Monday, January 23, 2017

Paul Ryan’s Two-Faced Comments on Auerbach’s Tax

Page 15 of the tax portion of A Better Way makes this claim:
This Blueprint represents a dramatic reform of the current income tax system. This Blueprint does not include a value-added tax (VAT), a sales tax, or any other tax as an addition to the fundamental reforms of the current income tax system. The reforms reflected in this Blueprint will deliver a 21st century tax code that is built for growth and that puts America first.
A few lines later, it makes this claim:
The focus on business cash flow, which is a move toward a consumption-based approach to taxation, will allow the United States to adopt, for the first time in history, the same destination-based approach to taxation that has long been used by our trading partners. This will end the self-imposed unilateral penalty for exports and subsidy for imports that are fundamental flaws in the current U.S. tax system. The new tax system also will end the U.S. taxation of the worldwide income of American-based global businesses
So is the Destination-Based Cash Flow Tax, an income tax or a consumption tax? And why is Speaker Ryan contradicting himself within the same page? I earlier praised Joel Trachtman for articulating the legalese of whether this proposal would violate WTO rules:
The ability to tax imports and exempt exports –known as border tax adjustments—is permitted under World Trade Organization rules, but only for taxes on a product, such as a sales tax (as opposed to income taxes). Many of the U.S.'s major trading partners tax imports while exempting exports because they have a system of what are called value-added taxes, which act like a sales tax on goods (but are collected in stages along the production chain). Value-added taxes are understood to be taxes on a product and are eligible to be border tax adjusted: they are rebated on exports and applied to imports as the product crosses the border. Relying on corporate income taxes has precluded the U.S. from applying similar border adjustments—a fact the GOP blueprint aims to rectify. But, whether the border tax adjustments in the blueprint are deemed legal from a World Trade Organization perspective will depend on a core interpretation: Is the tax in question an income tax or a tax on a product? While some argue that the business cash flow tax is economically equivalent to a value-added tax, legally it does not seem possible to characterize it as a tax on a product under the World Trade Organization rules. It is a tax on a firm, calculated by reference to firm-based attributes under a new and simplified definition of net income, but a definition of net income nonetheless. Moreover, imports would face 20% tax on their price with no deductions while domestic producers would be able to deduct most expenses — including payroll — from the tax base. This discriminatory treatment could also make the import border adjustment illegal under the international rules.
Reuven Avi-Yonah and Kimberly Clausing have a longer discussion that reaches the same conclusion. These authors also wondered why Speaker Ryan does not simply call this a consumption tax with a labor subsidy. The answer might be simply politics – Speaker Ryan has always wanted to get rid of the corporate profits tax replacing it with a consumption tax. But of course Speaker Ryan does not have the political courage to just say so. No wonder President Trump finds this too confusing. The tax’s main political proponent has never been exactly honest about what his agenda is. I stand by my second post on this topic:
I think the real issue here is that this proposal smooshes together two very different ideas sort of like how shimmer was a floor wax and a dessert topping

Sunday, January 22, 2017

What are the "Alternative Facts"?

The lies of Sean Spicer, Kellyanne Conway and Donald J. Trump are not meant to deceive. They are manipulative displays that operate at a pre-linguistic level of communication. Conway's "alternative facts" are best understood as the equivalent of chimpanzee poo-flinging:
In short, what appears to be the main reward for throwing is the simple ability to control or manipulate the behaviour of the targeted individual (ape or human). For example, in our laboratory, chimpanzees will patiently wait for strangers or visitors to approach and then will throw at them. They do not conceal their intentions and they will often stand bipedal and threaten to throw by cocking their arm with the projectile in their hand in preparation for throwing. The passers-by can see this and will often try and negotiate with the chimpanzees to put down the projectile, or they will try to trick the ape by stopping, then dashing rapidly past the ape enclosure. This seems to be the reaction the apes hope to get from the humans and, in operant conditioning terms, is the only ‘reward’ the chimpanzees receive for throwing. 
Neurologically, throwing is complex because it demands coordinated precision in timing the velocity and release window of a projectile in relation to the speed of movement and distance of the target (i.e. prey). Some have suggested that the increased selection for neural synchrony of rapid muscular sequencing routines associated with actions such as throwing are similar to the motor programming demands of language and speech, and therefore engage similar neural systems, notably Broca's area. 
Kellyanne Conway demonstrating how to put extra "spin" on a fecal projectile. 
Cognitively, we believe that the development and acquisition of throwing skills by chimpanzees operates in a manner similar to the emergence of manual gestural communication. As noted previously, the motivation for throwing in chimpanzees is largely to alter the behaviour of other individuals (be it human visitors or conspecifics). For this reason, the apes that have learned to throw have acquired an ability to understand how their behaviour affects the behaviours of others. 
People really need to learn to stop trying to "refute" the "alternative facts" that are being flung. Shit is shit. You cannot refute feces.

The Worst Human Being Ever Elected President Of The USA

That would be Donald John Trump, and I mean this judgment on a pretty traditional moralistic basis.  It may be obvious, but maybe not.  Anyway, I want to get this off my chest before we simply get swamped with all the probably bad policy things he will be doing in the near future.

Before I dump on him, let me note at least one more or less good thing, the same one that Hillary Clinton was able to come up with at the end of the second debate when asked to say something nice about him: he does seem to have been a mostly good father, at least to his oldest three children.  Now I could get off on some of his creepy remarks regarding Ivanka, and I am not sure how moral his two older sons are, although they do not seem to be unhappy or deranged or anything.  Tiffany seems to be somewhat estranged and off, but basically OK as well, I guess, and while some have been huffing and puffing about Barron not paying much attention at the inauguration, well, he is only 10, and I wish him the best. Anyway, not obviously bad as a dad.

I am mostly of the mind that sexual conduct is irrelevant to someone;s ability to  lead a country, and many world leaders have had scandalous sex lives reflecting their huge egos associated with lots of out of control sexual activity.  And we have certainly had some other presidents with records of apparently lots of extramarital sexual activity, notably Harding, JFK, LBJ, and Clinton, with probably some others in there as well, but with their activities unreported.  There were others that had reported affairs, notably FDR and Ike.  But Trump's activities have involved more flagrant contempt for women than any of these, with his nasty remarks, such things as wandering into the dressing rooms of the Teen Universe festival, and more accusations of rape than the others. Clinton has Paula Broderick, but Trump has his first wife, who withdrew the charge she initially made, and then a reputed underage woman whose name remains unrevealed, who was to bring a suit but pulled back.

As it is, noting a very conventional measure, he is the first president to have been divorced twice, both times following his cheating on existing wife with subsequent one.  The only other one to get divorced at all was Reagan, who was in Hollywood and only did it once.  There is, of course, the highly questionable conduct of Jefferson with Sally Hemings.  But I note that it was against the law to marry a slave in those days, although I suppose he could have freed her.  And there was the very odd detail that she was the half sister of his late wife.   As it is, I still know some old and conservative people in Virginia who refuse to accept the evidence that he fathered her children.

Bringing that up does bring up one area where Trump has been better than a whole bunch of our former presidents, including four of our first five: he has not owned any slaves.  But then I would argue that people should be judged by the standards of their times and compared to others of their times.  Certainly in terms of their views regarding policies, most earlier presidents were more sexist and homophobic and racist than Trump, if for nearly all of them less compared to other people of their periods than is Trump now compared to people of this time.

Of course many earlier presidents have done some pretty horrible things as president, and it may come to pass that Trump will not do things as bad as these.  John Adams, the only non-slaveholder among our first five presidents, signed the Alien and Sedition Acts.  Jackson forced Native Indian tribes to move with many dying on the Trail of Tears, a policy much admired by Hitler.  Lincoln suspended habeus corpus.  Wilson approved the Palmer raids.  FDR set up the internship camps for people of Japanese descent.  Truman dropped atomic bombs on Japan.  Nixon broke into competitors' offices and then lied about it. W. Bush invaded Iraq, and more.  For some of these things Trump has supported similar policies, if not too likely to fully follow through on them.  So, he has advocated making it easier to  sue the media for libel.  He has advocated a new Trail of Tears to deport massive numbers of people. He has suggested bringing back and expanding torture, as well as loosening various civil liberties in order to fight terror. But already on some of these he appears to have backed off. And, of course, some of the worst of these things were done in the midst of wars far worse than what we are involved in now, when, well, war is hell.

So where does he really look clearly worse than any of the rest in his personal moral conduct?  Well one of the biggest is his lying and another is his crookedness and financial corruption.  The best defense is an offense, and it is not at all surprising that among the memes he pushed at the GOP convention and regularly supported by his supporters who have  chanted "Lock her up," even at the inauguration when she appeared, was that HRC was a liar and a crook.  Well, she certainly did make some false statements, and she and Bill also had an unpleasant money grubbing aspect that reflected itself in everything from walking off with stuff from the WH when they left it and her abysmally stupid paid speeches to Wall Street banks, although the charges against them regarding their foundation look about as silly as the ones against her about Benghazi and her emails, especially when compared with the corruption and absurdity of his foundation, now being shut down.

But various studies showed Trump to be by far the biggest liar of all of the 23 candidates last year, with only Ted Cruz close to him.  He told so many lies that one could not keep track of them. The minute there was outrage about one, he would be issuing another. He has already put two out since his inauguration, one about the numbers attending and the other that it was the media who falsely claimed that he had differences with the CIA.  He has lied so frequently that the minute one is getting outraged by one lie, he puts out another.  One eventually just says, "Oh, there he goes again," and his supporters, those at least who realize he is lying a lot, simply view it as an acceptable part of his personality showing that he is strong, or something.  He can get away with it, good for him!

Certainly other presidents have lied, often about substantial policy matters, such as LBJ prior to the Gulf of Tonkin resolution that was used to justify the escalation of the Vietnam War.  But I cannot think of another president with such a record of just lying all the time repeatedly almost every other day, not a one.  If somebody can name one, please be my guest, and unfortunately it looks like Trump plans to continue doing it big time, which could end up having some really bad consequences.  It is one thing to lie as a candidate, and the number of presidents who broke campaign promises is  huge, but lying repeatedly, especially if he does it to foreign leaders, well, we simply have not see this, not remotely on this scale anyway.

Another is his level of his financial corruption and crookedness.  The simplest case of this is the simply enormous number of contractors he has shafted and not paid, or paid way less than they were legally owed, over the years.  This is fraud and theft, and while he has paid numerous fines for all this, he has not been in jail, and he has somehow managed to turn this into "being a good businessman," despite his numerous bankruptcies.  Oh, he did get nailed on his seriously fraudulent "university," but got off lightly with only paying $25 million, when the losses of those he defrauded on that far exceed that amount.  On top of this we have his refusal to release his tax returns, not illegal, but justified with something phony, that he cannot because he is being audited when that does not prevent one from doing so (Nixon did so)  We have suspicions of him being seriously in hock to a foreign power (Russian oligarchs, who reportedly poured money into his org after his 2009 bankruptcy when US banks refused to lend to him).  And he has not sold off his holdings or even put them in a blind trust, instead putting his sons in charge of his business dealings.  With foreigners openly staying at his hotel in Washington to curry his favor, he looks to be the first and only president to be blatantly in violation of the emoluments clause of the Constitution.  The presidencies of Grant and Harding were notorious for their corruption, but most of that involved their cronies and appointees, not them personally, and as it is Trump's appointees may well give the people in those administrations a serious run for their money.  This bodes to be by far the most corrupt administration ever, with the stink starting from the top, not bubbling up from the bottom.

Finally there is the matter of his completely unacceptable personal insults of other people.  He has made many, but the two that really stick in my mind are his slam on John McCain for getting captured during the Vietnam War and his very recent blast at John Lewis for being "all talk and no action."  But there have been many others.  Now maybe if previous presidents had had access to twitter, they would have been just as obnoxious and awful as Trump has been, but I doubt it.

Anyway, I could go on, but I would simply challenge anybody, any Trump supporter, anybody, to name another president who was a worse human being on moral grounds than Donald J. Trump.

Oh, I do have one figure to compete with him at the presidential level, but only a candidate and vice president.  That would be Aaron Burr.  He killed a political rival (Alexander Hamilton) and, after Jefferson dumped him as VP, he was arrested for treason in 1807 for plotting to lead a secession of portions of the Louisiana territory, although he was not convicted as he had only plotted it and not done it.  Heck, maybe Trump is even worse as a human being than that bad actor.

Barkley Rosser

Auerbach’s Tax and the Clone Wars

Menzie Chinn introduces a new asset to economist blogging. Joel Trachtman provides an excellent discussion of whether the Destination-Based Cash Flow Tax violates WTO rules concluding that it does. He adds:
If enacted, the plan would likely lead to lengthy litigation at the World Trade Organization. A (likely) ruling that the tax is an income tax, and is applied in a discriminatory manner, would mean that exempting exports would be considered an illegal subsidy and taxes on imports an illegal tariff. This could lead to trade sanctions against the U.S. and open the door to counter sanctions and the start of a trade war.
President Trump strikes me as someone who could care less about WTO rules. And starting a trade war fits his grand design of goverance. As Yoda noted:
Begun the clone war has
President Trump is Lord Palpatine.

Friday, January 20, 2017

Trump Will Make Us Wealthy Again?

I’m not alone in finding Trump’s speech incredibly disappointing. But there was one sentence that just struck me as beyond odd:
We Will Make America Wealthy Again.
Was the nation in the aggregate ever wealthier? I had to wonder and checked here. The $90.196 trillion is aggregate nominal household net wealth for the 3rd quarter of 2016 and cannot be compared to previous periods without two adjustments. Back in the 2nd quarter of 2007 was $67.705 but the GDP price index had risen by 14.87% over this period. So in real terms (2007QII = 1), real aggregate household net wealth had risen by around 16% to $78.52 trillion. And while we had only 301.7 million people back in 2007, population had risen to 324.6 million by the 3rd quarter of last year. So real wealth per capita was $224,412 back in 2007, it was recently $241,898 recently. In other words, real wealth per capita is 7.8% higher than it was in 2007. And yes I realize that the distribution of wealth was very uneven back in 2007 and in many ways got worse since then. But does anyone believe that this Republican Administration and Congress think for a moment that they intend to redistribute either income or wealth to the average Joe?

America First?

Fuck You's Inaugural Address

Dave Moss: What's your name? 
Blake: Fuck you. That's my name. You know why, mister? 'Cause you drove a Hyundai to get here tonight. I drove an $80,000 BMW. THAT's my name.
Long before Alec Baldwin did his Saturday Night Live impression of Donald J. Trump, Trump appropriated Baldwin's sadistic "motivational" character, Blake, from Glengarry Glen Ross. Blake is a caricature of the salesman-as-sociopath. Baldwin refers to him as "an asshole." Trump dialed the "you're fired" performance down a notch with a wink of tongue-in-cheekiness.

Watch the "always be closing" scene and judge for yourself which impersonation came first:

The tenth anniversary DVD of Glengarry Glen Ross includes a special feature in which the documentary film maker, Albert Maysles recounted the story of a sales manager who,  as he approached the prospect's door, started swaying his body and shuffling his feet. After the sale, the manager asked Maysles if he had noticed the odd movement and then explained,"when you're moving your body this way it's very hard for somebody listening to turn you down."

This calls attention to the erotic dimension of the sales transaction. Sometimes the commodity isn't the most auspicious thing being exchanged. Cue the traveling salesman jokes... did you hear the one about Amway Dream Night?
Where pathos rules, where pathos is finally derived, a character has fought a battle he could not possibly have won. The pathetic is achieved when the protagonist is, by virtue of his witlessness, his insensitivity, or the very air he gives off, incapable of grappling with a much superior force. -- Arthur Miller, Tragedy and the Common Man

Monday, January 16, 2017

Gavyn Davis on Auerbach’s Border Adjustments

Gavyn Davis struggles to grasp the Destination-Based Cash Flow Tax starting with this misconception:
The financial markets have begun to wake up to the fact that the Republican reforms to US corporate taxation will probably include important new “border adjustments” to the definitions of company revenues and costs. The basic idea is that US should shift to a “territorial” system, with corporations being taxed only on revenues and costs incurred within the US itself, and not on their worldwide aggregates, which is the principle behind the present system.
A lot of people are advocating getting rid of the repatriation tax and have the US join the rest of the world by having a territorial system. But the rest of the world taxes income at its source – not at its destination. Davis gets to this point eventually:
Although most other countries already operate “territorial” systems, the Republican plan includes other features that would make the new tax regime operate like a tariff on imports into the US, combined with a subsidy on many exports from the US, a combination that would have profound international economic consequences. This is not just an obscure change to the details of America’s corporate tax code. It would be seen by trading partners as a protectionist measure that could disrupt world trade.
Auerbach has noted that this plan is akin to replacing the corporate profits tax with a sales or VAT tax but with a twist – a subsidy to labor costs. Davis continues his discussion assuming that this labor subsidy would raise U.S. net exports, which would be the case if the exchange rate were fixed. Auerbach on the other hand has assumed that the dollar would so appreciate that there would be no effect on net exports. Davis notes this later:
Some proponents of a border tax, like Martin Feldstein, argue that the discriminatory nature of a border tax would be offset by an immediate rise in the dollar exchange rate which would exactly offset the impact of the tax on import and export prices.
If so – then what is the point of this proposal? Davis suggests:
Why would the US want to do this? First, in practice the new tax would be likely to raise a lot of revenue which could be used to pay for other reforms to the corporate tax system. Imports into the US exceed exports, so there would be a net gain reflecting the trade deficit.
Sure we import more goods than we export right now. But this is in theory a tax on profits with the big issue being that we would tax the intangible income created by foreign firms consumed in the U.S., while we would exclude the intangible income created by U.S. firms consumed abroad. As I noted:
we generate more IP income that most nations and DBCFT makes any IP income involved when foreigners consume our products tax free ... if we passed the DBCFT, then we would simply give up on taxing U.S. generated IP income when it is consumed abroad. This strikes me a very bad retreat from trying to enforce the transfer pricing rules.
I know I have been harping on this issue for a while but the other discussions of the transfer and income tax aspects of the Auerbach proposal strike me as falling horribly short.

Saturday, January 14, 2017

Interest Rates Since December 16

Yesterday Ben Bernanke offered a thoughtful discussion of fiscal policy that opens with:
Markets have responded strongly to Donald Trump’s election victory, pushing up equities, longer-term interest rates, and the dollar. While many factors influence asset prices, expectations of a much more expansionary fiscal policy under the new administration—higher spending, lower taxes, and larger deficits—appear to be an important driver of the recent market moves.
FRED provides the data on 10-year government bonds both in terms of nominal rates and real rates. Between the election and December 16, nominal rates rose by 80 basis points, while real rates rose by 60 basis points. This increase was indeed attributed to an expectation of fiscal stimulus from Team Trump. But notice over the past four weeks, interest rates have started coming back down. Why? Paul Krugman follows up on Bernanke’s post with this:
Let me be less gentle: there will be no significant public investment program, for two reasons. First, Congressional Republicans have no interest in such a program. They’re hell-bent on depriving millions of health care and cutting taxes at the top; they aren’t even talking about public investment, and would probably drag their feet even if Trump came forward with a detailed plan and made it a priority. But this then raises the obvious question: who really believes that this crew is going to come up with a serious plan? Trump has no policy shop, nor does he show any intention of creating one; he’s too busy tweeting about perceived insults from celebrities, and he’s creating a cabinet of people who know nothing about their responsibilities. Any substantive policy actions will be devised and turned into legislation by Congressional Republicans who, again, have zero interest in a public investment program. So investors betting on a big infrastructure push are almost surely deluding themselves.
It seems the initial market euphoria over a Trump fiscal stimulus has started to fade as we watch the clowns that Trump is appointing as his key economic advisors.

Thursday, January 12, 2017

Minimum Wages and Productivity

I had a chuckle reading a report in today’s New York Times that describes a pair of papers on the minimum wage presented at the recently-concluded economics meetings in Chicago, especially the first, an experimental study by John Horton of NYU.  Horton set up an online matching system between employers and workers, where each made wage offers for a variety of tasks that could be performed remotely.  The design allowed him to measure the actual productivity of workers in these tasks if they successfully concluded a deal with the employers.  Then he imposed a minimum wage to see what would happen.  The result was that employers sought out the most productive workers when they had to pay higher wages to everyone.  (They could estimate productivity differences from information on workers’ prior wages.)

There was lots of back and forth in the article about whether this result would generalize to a minimum wage established over all employers within a region rather than just a few (who could better pick and choose), but for me the irony is that this is exactly what proponents of the minimum wage hope it will achieve.  That is, one of the main purposes of setting a floor under wages is to generate incentives for firms to increase productivity.

Note that it is the firm that is expected to do this.  Economists for some reason tend to assume that productivity is essentially a worker attribute, like how tall you are or whether you’re left-handed.  No doubt workers differ greatly according to their potential productivity, but most actual, realized productivity is the result of the way the work is set up—whether the output is of lesser or greater value, how much and what kind of equipment the worker has available to work with, what kinds of skills the work develops and makes use of, and how much opportunity the worker herself has to tinker with the job to make it go better.  These are employer choices.  In a world of low wages employers have less incentive to invest in the productivity of work, so they don’t.

This argument will hardly come as earth-shattering news to development economists and economic historians.  One of the arguments why the industrial revolution first occurred in Europe rather than China, for instance, is that the possibility of emigration prevented European labor from being as abundant as Chinese, with correspondingly higher wage costs.  A major factor in the explosive rise of the US as an industrial power in the nineteenth century was the availability of cheap land, which put an even higher floor under wage rates.  This is not to say that workers had it easy, of course, just that they were significantly less destitute in some regions than others.

If increasing labor productivity is a major social goal—and it should be—then making labor more expensive is a good thing, all else being equal.  The only trick is to see that, in the modern, mechanized interdependent world, it’s the quality of the job that turns the worker’s potential productivity into the real thing.

Wednesday, January 11, 2017

The World Bank on Trump’s Fiscal Stimulus

Did this news account properly capture what the World Bank said? If so, I have some quibbles with it. First up a line that makes sense but needs further comment:
President-elect Donald Trump’s tax cuts and spending plans could deliver a shot in the arm to the U.S. economy, lifting growth around the world, although uncertainty about his trade policies adds to the risks, according to the World Bank.
As the U.S. economy grows, the story is that we import more from abroad. If this also leads to dollar appreciation, then net exports further turn negative which means the rest of the world enjoys increases in net exports. Assuming the U.S. economy is still below full employment – which I believe – this is good news for us even as we see a higher trade deficit. And it would certainly be good news for Europe. But now to the second paragraph of this story:
The Trump administration could squander the economic gains of fiscal stimulus if it imposes new trade barriers that provoke retaliation by other countries, the Washington-based development lender said Tuesday in the latest update to its global economic outlook.
I’m sorry but this is just bad writing. Squander for who? Trade protection allegedly shifts aggregate demand away from the rest of the world towards the U.S. So yea- it would squander the gains for Europe but it would increase even further aggregate demand for the U.S. Of course one could argue that Europe needs aggregate demand expansion even more than we do. The better argument is that a trade war might end up being net export neutral. The same might hold if the Trump trade protection led to dollar appreciation. But this is not the same thing as saying the fiscal stimulus would be squandered.

Tuesday, January 10, 2017

Why Did Bernie Sanders Lose The African-American Vote? The Death of Roy Innis

OK, weird juxtaposition, especially three quarters of an hour before Barack Obama delivers his farewell address in the McCormick Center in Chicago, not too far south of where the ASSA/AEA meetings were just held. But the death at age 82 of Roy Innis, the leader since 1968 of the Congress of Racial  Equality (CORE) has pushed me to this, especially as I have no doubt there is nobody else out there who is making these connections.

The immediate relevance of Roy Innis is that Bernie Sanders's very authentic role in the US civil rights movement was his very serious participation in CORE activities in Chicago during 1962-64, give or take a year on either end.  He was a local leader out front in numerous demonstrations, appearing in the local media, and so on.  He was about as solid and sincere an activist in support of CORE in Chicago as one could find fine, a very hard place then as well as now.

So, why did he lose his poltical standing with African-Americans?  I mean arguably they gave the Dem nomination to Hillary, especially southern female African-Americans, who then, unfortunately, were unable to deliver their states for her in the general election. In early spring, 2016, youth went for Bernie 2 to 1, but African Americans went for her 2 to 1, even if they did not turn out sufficiently in Philadelphia to offset the rural and Erie/Scranton white vote that gave PA to Trump, despite her spending lots of time and effort there, including on the closing night of her campaign.

Well, I do not think anybody can seriously diss the loyalty of older southern African-American women to Hillary over Bernie, but maybe it is too bad, especially given what is coming down on us soon after Barack Obama exits the White House.  A lot of it has to do with Bernie's specifically overt activism on this front was a long time ago, more than a half century, and he ended up in very white Vermont with white millennials supporting him. The southern African-Americans dumped Hillary for Obama in 08, although with a lag, despite their long support for her husband, "America's first black president," but they came home for her.  So it is.

Regarding CORE, it was founded in 1942 by the late James Farmer, who still led it in the early 60s, the most activist of the four major civil rights orgs of that day, NAACP, Urban League, SCLC, and CORE, with Martin Luther King specifically associated with the SCLC.  They all agreed on equal treatment between races and all people and nonviolence, although CORE pushed the envelope harder than the others.

It was after the death of MLK, Jr. in 1968 that Roy Innis came to the leadership of CORE.  He moved it towards black nationalism and violence, as well as a "conservative/libetarian" political economic perspective.  As near as I can tell it never played a significant role in national politics under his long leadership, lasting until now, near as I can tell. The most dramatic event of this many decades period was a showdown he had at one point with Al Sharpton over something, a showdown between two people between whom I am not sure which I view with less respect, frankly.

I note the odd detail that slightly overlapping with Bernie, around 1963-65, I was involved with CORE in Madison, Wisconsin, when I was in high school.  I was not nearly as active or as important as Bernie, but I did participate in some demos against Sears for discriminatory hiring.  For this I earned my first entry in the FBI lists, as I was informed by my well-too-well-informed late Old Man.

And now I shall send this off so I can hear Barack Hussein Obama give his farewell address, for better or worse.

Barkley Rosser

Tim Worstall on Trade Policy: Reductio ad Absurdum

Tim Worstall makes some bizarre arguments including this one which sort of cracked me up:
As we know the President-elect, Donald Trump, tweeted that he was most unhappy that Toyota announced an investment in and expansion of a plant in Mexico. Instead, cars should be built in the US--with the idea that if not perhaps a large border tax, a trade import tariff, should or would be considered. To which we've had the answer from Toyota--they have agreed to increase the US trade deficit by $10 billion over 5 years. Obviously, that's not quite what they've said, instead, they've pointed out that they're going to invest $10 billion in the US over the next 5 years, as they did in the past 5 years. Left unsaid is the point that obviously they've not decided to do this because of a soon to be President's tweet.
Alas his explanation was nothing more than some balance of payments identities which should draw the fire of Peter Dorman. How might I have made the point instead?
With a national savings rate of only 1.75%, we should not repeat the mistake of 1981 giving the rich another massive tax break which would further reduce national savings and make the trade deficit worse. We should instead think in terms of how to get investment demand – be it public infrastructure or private investment – higher. As Brad notes, lower interest rates and infrastructure investment would be good policy.
If the shareholders of Toyota want to build more U.S. automobile plants and sell their cars to Latin America, that would be a great thing even if it is partially offset by a modest dollar appreciation. So yea Worstall made me laugh as there is way too much internet and Twitter stupidity on this topic even if his own poking fun at it involved exploiting an identity rather thinking this issue through.

Sunday, January 8, 2017

Disney’s Transfer Pricing and the Destination Based Cash Flow Tax

Neil Irwin adequately addressed the trade policy debate over the Destination Based Cash Flow Tax (DBCFT) but his discussion of the transfer pricing angle leaves me cold:
Two prime examples are transferring intellectual property to overseas holding companies and engaging in corporate inversions that move a company’s legal headquarters to a country with lower taxes.
Corporation inversions do not impact transfer pricing as all they do is to allow a multinational to have a territorial system which many already effectively do. But I need to update my discussion to focus on intellectual property (IP) as this goes to the heart of my beef with what Auerbach has proposed. In my Trump Toaster Ovens example (Canadian production with U.S. distribution), I noted:
Total profits are $25 per oven with 80% going to the Canadian affiliate if the intercompany price is $100. US tax rates are now 35% and Canadian tax rates are close to 25% so with no repatriation tax involved (Canada is a territorial system), the effective tax rate is 27%. While currently Tiffany might want to raise the intercompany price – she knows the IRS could object. Of course Auerbach’s DBCFT would change her incentives as she might want to lower this price to only $80 to eliminate the Canadian income tax – assuming the Canadian Revenue Agency does not object. What’s going on here?
What’s going on per multinationals is that the U.S. becomes the tax haven per income taxation but also imposes sales taxes on imported goods. I know many U.S. centric transfer pricing types think all IP is created here but companies like the Japanese automobile manufacturers, Novartis, Adidas, Jimmy Choo, and Zara created IP abroad. DBCFT would be bad news for them as their IP faces sales taxes here as we consume their products but also face income taxes abroad. Let’s toss in Ikea even if Tim Worstall struggles to understand what an arm’s length royalty rate is. Of course we generate more IP income that most nations and DBCFT makes any IP income involved when foreigners consume our products tax free. Ricardo Hausmann and Federico Sturzenegger illustrated their “Dark Matter” idea with this:
Imagine the construction of EuroDisney at the cost of 100 million (the numbers are imaginary). Imagine also, for the sake of the argument that these resources were borrowed abroad at, say, a 5% rate of return. Once EuroDisney is in operation it yields 20 cents on the dollar. The investment generates a net income flow of 15 cents on the dollar but the BEA would say that the net foreign assets position would be equal to zero. We would say that EuroDisney in reality is not worth 100 million (what BEA would value it) but four times that (the capitalized value at our 5% rate of the 20 million per year that it earns). BEA is missing this and therefore grossly understates net assets. Why can EuroDisney earn such a return? Because the investment comes with a substantial amount of know-how, brand recognition, expertise, research and development and also with our good friends Mickey and Donald. This know-how is a source of dark matter.
In its latest fiscal year, Disney sourced over 94% of its worldwide income in the U.S. as its foreign affiliate pay the U.S. parent for the value of Mickey and Donald. While Starbucks has received some weird attention with respect to its transfer pricing, the 6% royalty rates paid by its foreign affiliate to the U.S. parent are consistent with what third parties pay and hence are arm’s length. In its latest fiscal year, over 84% of its worldwide income was sourced to the U.S. as a result. Both of these U.S. based multinationals are currently sourcing their IP income in the U.S. A switch to DBCFT would change that significantly reducing U.S. tax collections. Now you might ask what about those accused of Base Erosion and Profit Shifting such as Caterpillar? In her defense of their transfer pricing, Julie Lagacy noted that their Swiss affiliate paid the U.S. parent a 6% royalty rate for the use of Caterpillar’s technology but then other witnesses noted:
“I think the I.R.S. should have attacked this transaction on economic substance grounds,” said the other tax professor, Reuven S. Avi-Yonah, of the University of Michigan. To make the transaction bona fide, he said, the I.R.S. should have applied a 1986 law requiring the subsidiary to pay a “super-royalty” to its parent. That would have brought the profits back to the United States where Caterpillar’s higher rate, around 29 percent, would apply. Its negotiated rate in Switzerland was less than 6 percent. “There are all these opportunities that the I.R.S. had to go after this transaction, and unfortunately it didn’t,” he said.
The 29% percent effective tax rate was due to the fact that around 45% of Caterpillar’s income was U.S. sourced whereas only 30% of its sales were in the U.S. Again DBCFT would have meant even less U.S. taxes given the fact that a lot of the foreign generated IP income already was coming back to the U.S. This “super-royalty” would have the royalty rate raised from 6% to 9% as if the U.S. owned all worldwide intangibles, which strikes me as a very aggressive IRS view on this issue. In other words, one can make the case that the 6% royalty rate was arm’s length. If the IRS wants to disagree and pursue a transfer pricing challenge, then let it. But if we passed the DBCFT, then we would simply give up on taxing U.S. generated IP income when it is consumed abroad. This strikes me a very bad retreat from trying to enforce the transfer pricing rules.

Heterodox Session at ASSA: Marx, Rawls,Sraffa, and... Acemoglu

Yesterday morning I attended an URPE session at ASSA in Chicago titled,, "Marx, Rawls, and Sraffa, and the Limits of Mainstream Economics."  The Rawls person did not appear, but there was a paper on recent J.B. Clark award winners as reps of mainstream econ.  Lots of attention on Daron Acemoglu, with people arguing about whether what he is doing is good or not.  Wisecrack I heard was that "MIT economists are rediscovering insights of Marx, Kalecki, and Steindl, but not citing them."  This paper was presented by Robert Chenomas of U. of Manitoba.

The main debates came from presntations by Robin Hahnel and Michael Perelman.  The big whoop is that the archives of Piero Sraffa are now being made available.  This is engendering a massive search into his long secret writings with various proposed reinterpretations going on. A big issue is his relationship with Marx, with Hahnel claiming an FST vs an FMT, a Fundamental Sraffa Theorem vs a Fundamental Marx Theorem. The argument is that in a proper input-output Sraffa type system any commodity can be the "source of value," with the Marx argument being that it must be labor.  Well, all hell broke loose, and I shall not leak who was carrying on more than whom.

What is clear is that we are going to be hearing more  about this now that those long held archives have been opened.

Barkley Rosser