Mike's Economics Blog

Paul Krugman responds to the paper I linked to in Types of Taxes and Economic Growth by stating:

Now, the thing you have to realize about corporate taxes is that the statutory rate — the rate you pay after allowed deductions and all that — means very little. That’s because corporations have lots of potential deductions — and can hire the very best accountants to find them, and lawyers to justify them. So any time you see a table that compares the nasty 35% US rate with other countries, you know you’re being snowed.

A much better indicator is the amount of taxes corporations actually pay. From OECD data (behind a paywall, I think, unfortunately), I get the following for percentage of GDP paid in corporate taxes in some major economies, in 2005:

Canada 3.5
US 3.1
Japan 4.3
France 2.8
Germany 1.7
UK 3.4

So, OK, German profits taxes look low, but basically the United States looks normal. This whole fuss is much ado about nothing...

The data Prof. Krugman posts is interesting, but I think you need to examine this kind of data over a 5-10 year period, since corporate income fluctuates a great deal with the business cycle.

I cannot agree with the conclusion that this data shows that this is "whole fuss is much ado about nothing". Here's why:

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Macleans magazine has a terrific article on accelerating inflation across the world. It picks up my worry that 2008 is starting to look a lot like the 1970s:

Does this herald a return to the 1970s, when inflation ran wild, and you were lucky to get a mortgage at 10 per cent? Most economists won't admit that's a possibility — but it's a scary thought. Back then, Led Zeppelin's Stairway to Heaven blared on eight-tracks, Bob Barker began hosting The Price is Right, new cars cost $4,000, and Canada entered its worst economic decade since the Depression. Years of rampant government spending followed by the expensive Vietnam War had weakened the American economy, and Canada's soon followed suit. As then-prime minister Pierre Trudeau twirled for the nation, our economy sank into one of the longest slumps in Canadian history, marked by soaring unemployment and, in 1974, the largest stock market crash of the last 50 years.

Now, as Canada gets ready to sail past the four per cent inflation mark, it's hard not to notice that our situation is eerily similar to the situation back then. As Donald Coxe, global portfolio strategist at BMO Financial Group, notes, the inflation crisis then was first kicked off by a sudden rise in food prices (partly due to Nixon's "Great Grain Robbery" of 1972, and partly due to the loss of the anchovy crop off Peru, which created a shortage in protein supplements for animal feed). That was followed by a hike in oil prices, which helped create an inflation crisis in developing countries. By 1972, inflation in Canada pushed past four per cent, just as it will by the end of this year. One year later, the inflation rate hit 14 per cent.

The article does a good job of describing Cost-Push Inflation vs. Demand-Pull Inflation but I found this section puzzling:

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The OECD has recently come out with a new report that is an absolute gift for tax policy nerds like me. A PDF of the report Tax and Economic Growth is available here (PDF). The Tax Foundation summarizes as follows:

In a blockbuster new study titled "Tax and Economic Growth," economists at the Organization for International Cooperation and Development studied the effects of various types of taxes on the economic growth of developed nations within the OECD and found that "corporate taxes are found to be most harmful for growth, followed by personal income taxes, and then consumption taxes."

This should not be surprising, as these are similar to other marginal efficiency cost tax studies. Once again it shows that lowering income taxes and raising gas taxes could be beneficial, even if it does nothing for the environment. One result that should please Henry George fans is that reducing income taxes through an off-setting unimproved land value tax could also benefit the economy:

A shift towards taxes on property appears to be even better for growth than a shift towards consumption taxes and has the added advantage that it would be less likely to raise equity concerns. The discussion... suggests that the best form of the shift would be towards recurrent taxes on immovable property as this is the least distortionary type of property tax. Nonetheless, there are two practical drawbacks to a significant shift towards greater taxation of immovable property. First, these taxes are very unpopular in many countries, at least in part because of their visibility... The second practical drawback is that, in most OECD countries, property tax revenues belong to local governments and so a shift towards property taxes would require some changes to the revenue sharing arrangements.

Reading the whole paper is probably overkill unless you are really into tax policy - the summary gives enough of the basics.

Wikipedia has a list of the top 11 unsolved problems in economics. I love the concept, but I am not a fan of the choices, as I explain in:

Are These The Top 11 Unsolved Problems in Economics?

I would love to get your take. Please leave a comment!

Tyler Cowen on a reported Obama tax-plan:

The key point is this: "Reducing a person’s tax credit as his income goes up also reduces his incentive to earn more income." But before some of you get all upset, I do not intend this presentation as an endorsement of John McCain's utterances on fiscal policy.

Addendum: I am not saying that Obama is "raising taxes on the poor." It is about marginal rates and yes marginal rates do matter for incentives. This is a genuine problem of many indeed most anti-poverty programs...

This idea that social programs can lead to very high marginal tax rates for low income households is one I discuss in detail in How Good Intentions Lead to Crushing Marginal Tax Rates on the Working Poor. In anticipation of the e-mails and blog comments I am going to get from this post, I would like to add two things:

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King Banaian (someone I need to link to more often) writes:

You'd never know it, but... there were 23,000 more firms established in the fourth quarter of 2007 than there were firms that went out of business...

This despite a net loss of 107,000 construction jobs and 66,000 manufacturing jobs.

(emphasis mine)

I have to wonder if this should instead be because of. My thinking is this - people get fired or laid off from their job, need something to do and a source of income and decide to instead to follow their long-time dream of opening up a sports bar or baseball card store.

I need to go through the literature and see if anyone has ever studied this. I am a little surprised that I have never considered it up to now.

Eclectecon is not a fan of math camp for Ph.D. students and believes a camp in the 'economic way of thinking' would be more valuable:

The problem is that in graduate economics programmes, we have learned that the surest way to have students churn out dissertations that might lead to some piddly publications is to admit math and science majors who know little or no economics. These students excel at math and do not need a "math camp". But they don't know any economics.

If we are going to require incoming graduate students to take "math camp", then it is even more important that we require them to take "Alchian and Allen" camp; more than math camp, we should give them a two-week course "the economic way of thinking."

I cannot disagree more. Find out why in: Math Camp for Economics Graduate Students.

The Federal Reserve is leaving interest rates unchanged... for now. But it is clear from the release that we should expect to see lower rates in the future:

Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

Easing of monetary policy? The Fed Funds rate is at 2 percent! How much easier can you get? (I suppose the answer is 200 basis points, but the question is intended to be a rhetorical one).

As always, there is one person on the FOMC an inflation hawk like me can always count on:

Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.

I do not believe there are. That being said, I cannot agree with the analysis of Will Wilkinson. He starts out with:

Here is a thumbnail sketch of my position on the sustainability of economic growth. What do you think is wrong with it?

At first glance there are two things I would disagree with:

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A regular reader wants answers to the following questions:

1. What caused it?
2. Can it be good?
3. Can it be corrected without raising taxes?
4. How should it be dealt with?
5. How long should it take?

I would love to get your answers to the above questions. Please leave a comment to this blog post with your thoughts. My answers are here:

U.S. Budget Deficit - Five Key Questions.