Tag Archives: economics

False Tax Premises

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Edward Kleinbard, a USC law professor, had some thoughts on tax inversions, the process whereby a domestic company merges into a foreign company and moves its headquarters to that foreign company’s domicile in order to avoid high domestic taxes. The subject has come up in the last few weeks in the context of US companies doing the inversions. Dr Kleinbard, though, is proceeding from some false premises.

He argues, for instance,

Firms that invert argue that the deals are…harmless to US tax-revenue collection, and a necessary response to our anticompetitive world-wide corporate tax system. [“Harmless” is] demonstrably false…..

If allowed to continue, inversions will eviscerate the US domestic corporate tax base, because making a foreign company the parent of a US firm opens up new tax-avoidance possibilities.

The false premise is this. It isn’t the government’s money; it’s the money of the corporation’s owners. It simply isn’t possible for the government to be harmed by not receiving that which doesn’t belong to it.

Moreover, there shouldn’t be a “US domestic corporate tax base” in the first place. The corporation really doesn’t pay much of those taxes; the corporation’s customers do in the form of higher prices—which ultimately makes the American citizens doubly taxed.

Another of Kleinbard’s false premises is this:

Corporate tax reform will not be able to undo the damage done to the US tax base.

Part of this second error is simply a restatement of the first: no damage can be done to the government’s tax base by not receiving that which doesn’t belong to the government.

The larger question here, though, is the predicted failure of corporate tax reform. With American corporate tax rates lower than anywhere else in the world (their complete removal, say I) the US will be far more attractive to all companies, foreign and domestic. Including to those inverted companies, still inverted, or with the inversions undone as the more attractive alternative for the putative new senior partner company.

Besides, in the end, as always, the government doesn’t need the money; it needs to reduce spending.

A Thought from the Border Crisis and Immigration Generally

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…it’s not limited to those topics, but it was triggered by a quote by Dr Manny Alvarez in his piece about the bias of the Latino press in its coverage of the current children border crisis. What Alvarez said was this:

The crisis reminds me of that old saying: “Give a man a fish, and he’ll eat for a day; teach a man to fish, and he’ll eat for a lifetime.”

Alvarez offered this aphorism in the context of needing to address the root cause of the crisis, not merely treat the symptom that is what the crisis is.

Let me modify the aphorism slightly; it’ll illustrate another part of the root cause.

Give a man a fish, and he’ll eat for a day; teach a man to fish, and he’ll eat for a lifetime and deny the donor man the opportunity to maintain the dependency of the recipient on him.

College Isn’t for Everyone, Revisited

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I touched on this a while ago. Here’s another look.

Dakota Blazier had made a big decision. Friendly and fresh-faced, from a small town north of Indianapolis, he’d made up his mind: he wasn’t going to college.

“I discovered a long time ago,” he explained, “I’m not book smart. I don’t like sitting still, and I learn better when the problem is practical.” But he didn’t feel this limited his options—to the contrary. And he was executing a plan as purposeful as that of any of his high-school peers.

The questions that keep him up at night aren’t about inequality: how rich am I, or, how rich is my neighbor? What he worries about is the kinds of opportunities open to him. Can he get an education that equips him for a job he wants? Can he find that job and build on it to make a career? His concern is economic mobility.

Indeed, there are lots of opportunities—good opportunities. Tamar Jacoby, in the WSJ article linked above, outlined three requirements for these opportunities actually to be opportunities, and paths like Blazier’s meet those requirements [emphasis added].

The first requirement of any upward path is entry ramps at the ground level. The Craft Training Center of the Coastal Bend, in Corpus Christi, Texas [for instance], teaches welding to 200 high-school students, mostly at-risk youth.

The second requirement of any good upward path is for training to lead to a job. [Anthony, 19 years old] Solis’s big break came last August, when he and 20 other Coastal Bend students auditioned for JV Industrial, which does high-risk, high-paying maintenance work in oil refineries. JV had never recruited at the Corpus Christi center, and Mr Solis was so nervous that he was almost ill on the day of the hands-on test. Still, he made the grade and headed off to Houston for more free training—with the possibility of a big job if he finished.

A third requirement of a good career path is that it must be aligned with economic needs. This is where employers like JV can make all the difference.

Indeed. RTWT, as they say.

Define “Fair”

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Some think the mortgage interest deduction from our income taxes is unfair. After all, says one such,

I can easily construct a situation in which a taxpayer essentially enjoys no [mortgage related] tax benefits whatsoever. How about the single individual or possibly a married couple without children, who make just enough to make ends meet but still cannot save to buy a house? Or possibly, they prefer renting to the onerous commitment of home ownership. There doesn’t appear to be any tax breaks for them.

Although this person offers no definition of “fair” whatsoever, she seems to think that “fair” means everyone gets the same benefit, even though by her own construction, they’re not in the same situation as those who’ve “earned” that benefit. Because, equal outcomes.

One gets this grade on an assignment, another gets that grade, that’s unfair? One gets a first place prize in a contest and another doesn’t, that’s unfair? One earns more money than another, that’s unfair? One has a more fortunate endowment of work ethic, talent, luck, than another, that’s unfair? One made better use of his equal opportunity and so becomes better off than another, that’s unfair? How, exactly?

Of course, this particular question easily could be begged with a proper reform of our tax code, a reform that brings us to a single flat rate with no deductions, credits, etc. What is truly unfair is using our tax code for social and economic engineering and thereby picking winners and losers by government fiat rather than by actual performance and merit.

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Keep in mind that the sole purpose of taxes under our Constitution is to fund the government, not to control how free men interact with each other in a free market, not to say, “This is a worthy enterprise, but that is not.”

“Inversions”

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US corporate income is taxed at the highest rate in the world. “Inversion” is the process of American companies packing up, usually through merger with foreign entities, and reincorporating (if not physically relocating) in a foreign country in order to avoid US corporate income taxes.

Treasury Secretary Jacob Lew wants the inversions stopped. Writing to the Senate and House tax-writing committees, he said he said those two bodies “should enact legislation immediately…to shut down this abuse of our tax system.”

His letter went on:

What we need as a nation is a new sense of economic patriotism, where we all rise or fall together. We should not be providing support for corporations that seek to shift their profits overseas to avoid paying their fair share of taxes.

Prior to that,

the Obama administration in its budget…proposed tightening the rules to substantially limit inversions.

Of course, it’s utterly inconceivable to this administration that the abuse is our tax system itself. It’s utterly inconceivable to this administration that what is patriotic is lowering tax rates.

More fully, and contrary to the nonsense Lew is spouting, the proper tax action for preventing inversions is to lower corporate income, and related, taxes so as to remove the incentive to go overseas in the first place. Lowering the current rate to 20% would be a good start, especially if done with a view to eliminating corporate income, and related, taxes altogether in just a couple more years.

I’ll ignore, for now, the New Nationalism, Teddy Roosevelt Progressivism in Lew’s letter.