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Since several people have asked, I thought I would do some recycling. My plan (which I know I have stolen from someone) is to require companies to turn over an amount of stock, in the form of non-voting shares, roughly equal to the targeted tax rate. This means if we’re shooting for a 28 percent tax rate, then the shares going to the government are equal to 28 percent of the total. If the target is 20 percent, then the government’s shares are equal to 20 percent of the total.
From that point forward the government’s shares are treated the same as the other shares of the company. If the company pays a $2 per share dividend, the government gets $2 for each of its shares. If the company buys back 10 percent of its shares at $100 a share, it buys back 10 percent of the government’s shares at $100 per share. A company taking over the company at a $120 per share price has to also pay the government $120 per share. The basic story is that there is no way to cheat the government out of its tax revenue unless the corporation’s management is also cheating its shareholders.
To be as clear as possible, this is not a government takeover of corporate America. As it stands now, the government makes a claim on corporate profits in the form of income taxes. This just changes the form of this claim on profits.
Some folks may want the government to run the whole economy. I don’t. I value having firms compete in the market. This tax proposal doesn’t change that story. In fact, it has the nice feature that companies will no longer make decisions with an eye toward reducing their tax liability, since the only way they can do that is by screwing shareholders. Instead, companies will make decisions that maximize their expected profits.
I should also point out that this can be done on a voluntary basis. Wherever the tax rate is set, companies can be given the option of issuing stock in the same amount (e.g. a 25 percent tax rate means 25 percent of shares). This would have the advantage from the company’s perspective of ending the need to file tax returns. They just pay the government what they are paying shareholders.
From the government’s standpoint it reduces the enforcement costs. The companies that go this route will require minimal enforcement resources. Meanwhile, the companies that don’t opt to go this route will be telling the I.R.S. that they think they can reduce their tax liability substantially below the official rate. The I.R.S. can then focus its resources on policing these companies. That might not be as good as requiring all companies to go the stock route, but it would be a big step forward in my view.
Here are a couple of columns making the argument. Sorry, I’ve never written a longer piece making the case.
Since several people have asked, I thought I would do some recycling. My plan (which I know I have stolen from someone) is to require companies to turn over an amount of stock, in the form of non-voting shares, roughly equal to the targeted tax rate. This means if we’re shooting for a 28 percent tax rate, then the shares going to the government are equal to 28 percent of the total. If the target is 20 percent, then the government’s shares are equal to 20 percent of the total.
From that point forward the government’s shares are treated the same as the other shares of the company. If the company pays a $2 per share dividend, the government gets $2 for each of its shares. If the company buys back 10 percent of its shares at $100 a share, it buys back 10 percent of the government’s shares at $100 per share. A company taking over the company at a $120 per share price has to also pay the government $120 per share. The basic story is that there is no way to cheat the government out of its tax revenue unless the corporation’s management is also cheating its shareholders.
To be as clear as possible, this is not a government takeover of corporate America. As it stands now, the government makes a claim on corporate profits in the form of income taxes. This just changes the form of this claim on profits.
Some folks may want the government to run the whole economy. I don’t. I value having firms compete in the market. This tax proposal doesn’t change that story. In fact, it has the nice feature that companies will no longer make decisions with an eye toward reducing their tax liability, since the only way they can do that is by screwing shareholders. Instead, companies will make decisions that maximize their expected profits.
I should also point out that this can be done on a voluntary basis. Wherever the tax rate is set, companies can be given the option of issuing stock in the same amount (e.g. a 25 percent tax rate means 25 percent of shares). This would have the advantage from the company’s perspective of ending the need to file tax returns. They just pay the government what they are paying shareholders.
From the government’s standpoint it reduces the enforcement costs. The companies that go this route will require minimal enforcement resources. Meanwhile, the companies that don’t opt to go this route will be telling the I.R.S. that they think they can reduce their tax liability substantially below the official rate. The I.R.S. can then focus its resources on policing these companies. That might not be as good as requiring all companies to go the stock route, but it would be a big step forward in my view.
Here are a couple of columns making the argument. Sorry, I’ve never written a longer piece making the case.
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Donald Trump has been anxious to take credit for the sharp run-up in stock prices since his election. While it is not clear that anything really lies behind this run-up (remember Wall Street investors are the same folks who thought AOL.com was worth $250 billion back in 2001 and that subprime mortgage backed securities were perfectly safe assets), in principle, stock prices are supposed to represent the present value of future corporate profits. If we assume that the rise in stock prices actually reflect something in the world, and not just Wall Street fantasies, then Trump has given these companies a reason to expect larger future profits.
Profits can rise for two reasons. Either they can be the same share of a larger economic pie or they can be a larger share of the same economic pie. There is no reason to believe that anyone is now expecting faster economic growth than before the election. In fact, the I.M.F. recently cut its growth projection for the U.S. If nothing Trump has done or given any indication of doing is likely to boost the U.S. growth rate then the higher expected profits must mean that investors anticipate that corporations will have a larger share of the economic pie.
There are several paths through which Trump’s policies could have this effect. Most obviously, he has called for sharp reductions in the corporate tax rate. If his tax cuts go through, then after-tax corporate profits will be higher even if there is no change in before-tax profits.
A second route for higher corporate profits is by facilitating rip-offs of consumers. The Consumer Financial Protection Bureau (CFPB) was set up in large part to prevent predatory practices by the financial industry. For example, it has sought to make it more difficult for financial firms to slip conditions into contracts that no one would ever agree to if they understood them.
If the CFPB is prevented from protecting consumers then we can assume that financial firms will put more effort into ripping off their customers. This will actually reduce growth since the resources spent writing deceptive contracts could have otherwise been devoted to productive uses.
Another route in which corporate profits can be increased is by letting them destroy the environment at zero cost. For example, the Trump administration reversed an Obama administration executive order that required mining companies to restore hilltops after they did surface mining. By allowing these companies to mine areas without repairing the damage the Trump administration is saving them money. The people in the communities will suffer the consequences in the form of polluted streams and ruined forests, but this is still good news for corporate profits.
Lastly, Trump’s regulatory changes might shift money from wages to profits. The most obvious example here is the plan to reverse the Obama administration’s rule raising the cap under which salaried workers are automatically entitled to overtime pay. By allowing employers to require salaried workers to put in more than 40 hours a week, often without any additional pay, the Trump administration will be putting downward pressure on wages and boosting corporate profits.
For these reasons, investors might have some real cause for expecting higher corporate profits as a result of the Trump presidency. However, none of these reasons are good news for the 90 percent of the country that does not have substantial stock holdings.
Donald Trump has been anxious to take credit for the sharp run-up in stock prices since his election. While it is not clear that anything really lies behind this run-up (remember Wall Street investors are the same folks who thought AOL.com was worth $250 billion back in 2001 and that subprime mortgage backed securities were perfectly safe assets), in principle, stock prices are supposed to represent the present value of future corporate profits. If we assume that the rise in stock prices actually reflect something in the world, and not just Wall Street fantasies, then Trump has given these companies a reason to expect larger future profits.
Profits can rise for two reasons. Either they can be the same share of a larger economic pie or they can be a larger share of the same economic pie. There is no reason to believe that anyone is now expecting faster economic growth than before the election. In fact, the I.M.F. recently cut its growth projection for the U.S. If nothing Trump has done or given any indication of doing is likely to boost the U.S. growth rate then the higher expected profits must mean that investors anticipate that corporations will have a larger share of the economic pie.
There are several paths through which Trump’s policies could have this effect. Most obviously, he has called for sharp reductions in the corporate tax rate. If his tax cuts go through, then after-tax corporate profits will be higher even if there is no change in before-tax profits.
A second route for higher corporate profits is by facilitating rip-offs of consumers. The Consumer Financial Protection Bureau (CFPB) was set up in large part to prevent predatory practices by the financial industry. For example, it has sought to make it more difficult for financial firms to slip conditions into contracts that no one would ever agree to if they understood them.
If the CFPB is prevented from protecting consumers then we can assume that financial firms will put more effort into ripping off their customers. This will actually reduce growth since the resources spent writing deceptive contracts could have otherwise been devoted to productive uses.
Another route in which corporate profits can be increased is by letting them destroy the environment at zero cost. For example, the Trump administration reversed an Obama administration executive order that required mining companies to restore hilltops after they did surface mining. By allowing these companies to mine areas without repairing the damage the Trump administration is saving them money. The people in the communities will suffer the consequences in the form of polluted streams and ruined forests, but this is still good news for corporate profits.
Lastly, Trump’s regulatory changes might shift money from wages to profits. The most obvious example here is the plan to reverse the Obama administration’s rule raising the cap under which salaried workers are automatically entitled to overtime pay. By allowing employers to require salaried workers to put in more than 40 hours a week, often without any additional pay, the Trump administration will be putting downward pressure on wages and boosting corporate profits.
For these reasons, investors might have some real cause for expecting higher corporate profits as a result of the Trump presidency. However, none of these reasons are good news for the 90 percent of the country that does not have substantial stock holdings.
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Politico gets into the act telling readers how tragic the demise of the Trans-Pacific Partnership (TPP) is for the rural economy in a special report. Here’s the punch line:
“But for the already struggling agricultural sector, the sprawling 12-nation TPP, covering 40 percent of the world’s economy, was a lifeline. It was a chance to erase punishing tariffs that restricted the United States—the onetime ‘breadbasket of the world’—from selling its meats, grains and dairy products to massive importers of foodstuffs such as Japan and Vietnam.
“The decision to pull out of the trade deal has become a double hit on places like Eagle Grove. The promised bump of $10 billion in agricultural output over 15 years, based on estimates by the U.S. International Trade Commission, won’t materialize. But Trump’s decision to withdraw from the pact also cleared the way for rival exporters such as Australia, New Zealand and the European Union to negotiate even lower tariffs with importing nations, creating potentially greater competitive advantages over U.S. exports.”
Wow, we could have had another $10 billion in agricultural output after 15 years, if only Donald Trump had not pulled the plug. Hmm, $10 billion in additional agricultural output in 2032, is that a big deal?
Well, if we turn to the International Trade Commission (ITC) report cited in the piece, we see that it amounts to 0.5 percent of projected agricultural output in 2032. That’s about equal to six months of normal growth of the agricultural economy. This means that, according to the ITC report, with the TPP in effect, the agricultural economy would be producing roughly as much on January 1, 2032 as it would otherwise be producing on July 1, 2032 without the TPP.
Is this a “lifeline” for the agricultural economy?
There is also reason to be wary of the ITC report, since these models have been incredibly bad at predicting the outcome of past trade deals.
It’s also worth commenting on the apparent horror with which Politico views the possibility, “rival exporters such as Australia, New Zealand and the European Union to negotiate even lower tariffs with importing nations.” In the good old days, economists used to believe that the United States was helped by stronger trading partners. This was one reason the U.S. generally supported the process of economic integration that led to the European Union.
If other countries remove barriers between them, this could make some of their goods better positioned relative to U.S. exports, but it can also lead to more rapid growth in these countries, which will increase demand for U.S. exports. While both effects are likely to be small relative to the size of U.S. production, it is entirely possible that the growth effect will exceed the substitution effect. Long and short, there is no need for reasonable people to be terrified by the prospect of other countries crafting trade deals.
Politico gets into the act telling readers how tragic the demise of the Trans-Pacific Partnership (TPP) is for the rural economy in a special report. Here’s the punch line:
“But for the already struggling agricultural sector, the sprawling 12-nation TPP, covering 40 percent of the world’s economy, was a lifeline. It was a chance to erase punishing tariffs that restricted the United States—the onetime ‘breadbasket of the world’—from selling its meats, grains and dairy products to massive importers of foodstuffs such as Japan and Vietnam.
“The decision to pull out of the trade deal has become a double hit on places like Eagle Grove. The promised bump of $10 billion in agricultural output over 15 years, based on estimates by the U.S. International Trade Commission, won’t materialize. But Trump’s decision to withdraw from the pact also cleared the way for rival exporters such as Australia, New Zealand and the European Union to negotiate even lower tariffs with importing nations, creating potentially greater competitive advantages over U.S. exports.”
Wow, we could have had another $10 billion in agricultural output after 15 years, if only Donald Trump had not pulled the plug. Hmm, $10 billion in additional agricultural output in 2032, is that a big deal?
Well, if we turn to the International Trade Commission (ITC) report cited in the piece, we see that it amounts to 0.5 percent of projected agricultural output in 2032. That’s about equal to six months of normal growth of the agricultural economy. This means that, according to the ITC report, with the TPP in effect, the agricultural economy would be producing roughly as much on January 1, 2032 as it would otherwise be producing on July 1, 2032 without the TPP.
Is this a “lifeline” for the agricultural economy?
There is also reason to be wary of the ITC report, since these models have been incredibly bad at predicting the outcome of past trade deals.
It’s also worth commenting on the apparent horror with which Politico views the possibility, “rival exporters such as Australia, New Zealand and the European Union to negotiate even lower tariffs with importing nations.” In the good old days, economists used to believe that the United States was helped by stronger trading partners. This was one reason the U.S. generally supported the process of economic integration that led to the European Union.
If other countries remove barriers between them, this could make some of their goods better positioned relative to U.S. exports, but it can also lead to more rapid growth in these countries, which will increase demand for U.S. exports. While both effects are likely to be small relative to the size of U.S. production, it is entirely possible that the growth effect will exceed the substitution effect. Long and short, there is no need for reasonable people to be terrified by the prospect of other countries crafting trade deals.
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It is strange how the media often respond to the prospects of tariffs on imports by pointing to foreign-owned factories in the United States, implying that these are somehow at risk if tariffs are imposed. The NYT gives us an example of this reporting today in a front page article.
The piece highlights a number of foreign-owned factories in the United States and includes data on foreign direct investment by country and also employment levels. It also includes the warning:
“But political and business leaders here in Hamilton County, a conservative stronghold where Donald J. Trump won a majority of the votes, worry that the president’s attacks on trading partners and exhortations to ‘Buy American’ could set off a protectionist spiral of tariffs and import restrictions, hurting consumers and workers.”
This seems to be a non-sequitur. Tariffs on imports increase the incentive for foreign companies to invest in the United States. They allow them to produce for the U.S. market and get around any tariffs. The first Japanese auto factories in the United States were a direct response to the “voluntary export restraints” on the major Japanese manufacturers agreed to in the Reagan years. The cars that Toyota and other companies produced in the United States did not count against these limits.
There are good arguments to be made against putting up import tariffs, but the idea that it would somehow hurt foreign direct investment in the United States is not one of them. If new tariffs are put in place, it would more likely increase foreign investment than reduce it.
It is strange how the media often respond to the prospects of tariffs on imports by pointing to foreign-owned factories in the United States, implying that these are somehow at risk if tariffs are imposed. The NYT gives us an example of this reporting today in a front page article.
The piece highlights a number of foreign-owned factories in the United States and includes data on foreign direct investment by country and also employment levels. It also includes the warning:
“But political and business leaders here in Hamilton County, a conservative stronghold where Donald J. Trump won a majority of the votes, worry that the president’s attacks on trading partners and exhortations to ‘Buy American’ could set off a protectionist spiral of tariffs and import restrictions, hurting consumers and workers.”
This seems to be a non-sequitur. Tariffs on imports increase the incentive for foreign companies to invest in the United States. They allow them to produce for the U.S. market and get around any tariffs. The first Japanese auto factories in the United States were a direct response to the “voluntary export restraints” on the major Japanese manufacturers agreed to in the Reagan years. The cars that Toyota and other companies produced in the United States did not count against these limits.
There are good arguments to be made against putting up import tariffs, but the idea that it would somehow hurt foreign direct investment in the United States is not one of them. If new tariffs are put in place, it would more likely increase foreign investment than reduce it.
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In his NYT column on whether the turmoil of Trump’s presidency is slowing economic growth, Neil Gross refers to concerns about “secular stagnation” raised by former Treasury Secretary Larry Summers. Secular stagnation just means insufficient demand in the U.S. economy. While the column sees the major cause as weak investment demand, the more obvious cause of secular stagnation is the U.S. trade deficit.
The trade deficit is running at annual rate of more than $540 billion a year, close to 2.8 percent of GDP. This is money that is creating demand in other countries, not the United States. If the trade deficit were suddenly brought to zero it would have the same effect on demand as an increase in annual investment of $540 billion. That is far larger than any shortfall that could be explained by factors Summers cited.
It is bizarre that the trade deficit never features in discussions of secular stagnation since it is obviously a major drain on demand in the U.S. economy. It also runs contrary to textbook economics which holds that rich countries like the United States should be capital exporters to the developing world, which means that we should be running large trade surpluses, not deficits.
But, as the saying goes, economists are not very good at economics.
In his NYT column on whether the turmoil of Trump’s presidency is slowing economic growth, Neil Gross refers to concerns about “secular stagnation” raised by former Treasury Secretary Larry Summers. Secular stagnation just means insufficient demand in the U.S. economy. While the column sees the major cause as weak investment demand, the more obvious cause of secular stagnation is the U.S. trade deficit.
The trade deficit is running at annual rate of more than $540 billion a year, close to 2.8 percent of GDP. This is money that is creating demand in other countries, not the United States. If the trade deficit were suddenly brought to zero it would have the same effect on demand as an increase in annual investment of $540 billion. That is far larger than any shortfall that could be explained by factors Summers cited.
It is bizarre that the trade deficit never features in discussions of secular stagnation since it is obviously a major drain on demand in the U.S. economy. It also runs contrary to textbook economics which holds that rich countries like the United States should be capital exporters to the developing world, which means that we should be running large trade surpluses, not deficits.
But, as the saying goes, economists are not very good at economics.
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According to the Bureau of Labor Statistics, productivity growth, especially in manufacturing, has slowed to a record slow pace. In light of this fact, the Washington Post naturally decided to run a major front page article, jumping to two full inside pages, on automation.
It would be good if we were seeing more rapid productivity growth. It would mean that we could enjoy higher wages and/or shorter hours. The Fed could also stop raising interest rates since it wouldn’t have to worry so much about having too many jobs. But that is not the world we are seeing — or at least not the world that we are seeing outside of the pages of the Washington Post.
According to the Bureau of Labor Statistics, productivity growth, especially in manufacturing, has slowed to a record slow pace. In light of this fact, the Washington Post naturally decided to run a major front page article, jumping to two full inside pages, on automation.
It would be good if we were seeing more rapid productivity growth. It would mean that we could enjoy higher wages and/or shorter hours. The Fed could also stop raising interest rates since it wouldn’t have to worry so much about having too many jobs. But that is not the world we are seeing — or at least not the world that we are seeing outside of the pages of the Washington Post.
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The big difference between outsourcing and robots is that the former is happening and the latter isn’t. Productivity growth (a.k.a. robots) has been very slow in recent years. It has averaged less than 1.0 percent over the last seven years and has sometimes been negative.
By contrast, many firms are looking to outsource jobs, both domestically and internationally, on an ongoing basis. For this reason, when the NYT told readers in a story on the jobs report and the economy:
“Perhaps even more than outsourcing, the real threat to job growth for Mr. Trump’s blue-collar base comes from automation and other efforts to improve productivity on the factory floor.”
It had the picture backward. At least for the immediate future, it does not seem rapid productivity growth will be a major source of job loss.
The big difference between outsourcing and robots is that the former is happening and the latter isn’t. Productivity growth (a.k.a. robots) has been very slow in recent years. It has averaged less than 1.0 percent over the last seven years and has sometimes been negative.
By contrast, many firms are looking to outsource jobs, both domestically and internationally, on an ongoing basis. For this reason, when the NYT told readers in a story on the jobs report and the economy:
“Perhaps even more than outsourcing, the real threat to job growth for Mr. Trump’s blue-collar base comes from automation and other efforts to improve productivity on the factory floor.”
It had the picture backward. At least for the immediate future, it does not seem rapid productivity growth will be a major source of job loss.
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Okay, this is getting beyond ridiculous. Productivity growth, especially in manufacturing, is at a record slow (as in not fast) pace. This is not secret information. The data are published every quarter by the Bureau of Labor Statistics. You can even find a nice graph in my previous post. Yet, in spite of the fact that all the evidence shows that workers are not losing jobs due to automation, or at least at a much slower pace than in prior decades, the Washington Post still tells us:
“Yet manufacturing hit a new low in July as a share of all U.S. jobs, said Kolko. While manufacturing has been a focus of the Trump administration, the sector continues to shed jobs, due largely to automation.”
Apart from the fact that manufacturing has actually been adding jobs for last eight months, how does the Post get off blaming non-existent job loss on automation? This seems like a knee jerk response.
No, job loss can’t be due to a trade deficit. The idea that importing things rather than producing them here, couldn’t possibly mean that we hire fewer people to produce things here. The papers can’t have people believe this. So we get outright lies. (Sorry, it is a lie — it is reasonable to expect reporters/editors at a major news outlet to be able to look up data that is readily accessible from a government agency. At the least, there is a deliberate decision to remain ignorant at work here.)
Let me also point out another aspect to this issue. Even if automation was the factor costing jobs, it would not be technology that was responsible for any increase in inequality. The ownership of technology is determined by government policy on patent and copyrights. The government can (and has) made these forms of protection longer and stronger. It could make them shorter and weaker.
Without patent and copyright protection, Bill Gates, the richest person in the world, probably would not have much more money than your average successful doctor or lawyer. It is possible to argue that these are good policies and that we have all benefited from making them stronger and longer, but to deny that the resulting upward redistribution was just technology is just flat-out dishonest.
Incredibly, I have never seen any discussion of this simple and obvious point in any major outlet. I haven’t seen in the NYT, WaPo, WSJ, heard it on NPR or PBS Newshour. I haven’t even seen it mentioned in ostensibly liberal and progressive magazines like the New Republic and the Nation.
It is worth noting that the technology view does have the implication that upward redistribution is something that happened, as opposed to upward redistribution being something that was done through deliberate policy. The implication that the rich getting richer is just the natural state of things is convenient for the winners in this story.
Okay, this is getting beyond ridiculous. Productivity growth, especially in manufacturing, is at a record slow (as in not fast) pace. This is not secret information. The data are published every quarter by the Bureau of Labor Statistics. You can even find a nice graph in my previous post. Yet, in spite of the fact that all the evidence shows that workers are not losing jobs due to automation, or at least at a much slower pace than in prior decades, the Washington Post still tells us:
“Yet manufacturing hit a new low in July as a share of all U.S. jobs, said Kolko. While manufacturing has been a focus of the Trump administration, the sector continues to shed jobs, due largely to automation.”
Apart from the fact that manufacturing has actually been adding jobs for last eight months, how does the Post get off blaming non-existent job loss on automation? This seems like a knee jerk response.
No, job loss can’t be due to a trade deficit. The idea that importing things rather than producing them here, couldn’t possibly mean that we hire fewer people to produce things here. The papers can’t have people believe this. So we get outright lies. (Sorry, it is a lie — it is reasonable to expect reporters/editors at a major news outlet to be able to look up data that is readily accessible from a government agency. At the least, there is a deliberate decision to remain ignorant at work here.)
Let me also point out another aspect to this issue. Even if automation was the factor costing jobs, it would not be technology that was responsible for any increase in inequality. The ownership of technology is determined by government policy on patent and copyrights. The government can (and has) made these forms of protection longer and stronger. It could make them shorter and weaker.
Without patent and copyright protection, Bill Gates, the richest person in the world, probably would not have much more money than your average successful doctor or lawyer. It is possible to argue that these are good policies and that we have all benefited from making them stronger and longer, but to deny that the resulting upward redistribution was just technology is just flat-out dishonest.
Incredibly, I have never seen any discussion of this simple and obvious point in any major outlet. I haven’t seen in the NYT, WaPo, WSJ, heard it on NPR or PBS Newshour. I haven’t even seen it mentioned in ostensibly liberal and progressive magazines like the New Republic and the Nation.
It is worth noting that the technology view does have the implication that upward redistribution is something that happened, as opposed to upward redistribution being something that was done through deliberate policy. The implication that the rich getting richer is just the natural state of things is convenient for the winners in this story.
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