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Thursday, August 21, 2008

Tax Rates vs. Tax Revenue

Mankiw posts this video of Obama economic advisor Austan Goolsbee being interviewed on economic policy.

In previous posts Mankiw has showed the fact that, under Obama's current tax plan, effective marginal corporate tax rates would rise pretty substantially.
But he neglects to say that, as Austan points out in the interview, the US reaps some of the smallest tax revenues as a percent of GDP in the entire world. So, slight laffer effects aside (which history shows to be minimal), having companies pay a bit more than they already are (either due to current subsidies or loopholes) makes sense to me at evening the playing field and increasing revenues overall.

Also as Austan points out, eliminating some of the subsidies large corporations currently receive for shipping jobs overseas means more jobs / businesses staying here, which means more revenue and/or may eliminate the need to let the marginal tax rates to go back to the 1990s level to the same degree.


The TeleSales Guru said...

Jobs move overseas because competitive pressure forces US businesses to be more efficient to compete. They do this by seeking lower costs elsewhere in the world.

Part of the problem is the US's soft policy on fair tariffs for foreign goods. But US companies still must compete.

Please explain to me how forcing US companies to compete with a foreign company having lower a cost basis is going to increase the revenues of US companies rather than put them at a market disadvantage causing them to cut jobs and wages to compete and survive.

Unless you don't participate in the world economy you are forced to compete with it. Jobs flowing to developing countries where wages are far lower is a natural and necessary event as that is where the competitive products are coming from.

Forcing US companies in to positions where they can't compete because of higher labor costs than the rest of the world market doesn't solve the problems of jobs or the economy, it makes them worse. It puts US companies out of business.

Hasn't anyone taken an economics class?

I would truly like you to explain this to me.

mackay said...

I've taken some economics classes. Here are two answers to your question:
1) I agree with you that the forces pulling jobs off-shore are strong, and natural. But your implicit argument (that we should make the Bush tax cuts permanent) does not solve anything. Perhaps if you (or Mankiw) could show that the tax cuts made any significant impact on job flight from 2001-present, there would be some weight to this policy that would offset the deficit increase that it has produced.

2) A tax break to keep jobs onshore will lower the costs enough to persuade some, but not all, small- and mid-cap firms (let's say 5%) to keep some fraction of jobs on-shore. McCain cannot claim this advantage.

3) I think we can both agree that we're never going to win the marginal tax-rate race. But we can win the infrastructure/property rights/education/advanced technology race. Given the inherent economic incentives facing most multinational companies to move overseas, our best bet is to improve the native advantages of employing in the US.

The TeleSales Guru said...

The tax cuts and more of the same, according to what I understand actually increase government revenues.

Though the current administration has been careless with spending the tax cuts did in fact grow GNP and produce larger revenues. According to experts what happens is that the rich, when taxes are lowered, because the increase business, end up actually paying more in taxes that with higher rates where their incomes and their willingness to invest recedes.

My point with jobs is that we can do nothing to stop the flow overseas except become protectionist and enforce rules that would destroy US businesses.

However, by changing the climate and lowering business tax rates (as we are the second highest in the Western world) we can keep more and attract foreign investment.

What has happened with the markets recently is the perfect opportunity for those wishing to move us towards the Socialism of Europe. This is quit scary as those economies are dead.

Capitalism is what made our economy the leader in innovation and technology -- Socialism will kill all of that.

Anonymous said...

Mackay, you ignore the "but for" fact associated with the Bush tax cuts. That is, what would the tax receipts and job losses have been but for the tax cuts? My guess is tax receipts would have been much lower due to the impacts of the dot com implosion, the terrorist attacks, and the recession. Job losses would have been greater, because there would have been fewer dollars available to retain employees.

Let's look at two companies, Novartis (Sweden) and Pfizer (U.S.). Each makes $1 billion in profits. Novartis has a 10% income tax rate and pays $100 million in taxes, leaving $900 million for reinvestment, jobs, dividends, etc. Pfizer, based in the U.S. has a corporate tax rate of 35% and pays $350 million in taxes, leaving $650 million for reinvestmetn, jobs, dividends, etc. Due to the U.S. tax policy, Pfizer is at a structural disadvantage in the U.S. For it to have the equivalent after-tax cash flow, it would have to generate an additional $384 million in profit.

Obama is a smart guy, but as a lawyer, he should know about the law of unintended consequences. Raise people's tax rates high enough and it disincentivises output and people put their energy into avoidance.

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