Friday, June 22, 2007
Older Children are Smarter
According to Will Saletan's Human Nature Blog over at Slate. This is sort of a bummer as I am the youngest child in my family. In my personal experience this is true though, my brother is smarter than me, but I definitely got the looks (if you have seen my family you will know I got the raw end of that deal).
Radley Balko
Works at the Cato institute and contributes to Reason Magazine. You should check out his blog "The Agitator". He is libertarian and blogs frequently about the militarization of the police and the destructive folly that is the War on Drugs. His reports on both are quite alarming.
Rand Part II
Health Care accounts for 16% of our GDP but surprisingly we have little information available as to what treatments are cost effective or more basic things like how different types of insurance affect health outcomes. The last major study focusing on insurance and health outcomes, and really the only authoritative study, was conducted by the Rand Corporation about 25 years ago. In the study people were randomly assigned to three different health plans with varying levels of co-insurance (level of deductible, co-payments, things of that sort). The finding was that those that had higher levels of co-insurance tended to consume less care (both effective and ineffective care) and use less sick leave but without suffering in terms of health outcomes. But the fact is the study is dated, we should be conducting longitudinal studies of this nature on an ongoing basis.
Kevin McHale: Worst GM Ever
I thought for you long-suffering Wolves fan (I like KG, not the Wolves) you might find this piece by Bill Simmons of ESPN funny: "The First Annual Atrocious GM Summit".
Thursday, June 21, 2007
Bloomberg
There has been much hoopla over Mayor Bloomberg switching his party affiliaton from Republican to ... well nothing.. independent I suppose. Many have speculated that this is the first step in setting up a run for president as a third party candidate. I think this is possible but I tend to think this is more of a publicity stunt. I ultimately doubt Mayor Bloomberg will toss his hat into the ring but will tease the media and fan the flames of speculation so he can:
1. Get attention for its own sake
2. Get the spotlight to force the discussion on some public policy issue otherwise not discussed at the present (I have no idea what)
3. Garner consideration for the Veep slot on a Democratic ticket.
I think the chances of Mayor Bloomberg being tabbed as a Veep are slim. However, he would provide somebody like Obama cover to move very quickly to the center and posture as a New Democrat as opposed to the more old school liberal approach that he is taking now. Also it would enhance his "the enemy is partisanship" spiel by nominating somebody who doesn't neatly fit our political categories.
Regardless of whether he runs or not I suspect whoever the Democratic Nominee is will win. He will just ensure they win by a larger margin.
1. Get attention for its own sake
2. Get the spotlight to force the discussion on some public policy issue otherwise not discussed at the present (I have no idea what)
3. Garner consideration for the Veep slot on a Democratic ticket.
I think the chances of Mayor Bloomberg being tabbed as a Veep are slim. However, he would provide somebody like Obama cover to move very quickly to the center and posture as a New Democrat as opposed to the more old school liberal approach that he is taking now. Also it would enhance his "the enemy is partisanship" spiel by nominating somebody who doesn't neatly fit our political categories.
Regardless of whether he runs or not I suspect whoever the Democratic Nominee is will win. He will just ensure they win by a larger margin.
Wise Words about Health Care
from Peter Orzag, Congressional Budget Office Director:
"Furthermore, hard evidence is often unavailable about which treatments work best for which patients or whether the added benefits of more-effective but more-expensive services are sufficient to warrant their added costs. In many cases, the extent of the variation in treatments is greatest for those types of care for which evidence about relative effectiveness is lacking. Together, those findings suggest that better information about the costs and benefits of different treatment options, combined with new incentive structures reflecting the information, could eventually yield lower health care spending without having adverse effects on health—and that the potential reduction in spending below projected levels could be substantial. Moving the nation toward that possibility—which will inevitably be an iterative process in which policy steps are tried, evaluated, and reconsidered—is essential to putting the country on a sounder long-term fiscal path. But even if it did not bring about significant reductions in spending, more information about comparative effectiveness could yield better health outcomes from the resources devoted to health care."
hat tip: Arnold Kling
Note: I would highly recommend reading Arnold Kling's book on healthcare "Crisis of Abundance". It's a short read and I think does a great job on diagnosing some of the drivers behind spending. That said, I think his policy recommendations, while gesturing in the right direction (more cost sharing, taking employers out of health care provision), are politically untenable. He also writes for TCSdaily.com and runs a very interesting blog with Bryan Caplan (also a GMU Econ professor and author of the "Myth of the Rational Voter"): Econlog.
"Furthermore, hard evidence is often unavailable about which treatments work best for which patients or whether the added benefits of more-effective but more-expensive services are sufficient to warrant their added costs. In many cases, the extent of the variation in treatments is greatest for those types of care for which evidence about relative effectiveness is lacking. Together, those findings suggest that better information about the costs and benefits of different treatment options, combined with new incentive structures reflecting the information, could eventually yield lower health care spending without having adverse effects on health—and that the potential reduction in spending below projected levels could be substantial. Moving the nation toward that possibility—which will inevitably be an iterative process in which policy steps are tried, evaluated, and reconsidered—is essential to putting the country on a sounder long-term fiscal path. But even if it did not bring about significant reductions in spending, more information about comparative effectiveness could yield better health outcomes from the resources devoted to health care."
hat tip: Arnold Kling
Note: I would highly recommend reading Arnold Kling's book on healthcare "Crisis of Abundance". It's a short read and I think does a great job on diagnosing some of the drivers behind spending. That said, I think his policy recommendations, while gesturing in the right direction (more cost sharing, taking employers out of health care provision), are politically untenable. He also writes for TCSdaily.com and runs a very interesting blog with Bryan Caplan (also a GMU Econ professor and author of the "Myth of the Rational Voter"): Econlog.
Marketing to Geeks and Dorks
I fashion myself as more of a dork than a geek (I lack the IQ to be a true geek, not that I don't aspire to geekdom). Anyhow, Tyler Cowen, Econ professor at GMU and blogger extradonaiire has a new book out- "Discover Your Inner Economist: Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist". It is obviously riding the freakonomics wave by using the tools of economics (I would expect in this book more theory as opposed to fancy regressions) as applied to everyday life. Mr. Cowen has set up and advertised the existence of a secret blog. To gain access to the secret blog you need to pre-order the book and then email Mr. Cowen @ Iboughttylersbook@gmail.com that you purchased the book and he will send you the site address. He has clearly built an honor system because he doesn't advertise that there is a secret password and his blogs ask all participants to keep the blog postings and such under wraps.
Anyhow, being the massive dork (sometimes douchebag) that I am, I am going to pre-order the book so that I too can read Mr. Cowen's secret blog. More interesting than the fact that I am a dork/douche is the fact that Mr. Cowen has set up this incentive blog that is underpinned by an honor system, namely: that people are honest about their book purchase and they do not release the contents or address of the blog to the public. I am not trying to game the system and gain access to the "secret blog" illegitimately but I wonder how representative I am. It could just be that Mr. Cowen can rely on the honor system as this type of incentive is pretty self-selecting (cool people need not apply_dorks only) and the targeted public (dorks like me) are fairly honest or entirely risk averse.
Anyhow, being the massive dork (sometimes douchebag) that I am, I am going to pre-order the book so that I too can read Mr. Cowen's secret blog. More interesting than the fact that I am a dork/douche is the fact that Mr. Cowen has set up this incentive blog that is underpinned by an honor system, namely: that people are honest about their book purchase and they do not release the contents or address of the blog to the public. I am not trying to game the system and gain access to the "secret blog" illegitimately but I wonder how representative I am. It could just be that Mr. Cowen can rely on the honor system as this type of incentive is pretty self-selecting (cool people need not apply_dorks only) and the targeted public (dorks like me) are fairly honest or entirely risk averse.
Wednesday, June 20, 2007
K.G.
While we are on the topic of Basketball I think it has to be said that K.G. deserves to be traded. He has been held captive to a mediocre team (thank you Kevin McHale world's worst GM) for too long. He still has a couple years left of total badassness. Let him go.
Miller Lite
I am a recovering beer snob. I was that guy that chortled every time that somebody ordered a major domestic beer. However, somewhere along the way I decided that all mass produced beers weren't all that bad, and in fact some rather decent. But until recently I would never stoop to drink a light beer. But as my waistline expands and I get older I am slowly reconciling myself to light beer. The turning point occured occured while I was in Dallas and had just finished a 5k run (I actually ran the entire time, not that is an accomplishment for most people but if you have ever seen me in person you will recognize it as such). The 5k was sponsored by Michelob Ultra and thus this lightest of light beers was abundant and free. In the hot Dallas weather and my body still teetering on the brink of cardiac arrest, I found Michelob Ultra to be the perfect refreshment. It was cold, had some body but not too much for the setting, and actually sorta tasted like beer. While I still prefer full bodied beers, a light does just fine in the right situation. That said, I don't understand the reverance that some show for Miller Lite. It has no taste, none, absolutely none. People that drink Miller Lite honestly do not like beer. They claim to but this is impossible as they only drink Miller Lite which in no way resembles the taste of beer. It tastes like decent tap water and looks like the urine from somebody that is pretty well hydrated. Which makes the obsession with Miller Lite baffling to me. When people order a Miller Lite they almost do so with a sense of pride. I must be missing something. Is this code, or maybe some cruel hoax operated by a vast non-partisan conspiracy (you know, like how art historians have for years been able to persuade the viewing public that Leonardo's Mona Lisa is in fact amazing or that anything by Mark Rothko is worthwhile). I don't know, I am missing something here.
Pie-Eyed Endorsement
Not yet, but I say we endorse any candidate who selects Journey's "Don't Stop Believin'" as their campaign song.
Celine Dion and Politics
Some of you may have noticed that Hillary held a contest for the campaign song. I thought this was a cute idea and her ad launching it was a good attemtpt (notice attempt) at humanizing Hillary (almost there, lotta progress made, though). Anyhow, the winner is in: Celine Dion's "You and I". Hillary is still the Democrat I find the most tolerable, which is good, since she will be President. However, she could have picked a better campaign song. My personal vote Justin Timberlake's "Bringing Sexy Back".
Tuesday, June 19, 2007
The Best Argument for Abolishing the Corporate Income Tax
Courtesy of Megan McArdle from janegalt.net:
Why I'm in Favor of Abolishing the Corporate Income Tax
How many times have we heard columnists or activists foaming at the mouth about those evil corporations that don't pay their "fair share" of taxes? Well, since I have to wait for the copier repairman to finish up some work, I'm going to take this opportunity to plug one of my pet causes: abolishing the corporate income tax.
Now, I know what you're thinking. If you're a conservative, you're thinking "Right on!" If you're a liberal, you're thinking "typical pro-business yuppie." (You make more money than I do. Trust me. I'm currently the executive copy girl in a construction trailer.) If you're one of those activists, you're thinking "When the revolution comes, she'll be the first one with her back against the wall." Too true, and it will save me a lot of time waiting for common sense to wither away and true Naderism to arrive. And probably I'm not going to convince you. But the rest of you, listen up, because I've got compelling arguments with which to convince you, or your friends, if you're already a believer.
Background: How the Corporate Tax Works
Corporations are taxed on their revenue minus their expenses. This is different from the way people are taxed, because the government assumes that the expenses necessary to operate a person are roughly the same from person to person. You may think you need a widescreen TV with picture-in-picture and dolby surround sound in order to support basic life functions, but the government doesn't. Therefore, it taxes you on your revenue -- the money you make for selling your services -- and leaves it to you to figure out the expense part.
The problem with doing likewise with corporations is that they are very different from each other. An aluminum smelter, for example, may have very high revenues, but because there is a lot of competition in the market, it may cost the smelter 99.5 cents to make every dollar it earns. Since the corporate tax rate is 35%, the aluminum smelter would be making an after-tax profit of -34.5 cents for every dollar in revenue. This would quickly put the smelters out of business, and we'd all have to go back to shingling our houses and desperately gulping Mountain Dew out of our hands before it all ran through our fingers.
My old consulting firm, on the other hand, by my rough calculations experienced a 450% return on the cost of my labor and associated overhead (although that figure leaves out the various layabout nephews, current and former mistresses, and assorted friends' children employed by the owner of the company to write reports nobody read. I view those as a personal expense, although the IRS, unfortunately, did not.) 35% of revenue hardly makes a dent in the profits. That is why the government takes into account expenses as well as revenues when calculating taxes.
Argument One: Corporations aren't People
As my favorite macroeconomics professor pointed out, it is impossible to tax a corporation because the corporation is just a fictional entity designed to pass profits back to its owners. When you say you're going to "tax a corporation", the corporation doesn't go to the money farm to harvest some more cash to give to the government so we can expand job training for unwed mothers -- some real person is going to pay that tax. When you put a tax on wages, such as social security or the unemployment tax, the employer doesn't say, "oh, well, profits dropped 15% this year; better tell Merrill Lynch to issue a 'sell' rating" -- they pay their employees less, both to lower the tax burden and to recover the lost profits. They hire fewer employees, because each employee is now more expensive. This costs real people money. When you up the corporate tax, either the employees pay, because the firm can't afford as many of them; the customers pay, because the firms have to raise their prices to cover the taxes; or the shareholders pay because dividends are lower and the company is worth less. And before you liberal types start rubbing your hands in glee at the thought of those pained shareholders, keep in mind that the largest shareholders in companies are insurance companies, which invest in stocks in order to make the money they need to pay off when your house burns down; and pension funds, making the money to take picketing US Steelworkers off the streets and put them into good homes. The other big holders are mutual funds, which is what most of us have our 401(k)'s in. So when you say "I want to tax corporate profits", try silently saying to yourself "so that Mom can sell the condo in Florida and move in with me."
Argument Two: The Corporate Income Tax Costs the Economy More than it Earns
The Corporate Income Tax brought in $204.9 billion in 1998. My tax professor (a Democrat) estimated the cost of corporate compliance in that year to be $300 billion. That's just the direct cost -- what corporations paid tax lawyers and accountants.
This labor is unproductive. It adds no new wealth to the economy; we are paying people simply to transfer money from one place to another, a net economic loss. Particularly so because the money isn't being transferred into any sort of wealth producing investment, such as a store or manufacturing plant. This doesn't mean that we shouldn't have any government or regulations -- the police add no new wealth to the economy, but I still want them around. It just means that we have to weigh the cost of the regulations against the benefit we get out of them. In this case, we make $204.9 billion off the corporations, but at the expense of taking $300 billion worth of resources out of the economy which could have been building widgets or thinking up a new recipe for fat-free muffins.
Nor is $300 billion the only cost. Remember, those corporations won't stump up on their own: you need IRS agents to check on them. And congressional staffers to write laws closing "loopholes". And courts to take corporations you think aren't complying. And reporters to write foamy-mouthed editorials about how corporations aren't paying their "fair share". More importantly, there is a hugely distortionary effect on the economy, because corporations spend an enormous amount of time and money trying to structure transactions to get around taxes. All of this activity is economic dross, and its so widespread I've given it its own section.
Argument 3: The Corporate Income Tax is Extremely Distortionary
I've talked elsewhere about the lengths that companies go to in order to avoid, among other things, taxes. One of the most egregious of these is the way that taxes favor debt. Now, corporations prefer debt to equity anyway, for the same reason that you'd rather take a loan from your parents than sell them part of your house. What makes this preferance so compelling, however, is that while corporations have to pay dividends or repurchase shares out of their after-tax profits, they can deduct any interest on debt. Suppose I have a project that is projected to return 8% -- every dollar I invest yields me $1.08 at the beginning of the year. We'll posit 0 inflation and a risk-free environment so that we don't have to get into tiresome concepts like the time value of money. Now assume that I don't have the cash to make the investment, but I can borrow money at 9%. In a tax-free world, this would give mea return of -1%, and I would pass up the opportunity to own my very own fur-bearing trout ranch. However, if I am a corporation, I can deduct that 9% -- call it $9 annual interest on a $100 loan. Since the corporate tax rate is 35%, I have just lowered my tax bill by a little over $3. Add that $3 to the $8 I'm getting off the trout, and suddenly it's an attractive business opportunity. The trout are no more fruitful, their pelts no more soft and lustrous -- the tax status makes all the difference.
So why is this bad? Partly because it encourages companies to make investments that have a negative economic return -- the actual economic return of 8%, with an actual economic cost of lending the money of 9%. (Yes, this is simplistic. Work with me.) But mostly because it allows companies to take on more risk than they otherwise would. As I said in the above-referenced post, debt makes the company riskier in ways that equity does not, because corporations, not being people, can't borrow money from their parents and therefore get into real trouble when they can't meet their interest payments. The tax exemption, added to the innate preference for debt, means that companies will leverage themselves right up to the point where Moody's threatens to drop their rating to "run for the hills!". People are always over-optimistic about the outcomes of the projects they are pursuing, as you know if you've ever attended a budget meeting or a bridal shower. Add in a little shoddy accounting and you get Enron.
There are numerous other ways in which companies engage in distortionary behavior; entire firms exist for the sole purpose of arranging asset swaps between firms or entities that can't deduct the assets, and firms or entities that can -- every major investment bank has several groups pretty much solely devoted to this purpose. This makes money for the corporation, but it doesn't create new wealth; it merely transfers money from the government's pocket to its own. Meanwhile, all those people and resources that could be utilized to actually produce something are paid instead to engineer the transfer.
The standard activist response is to close the "loopholes." This is discussed in our next section:
Argument 4: It is Impossible to Close the Loopholes
I am all for closing loopholes that are special breaks generated by friendly legislators. Most loopholes, however, do not fall under that category. Most loopholes have to do with items that are legitimately treated as expenses for some purpose. For example, if you eliminated the debt deduction, you would get rid of a lot of fur-bearing trout ranches -- but there are companies that require a high level of capital investment in order to operate, such as automakers. They finance their physical plant with debt, partly for the tax break, but also partly so that they can match the financing cost of the equipment to the life of the equipment. During a bad year, with those debt payments coming in, it wouldn't be a good idea to slap them with an enormous tax bill too -- not unless we've decided as a nation that we'd rather drive Yugos. Many of the "loopholes" decried by Nader and his ilk fall into this category -- corporations engaged in clearly distortionary, but legal behavior, in order to minimize their taxes.
So why can't we eliminate this? There are several reasons. The first is the same reason that it's impossible to entirely eliminate computer hacking, or burglary -- they've only got to find one way in, while you have to close all the doors. As fast as you write the new laws, an army investment bankers, accountants, and tax attorneys will get busy seeking a way around it. I'm sure Nader would like to outlaw this as well, but since this would amount to a law against thinking, it would be impossible -- although he may not realize this, given how successful he's been at implementing such a plan among his own followers.
The second reason is that there's a fine line between necessary and unnecessary transactions, and picking where that line falls will remain more of an art than a science. The harder we try to crack down, the more time and money we waste arguing whether the trout pelts really need to be stored at the dry cleaners before they're sold.
And the third goes back to those costs we talked about in Argument 2. The more laws we write to try to close loopholes, the more congressional staffers we need to write them, judges to interpret them, IRS staffers to enforce them, tax lawyers to brief companies on them, etc. And the effect is geometric, not arithmetic -- the more tiny, specific laws we write, the more impossible the tax code becomes to comply with, as complexities generate ever more conflicts and gray areas, and the code itself passes beyond the comprehension of a single person, thereby making it impossible to completely tell whether or not you're in compliance. This unpredictability adds risk, raising the cost of capital and reducing the willingness of companies to invest. This latter cost is impossible to quantify, but we could quantify most of those direct compliance costs -- and I would be willing to bet that they far exceed any revenue generated by "closing the loophole".
Argument 5: Eliminating the Corporate Income Tax Makes Corporate Welfare Harder
At last, an argument even a Naderite could love. Much of that corporate welfare consists of tax deductions, credits, or what have you, that the public perceives as "free" because we're not handing them a fistful of cash. Eliminating the corporate income tax will force voters to ask themselves whether we actually like Chiquita bananas enough to hand them a wad of our hard earned cash every April 15. When we think about all of the unproductive activity we'd be eliminating by eliminating the corporate tax, lets not forget all those high-priced lawyers eating tax deductible dinners with your congressman in order to convince him that his latest client desperately needs a tax break for the Good of the Nation.
Summary
The corporate income tax costs the economy much more than it produces in revenue. Eliminate it and watch a flood of economic activity be unleashed as all those unemployed accountants, tax lawyers, and IRS agents get to work inventing the next Furby. Recoup any lost revenue by eliminating the capital gains tax and treating capital gains as ordinary income in order to equalize the tax treatment of debt and equity, and it will be a long time before we see another Enron.
Summary for Those Who Started to Nod off in the Third Paragraph and Skipped to the Bottom
The corporate income tax is very bad. You should be against it. Email this link to any of your friends who question this.
Why I'm in Favor of Abolishing the Corporate Income Tax
How many times have we heard columnists or activists foaming at the mouth about those evil corporations that don't pay their "fair share" of taxes? Well, since I have to wait for the copier repairman to finish up some work, I'm going to take this opportunity to plug one of my pet causes: abolishing the corporate income tax.
Now, I know what you're thinking. If you're a conservative, you're thinking "Right on!" If you're a liberal, you're thinking "typical pro-business yuppie." (You make more money than I do. Trust me. I'm currently the executive copy girl in a construction trailer.) If you're one of those activists, you're thinking "When the revolution comes, she'll be the first one with her back against the wall." Too true, and it will save me a lot of time waiting for common sense to wither away and true Naderism to arrive. And probably I'm not going to convince you. But the rest of you, listen up, because I've got compelling arguments with which to convince you, or your friends, if you're already a believer.
Background: How the Corporate Tax Works
Corporations are taxed on their revenue minus their expenses. This is different from the way people are taxed, because the government assumes that the expenses necessary to operate a person are roughly the same from person to person. You may think you need a widescreen TV with picture-in-picture and dolby surround sound in order to support basic life functions, but the government doesn't. Therefore, it taxes you on your revenue -- the money you make for selling your services -- and leaves it to you to figure out the expense part.
The problem with doing likewise with corporations is that they are very different from each other. An aluminum smelter, for example, may have very high revenues, but because there is a lot of competition in the market, it may cost the smelter 99.5 cents to make every dollar it earns. Since the corporate tax rate is 35%, the aluminum smelter would be making an after-tax profit of -34.5 cents for every dollar in revenue. This would quickly put the smelters out of business, and we'd all have to go back to shingling our houses and desperately gulping Mountain Dew out of our hands before it all ran through our fingers.
My old consulting firm, on the other hand, by my rough calculations experienced a 450% return on the cost of my labor and associated overhead (although that figure leaves out the various layabout nephews, current and former mistresses, and assorted friends' children employed by the owner of the company to write reports nobody read. I view those as a personal expense, although the IRS, unfortunately, did not.) 35% of revenue hardly makes a dent in the profits. That is why the government takes into account expenses as well as revenues when calculating taxes.
Argument One: Corporations aren't People
As my favorite macroeconomics professor pointed out, it is impossible to tax a corporation because the corporation is just a fictional entity designed to pass profits back to its owners. When you say you're going to "tax a corporation", the corporation doesn't go to the money farm to harvest some more cash to give to the government so we can expand job training for unwed mothers -- some real person is going to pay that tax. When you put a tax on wages, such as social security or the unemployment tax, the employer doesn't say, "oh, well, profits dropped 15% this year; better tell Merrill Lynch to issue a 'sell' rating" -- they pay their employees less, both to lower the tax burden and to recover the lost profits. They hire fewer employees, because each employee is now more expensive. This costs real people money. When you up the corporate tax, either the employees pay, because the firm can't afford as many of them; the customers pay, because the firms have to raise their prices to cover the taxes; or the shareholders pay because dividends are lower and the company is worth less. And before you liberal types start rubbing your hands in glee at the thought of those pained shareholders, keep in mind that the largest shareholders in companies are insurance companies, which invest in stocks in order to make the money they need to pay off when your house burns down; and pension funds, making the money to take picketing US Steelworkers off the streets and put them into good homes. The other big holders are mutual funds, which is what most of us have our 401(k)'s in. So when you say "I want to tax corporate profits", try silently saying to yourself "so that Mom can sell the condo in Florida and move in with me."
Argument Two: The Corporate Income Tax Costs the Economy More than it Earns
The Corporate Income Tax brought in $204.9 billion in 1998. My tax professor (a Democrat) estimated the cost of corporate compliance in that year to be $300 billion. That's just the direct cost -- what corporations paid tax lawyers and accountants.
This labor is unproductive. It adds no new wealth to the economy; we are paying people simply to transfer money from one place to another, a net economic loss. Particularly so because the money isn't being transferred into any sort of wealth producing investment, such as a store or manufacturing plant. This doesn't mean that we shouldn't have any government or regulations -- the police add no new wealth to the economy, but I still want them around. It just means that we have to weigh the cost of the regulations against the benefit we get out of them. In this case, we make $204.9 billion off the corporations, but at the expense of taking $300 billion worth of resources out of the economy which could have been building widgets or thinking up a new recipe for fat-free muffins.
Nor is $300 billion the only cost. Remember, those corporations won't stump up on their own: you need IRS agents to check on them. And congressional staffers to write laws closing "loopholes". And courts to take corporations you think aren't complying. And reporters to write foamy-mouthed editorials about how corporations aren't paying their "fair share". More importantly, there is a hugely distortionary effect on the economy, because corporations spend an enormous amount of time and money trying to structure transactions to get around taxes. All of this activity is economic dross, and its so widespread I've given it its own section.
Argument 3: The Corporate Income Tax is Extremely Distortionary
I've talked elsewhere about the lengths that companies go to in order to avoid, among other things, taxes. One of the most egregious of these is the way that taxes favor debt. Now, corporations prefer debt to equity anyway, for the same reason that you'd rather take a loan from your parents than sell them part of your house. What makes this preferance so compelling, however, is that while corporations have to pay dividends or repurchase shares out of their after-tax profits, they can deduct any interest on debt. Suppose I have a project that is projected to return 8% -- every dollar I invest yields me $1.08 at the beginning of the year. We'll posit 0 inflation and a risk-free environment so that we don't have to get into tiresome concepts like the time value of money. Now assume that I don't have the cash to make the investment, but I can borrow money at 9%. In a tax-free world, this would give mea return of -1%, and I would pass up the opportunity to own my very own fur-bearing trout ranch. However, if I am a corporation, I can deduct that 9% -- call it $9 annual interest on a $100 loan. Since the corporate tax rate is 35%, I have just lowered my tax bill by a little over $3. Add that $3 to the $8 I'm getting off the trout, and suddenly it's an attractive business opportunity. The trout are no more fruitful, their pelts no more soft and lustrous -- the tax status makes all the difference.
So why is this bad? Partly because it encourages companies to make investments that have a negative economic return -- the actual economic return of 8%, with an actual economic cost of lending the money of 9%. (Yes, this is simplistic. Work with me.) But mostly because it allows companies to take on more risk than they otherwise would. As I said in the above-referenced post, debt makes the company riskier in ways that equity does not, because corporations, not being people, can't borrow money from their parents and therefore get into real trouble when they can't meet their interest payments. The tax exemption, added to the innate preference for debt, means that companies will leverage themselves right up to the point where Moody's threatens to drop their rating to "run for the hills!". People are always over-optimistic about the outcomes of the projects they are pursuing, as you know if you've ever attended a budget meeting or a bridal shower. Add in a little shoddy accounting and you get Enron.
There are numerous other ways in which companies engage in distortionary behavior; entire firms exist for the sole purpose of arranging asset swaps between firms or entities that can't deduct the assets, and firms or entities that can -- every major investment bank has several groups pretty much solely devoted to this purpose. This makes money for the corporation, but it doesn't create new wealth; it merely transfers money from the government's pocket to its own. Meanwhile, all those people and resources that could be utilized to actually produce something are paid instead to engineer the transfer.
The standard activist response is to close the "loopholes." This is discussed in our next section:
Argument 4: It is Impossible to Close the Loopholes
I am all for closing loopholes that are special breaks generated by friendly legislators. Most loopholes, however, do not fall under that category. Most loopholes have to do with items that are legitimately treated as expenses for some purpose. For example, if you eliminated the debt deduction, you would get rid of a lot of fur-bearing trout ranches -- but there are companies that require a high level of capital investment in order to operate, such as automakers. They finance their physical plant with debt, partly for the tax break, but also partly so that they can match the financing cost of the equipment to the life of the equipment. During a bad year, with those debt payments coming in, it wouldn't be a good idea to slap them with an enormous tax bill too -- not unless we've decided as a nation that we'd rather drive Yugos. Many of the "loopholes" decried by Nader and his ilk fall into this category -- corporations engaged in clearly distortionary, but legal behavior, in order to minimize their taxes.
So why can't we eliminate this? There are several reasons. The first is the same reason that it's impossible to entirely eliminate computer hacking, or burglary -- they've only got to find one way in, while you have to close all the doors. As fast as you write the new laws, an army investment bankers, accountants, and tax attorneys will get busy seeking a way around it. I'm sure Nader would like to outlaw this as well, but since this would amount to a law against thinking, it would be impossible -- although he may not realize this, given how successful he's been at implementing such a plan among his own followers.
The second reason is that there's a fine line between necessary and unnecessary transactions, and picking where that line falls will remain more of an art than a science. The harder we try to crack down, the more time and money we waste arguing whether the trout pelts really need to be stored at the dry cleaners before they're sold.
And the third goes back to those costs we talked about in Argument 2. The more laws we write to try to close loopholes, the more congressional staffers we need to write them, judges to interpret them, IRS staffers to enforce them, tax lawyers to brief companies on them, etc. And the effect is geometric, not arithmetic -- the more tiny, specific laws we write, the more impossible the tax code becomes to comply with, as complexities generate ever more conflicts and gray areas, and the code itself passes beyond the comprehension of a single person, thereby making it impossible to completely tell whether or not you're in compliance. This unpredictability adds risk, raising the cost of capital and reducing the willingness of companies to invest. This latter cost is impossible to quantify, but we could quantify most of those direct compliance costs -- and I would be willing to bet that they far exceed any revenue generated by "closing the loophole".
Argument 5: Eliminating the Corporate Income Tax Makes Corporate Welfare Harder
At last, an argument even a Naderite could love. Much of that corporate welfare consists of tax deductions, credits, or what have you, that the public perceives as "free" because we're not handing them a fistful of cash. Eliminating the corporate income tax will force voters to ask themselves whether we actually like Chiquita bananas enough to hand them a wad of our hard earned cash every April 15. When we think about all of the unproductive activity we'd be eliminating by eliminating the corporate tax, lets not forget all those high-priced lawyers eating tax deductible dinners with your congressman in order to convince him that his latest client desperately needs a tax break for the Good of the Nation.
Summary
The corporate income tax costs the economy much more than it produces in revenue. Eliminate it and watch a flood of economic activity be unleashed as all those unemployed accountants, tax lawyers, and IRS agents get to work inventing the next Furby. Recoup any lost revenue by eliminating the capital gains tax and treating capital gains as ordinary income in order to equalize the tax treatment of debt and equity, and it will be a long time before we see another Enron.
Summary for Those Who Started to Nod off in the Third Paragraph and Skipped to the Bottom
The corporate income tax is very bad. You should be against it. Email this link to any of your friends who question this.
Wednesday, June 13, 2007
More Random Notes
So I saw bits and pieces of the Democratic debate and the part that sent me through the roof was not anything that the Democrats said but rather one of Wolf Blitzers questions. It went something like this "What would you do as a president about high gas prices?" Now the correct answer is nothing but this questions conveys a total ignorance on Mr. Blitzer's part. At least in the short term, the President has very little ability to influence things such as price (they are driven by supply and demand). Clinton released some fuel from the strategic reserve to ease the price of gas by a nickel or so but that is about all that can be done. Ostensibly the President could lobby congress to give the President authority to set gas prices and we could all return to fuel shortages, gas lines, and even and odd numbered fueling days. That would be assanine. There is only so much that can be done. The candidates to be honest, acquitted themselves quite poorly. John Edwards muttered something inane about investigating oil companies (cuz gee whiz, they are making so much money) and almost pretended that gas prices operated in a vacuum. Chris Dodd said something stupid. Yet they all proceeded to move from gas prices to two things: Energy Independence and Environmental Protection. If you champion the latter then high gas prices have to be viewed as an unmitigated good. People's behavior is being influenced in a direction towards your policy goal (via purchasing autos that have a higher fuel economy, driving less, etc.).
Now on to energy independence. I was listening to C-SPAN radio on the way home from work and there was some subcommittee hearing (it was like the catchall subcommittee of current big fads- global warming, energy independence, tinky winky, etc.) and the chairman (rep. Markey (D-MA)) was bitching at the head of NHTSA (National Highway Traffic Safety Administration or something rather) for not mandating higher a fuel economy for Auto Manufacturers. So he goes on to talk about Europe and how they have very high fuel economy standards there (it's 35 mpg right now, which is what is being proposed here for ten years hence) and how Ford and GM are able to meet these standards in Europe, how come they don't here. Then he did his bit about how there is no reason the American manufacturers can't meet these standards today and cited the Ford Escape hybrid as an example (it manages 36 mpg v. 26 mpg for the standard model) of how the American manufacturers can meet a higher fuel economy without sacrificing safety. But his example is telling, the Ford Escape hybrid is several thousand dollars more expensive than the equivalent standard engine version.
In Europe where energy is expensive (i.e. where they tax the bejeezus out of gas) cars are smaller, much smaller. I drive a Volkswagen Rabbit (the Golf in Europe). In the U.S. the Rabbit VW's entry level car. In Europe it is considered a full-size car, there are two cars below it in horsepower and curbweight- the Polo and the Lupo. A car that weighs 2000 pounds and has 80 horsepower is unthinkable in the U.S. but it is quite standard in Europe. There are reasons other than gas prices (smaller families, greater population density provides for greater economies of scale vis-a-vis public transport, urban running as opposed to highway driving, etc.) but ultimately gas is expensive there and cheap here, ergo, we have gaz guzzling cars. If you want to change that, change the market incentives. Fuel Economy mandates may have some effect but ultimately the consumer will chase the exemption (read: Minivan, SUV, CUV).
Now on to energy independence. I was listening to C-SPAN radio on the way home from work and there was some subcommittee hearing (it was like the catchall subcommittee of current big fads- global warming, energy independence, tinky winky, etc.) and the chairman (rep. Markey (D-MA)) was bitching at the head of NHTSA (National Highway Traffic Safety Administration or something rather) for not mandating higher a fuel economy for Auto Manufacturers. So he goes on to talk about Europe and how they have very high fuel economy standards there (it's 35 mpg right now, which is what is being proposed here for ten years hence) and how Ford and GM are able to meet these standards in Europe, how come they don't here. Then he did his bit about how there is no reason the American manufacturers can't meet these standards today and cited the Ford Escape hybrid as an example (it manages 36 mpg v. 26 mpg for the standard model) of how the American manufacturers can meet a higher fuel economy without sacrificing safety. But his example is telling, the Ford Escape hybrid is several thousand dollars more expensive than the equivalent standard engine version.
In Europe where energy is expensive (i.e. where they tax the bejeezus out of gas) cars are smaller, much smaller. I drive a Volkswagen Rabbit (the Golf in Europe). In the U.S. the Rabbit VW's entry level car. In Europe it is considered a full-size car, there are two cars below it in horsepower and curbweight- the Polo and the Lupo. A car that weighs 2000 pounds and has 80 horsepower is unthinkable in the U.S. but it is quite standard in Europe. There are reasons other than gas prices (smaller families, greater population density provides for greater economies of scale vis-a-vis public transport, urban running as opposed to highway driving, etc.) but ultimately gas is expensive there and cheap here, ergo, we have gaz guzzling cars. If you want to change that, change the market incentives. Fuel Economy mandates may have some effect but ultimately the consumer will chase the exemption (read: Minivan, SUV, CUV).
Thursday, June 07, 2007
Immigration Bill
The support for the immigration bill has me utterly flummoxed. Though, I should qualify my use of the term support, this is clearly an issue where there is a stark elite/base divide, and this goes for both sides of the aisle. We have been told that we are in an intolerable state, that there is a burgeoning underclass of illegal immigrants and something must be done to rectify this situation. The proposed something is amnesty for the 12-20 million illegal immigrants (though the actual language of the bill proposed implies the deportation of about 2 million recent arrivals), a guest worker program that will provide for 200,000 slots, and eventual border enforcement (thus far not coupled with workplace enforcement).
For those that support the "we have to do something now, and it must be comprehensive" approach, I have some questions.
1. Will blanket amnesty not beget more illegal immigrants, or put in other words, will amnesty not beget a futue amnesty?
2. Have temporary guest worker programs been successful in other industrialized countries?
3. Have temporary guest worker programs created a new underclass in other countries? If so, does this not replicate the problem legislation is purportedly designed to solve?
4. Is the status quo really worse than the alternatives?
For those that support the "we have to do something now, and it must be comprehensive" approach, I have some questions.
1. Will blanket amnesty not beget more illegal immigrants, or put in other words, will amnesty not beget a futue amnesty?
2. Have temporary guest worker programs been successful in other industrialized countries?
3. Have temporary guest worker programs created a new underclass in other countries? If so, does this not replicate the problem legislation is purportedly designed to solve?
4. Is the status quo really worse than the alternatives?
Wednesday, June 06, 2007
Silver Bullets in Health Care
One of the obnoxious features in the debate about health care is the notion of silver bullets whether it be preventative care or information technology. These things may in fact improve health outcomes though I am skeptical that they will ultimately achieve significant cost savings. If we want to achieve cost savings there are a very limited number of options- increased coinsurance- i.e. you pay more for your treatments, limiting treatment through qeueing and rationing or like HMOs did (until government intervened), battering suppliers (doctors and big Pharma). That's your toolkit. None are popular but that's what you got.
I am curious as to what corporate social responsibility advocates think of Google. I think there is a compelling case that Google is at this point one of the worst companies on the face of the earth when one considers their different forms of privacy invasion to the abetting the Chinese in censorship of the internet. I understand it is a young company and they contribute to Democrats but I wouldn't think those things are enough to placate CSR-types, or are they?
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