the increase in investment and employment. That could be explained partially by relative competitive advantage (in a free market assets pursue the best return) but the authors opined that if the entire world dropped all business taxes the US would still come out ahead.

Note that the models themselves are "selected" politically, and through economics-as-science lends credibility (or even un-avoidability) to any political agenda you need legitimized.

Indeed, the second link is from a business friendly right leaning organization, who "liked" the conclusions. The original paper was published by a more centrist or slightly left leaning organization. While it is the nature of opinion wranglers to group with like minded souls. This is not a politically motivated study IMO, it is so counter-intuitive and unlikely to be popular with the political class, since it takes power from them.

Economics is NOT a hard science, contrary to common belief and "marketing". Not even close.

I have long pointed out the softness in economics, which makes it hard to discern and apply, for reasons I've already stated, we rarely have only one variable, and corporate taxes are likewise not then only factor affecting business investment, hiring, and pay decisions. That said I do not think this study is "whacky" while it is unexpected. The common understanding is that wealthy business owners pay corporate taxes, not the customers and workers.

Many of us here own or operate businesses. What would we do with lower costs? Yes, taxes are a cost to business. We could lower the price of our products and sell more,  ;D invest more in additional products,  hire more help, etc. 

If we actually want to help the unemployed and underemployed (fast food work is not a career), we need a private economy small business sector running on all cylinders. All I have seen for the last several years is government acting like a sea anchor on business, and this political debate about relative wealth is setting up for more taking by government force from those with success , rather than creating the environment for those without success yet to succeed.

The rich people are not holding poor people back, it's the government with all it's misguided help.

Of course maybe I'm wrong.

JR

Jakob E.

PS: people are getting nervous about the market correcting, blaming it on a softening in emerging market economies. It feels to me like a  relative currency valuation issue, where increasing interest rates here will make the US dollar stronger, and conversely all other currencies weaker. One thing I have seen increasingly in recent years is high correlation in markets (perhaps caused by investment vehicles to reduce differences and risk which is ironic). If some small country central bank does not have enough reserves to defend their currency against the rising dollar, stuff happens. I expect the west to keep pumping liquidity into the system. Europe is concerned about deflation now, so I expect them to adopt a Bernanke-like bond purchase program. If the majors keep pumping, the small countries will dodge the bullet, but we are nowhere near recovered from the 2007-8 economic collapse. It's hard to get off the medicine, and just reducing the dose of medicine (tapering) is having repercussions around the world..  Of course opinions vary.

 

[JohnRoberts]

I think the increase in overall buying power may often be overstated. Things that have are supposedly cheaper now are very often of inferior quality and have externalities built-in that will haunt humanity in the future. Food production today for example is largely a game of what you can get away with, in terms of the product itself as well as the environmental damage you leave for future generations. The short-life-cycles and lack of fixability of modern tech gear make them a lot more expensive if you consider larger time-frames. And commodities overall have not become less expensive either.

A rather dark view. Advances in technology have delivered huge cost reductions for us all.

Leaving behind a massive debt obligation for future generations is another disservice.

What has happened is that the super-rich and multi-nationals have used their influence and global infrastructure to get tailor-made-legislation, massive tax breaks and enriched themselves whereever possible by exploiting government assignments to their advantage.

ding ding ding... Crony capitalism is bigger than ever.  Eliminating the corporate tax code in one step, eliminates a huge infrastructure of competitive advantage that big business has paid for with lobbyists and enjoyed for years. Level the playing field and small business that hires more workers will prosper.

The numbers clearly show this the reason for inequality, more tax breaks will make it works. You can look at a plethora of similar "studies" from the last 40-50 years predicting growth, employment and equality via tax breaks, offshoring etc., but it's actually all hogwash. Made by the super-rich and corporate special interests to further their own destructive agenda.

The numbers do not show anything of the sort.  Equality of outcome is not the expected result from a merit based system. Workers should be compensated for the wealth/value they create, not "to all according to their needs". They tried that before and it doesn't work.

We agree ( I think) that big business has too much influence over government, but the answer is not to attack all business. Just like the better educated wealthy do better than less skilled poor, big business will do better than small business precisely because of their wealth that helps them negotiate legislation.

I am repeating myself but the one good concept from the occupy movement was demanding a "separation of business and state", just like the already practiced separation of church and state.

Reducing the complexity and gamesmanship from the tax code, will reduce the influence of big business.

But like i said I don't expect government to embrace reducing this honey pot (lobbying)  for campaign funds, nor do I expect the voting public to understand this. I just find the income inequality arguments yet one more political excuse for government taking by force. 

lets all hope I'm wrong...

JR

 

[JohnRoberts]

Bernanke just announced another $10B taper at his last fed meeting before Yellin takes over.

As I am reminded by some here economics is not a hard science, but I still try to use it as a filter to understand how the world economies work (or don't work).

Helicopter Ben's quantitative easing is hard to describe as anything other than "price fixing". The fed has a $4T balance sheet of our own debt that they bought to prop up sovereign debt prices (hold down interest rates).  So without free market price discovery of real interest rates , who knows where we will end up when this accommodation finally gets unwound?

Price fixing rarely ends well, we'll see if this time is different.  8)

So far so good, so good luck to us all...  I hope this QE dies not turn into a "Hotel California" government program... (you can never leave).  At some point the orderly unwinding of this balance sheet could get volatile if/when real market forces take over again.

or not...

JR

 

[Spiritworks]

Let alone now the push is on from on-high to raise the minimum wage. The real push seems to be to eliminate the free market completely.

 

[Gustav]

I don't think basic micro- and macro economical mechanics are suspect, but it might depend on how hard you want your science to be. The distinction between those and the more philosophical aspects of economics seems to have been blurred quite a bit, though.

For example - Statements like "Its not a zero sum game" to make an argument seems like it rests on a broad, utilitarian model and an economic fact. The dynamics of pricing changes when wealth is concentrated, and I can easily imagine scenarios where it leaves the poor even poorer qua relative purchasing power and the value of goods or any number of variables. I can also imagine a scenario where principles would trump utility, even if the pie grew larger.

Personally, I am more concerned about all the money that is currently being made strictly from moving around money, and the clear path that has been plowed for moral hazard, than I am about minimum wages.

I still hope it turns out, that Marx was right about capitalism

Gustav

 

[JohnRoberts]

Personally, I am more concerned about all the money that is currently being made strictly from moving around money, and the clear path that has been plowed for moral hazard, than I am about minimum wages.

no argument... crony capitalism is bad...  I really dislike high speed stock trading.. theft in small bites.

I still hope it turns out, that Marx was right about capitalism

Gustav

Not sure I can support comrade Karl Marx.. maybe the ideas of Groucho Marx... not Karl.

JR

 

[bruno2000]

Personally, I am more concerned about all the money that is currently being made strictly from moving around money, and the clear path that has been plowed for moral hazard, than I am about minimum wages.

no argument... crony capitalism is bad...  I really dislike high speed stock trading.. theft in small bites.

I still hope it turns out, that Marx was right about capitalism

Gustav

Not sure I can support comrade Karl Marx.. maybe the ideas of Groucho Marx... not Karl.

JR

I think he meant Harpo.  Wasn't he the one who didn't talk?
Best,
Bruno2000

 

[Gold]

I like how a thoroughly human creation like a monetary system is beyond comprehension by humans. Economists try to understand what is going on and can't agree. There is the more mathy stuff like central banks do and there is softer stuff at the intersection of monetary policy and social outcomes.

 

[Gustav]

I still hope it turns out, that Marx was right about capitalism

Gustav

Not sure I can support comrade Karl Marx.. maybe the ideas of Groucho Marx... not Karl.

JR

In the context of this thread, I was referring to his analysis of capitalism as the most effective driving force of efficient production and technological development.

But now, bankers in general seem to be making more than scientists and engineers.

Gustav

 

[JohnRoberts]

I still hope it turns out, that Marx was right about capitalism

Gustav

Not sure I can support comrade Karl Marx.. maybe the ideas of Groucho Marx... not Karl.

JR

In the context of this thread, I was referring to his analysis of capitalism as the most effective driving force of efficient production and technological development.

He was such a fan he advocated violent overthrow of it. 

But now, bankers in general seem to be making more than scientists and engineers.

Gustav

Yes, that is disappointing but in a free market they are being paid to create value however esoteric. Sometimes that value is imaginary (like Madoff ) and they must be driven from the temple.  It's hard to grasp the riches showered on high profile artists and athletes.

If I get your point, capitalism may be flawed, but is the best system there is to grow the economy. We clearly need more of this growth to pay for government's bad spending habit. For government to throttle capitalism is like killing the golden goose. Some in government are too accommodating (crony capitalism), others not enough (punitive regulation). Not simple, apparently.

JR

PS: China is an interesting example of a government trying to use capitalism to create wealth, while not allowing for a fully free market. It continues to be interesting to watch as they even more powerful. If anyone thinks they will be a benign force for good, just look at history. 

 

[JohnRoberts]

I like how a thoroughly human creation like a monetary system is beyond comprehension by humans. Economists try to understand what is going on and can't agree. There is the more mathy stuff like central banks do and there is softer stuff at the intersection of monetary policy and social outcomes.

Economists are not the only ones who do not agree with all of their peers. We often do not agree about physical things like the finite science surrounding audio electronics. I believe the mechanics of monetary systems are painfully understood by central bankers around the world, but they have limited capability to alter a given currencies trajectory. The value of a given currency when allowed to trade freely against other currencies is relative to all others, so an individual nations ability to alter the value of the currency is limited to what they can do locally.

An obvious example of this is what is going on in Turkey tight now. Turkey central bankers just massively increased their interest rates to prop up the value of their Lira and prevent the declining value.  But this is not without consequences internally and externally. Externally this will hurt trade as their exports become harder to sell. The higher cost of money internally will damp business growth and may cause the economy to contract. In fact if they continue on their current path a recession is very possible. This is obviously undesirable and not popular, but apparently they consider this medicine less onerous than allowing the currency to collapse.

The elephant in the room is that this ultimately comes down to a relative power game. The larger the world economy the more ability to manipulate currency valuations.  China has been guilty of managing exchange rates and over the last several years has been relaxing exchange rates to get closer to the real rate.

The US monetary policy can and does have consequences around the world. I see more than coincidence with the US fed tapering and the softness in emerging markets. As I have offered we in the tail end of the largest monetary "price fixing" experiment in history (The US fed kept the price of US sovereign debt high by being the marginal buyer ourself.).  It still stands to be seen if Janet Yellin can unwind Bernanke's $4T balance sheet of sovereign debt without losing control of the price.

Interesting times, and good luck to us all...

JR