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Article Artículo

The United States Is Not as Low Tax As It Seems

Eduardo Porter had a good piece noting that the United States is an outlier among rich countries in that it takes in far less tax revenue each year than other wealthy countries. As a result, it provides less in public services like health care and higher education. However, this is an incomplete story.

Tax collections are only one way in which the government pays for goods and services. There are three other important mechanisms:

1) patent and copyright monopolies;

2) tax expenditures, and;

3) loan guarantees.

While tax collections have increased little over the last three decades, the money committed in these three categories has expanded hugely relatively to the size of the economy over this period.

In the case of patent and copyright monopolies, these are mechanisms that the government uses to pay for innovation and creative work as an alternative to direct spending. For example, the United States could spend another $50 billion a year on biomedical research (in addition to the $32 billion it spends through the National Institutes of Health) and take responsibility for developing and testing new drugs. Instead, it tells the pharmaceutical industry to develop drugs and it will give it patents and other types of monopolies so it can recoup its costs.

CEPR / November 14, 2017

Article Artículo

Imagining Tax Debate Was in the Real World: Suppose Productivity Growth Is Already Up

The main claim of proponents of the Republican tax bill is that lowering corporate taxes will lead to a surge in corporate investment. This is supposed to lead to more rapid productivity growth and therefore higher wages.

As those of us who are fond of data have pointed out, the world doesn't seem to work this way. There is very little relationship between after-tax profit rates and investment. In fact, the period of strongest investment was the late 1970s and early 1980s when after-tax profits were at their post-World War II low, while the current period of very high profits has been associated with lackluster investment. This leaves little reason to believe that cutting the corporate tax rate will have much impact on investment. (Of course, we also tried this trick in 1986, also with little impact on investment.) 

But there is another aspect to this story that folks in the reality-based universe should be thinking about. Productivity growth has been dismal in recent years, in spite of all the talk about robots taking our jobs. (Pundits aren't paid to know anything about the world.) Over the last five years, productivity growth has averaged less than 0.7 percent annually. That compares to rates of close to 3.0 percent from 1995 to 2005 and also during the long golden age from 1947 to 1973.

However this may be changing. Last quarter, productivity rose at a 3.0 percent annual rate. As everyone familiar with productivity data knows, the best thing to do with quarterly number is to ignore it. Nonetheless, a faster trend has to start somewhere and what is striking is that we seem to be on a path for another strong number for the fourth quarter.

CEPR / November 10, 2017