Wile E. Coyote tax and tariff policy

Here’s a piece from New Yorker about how restricting trade to help American workers ends up hurting the poorest Americans: “The Free Trade Paradox” (May 26, 2008). The point is that keeping imported calculators (for example) out of the U.S. would be great for a handful of guys who work in a calculator factory, of little consequence for the BMW-driving professionals, and ruinous for ghetto schoolchildren who would pay $100 for a calculator that used to cost $12 (though maybe they would learn how to do arithmetic?).

Harvard egghead Gregory Mankiw argues for cutting the corporate tax in a June 1, 2008 New York Times editorial. The stated goal of the corporate tax is to rake off money before it gets into the hands of wealthy investors. Mankiw cites studies from Europe that found that 92 cents of every $1 in corporate tax came out of the hides of workers in the form of reduced wages. Mankiw argues persuasively that the corporate tax discourages economic growth. The one example that he does not cite is the massive economic boom achieved by Ireland. You could argue that the Irish are simply much smarter and harder working that their counterparts in England and Western Europe. Alternatively you could note that a company in Ireland pays half as much corporate tax as one located anywhere else in Europe. (Artists, such as musicians, did not pay any tax for a long time. When Ireland tweaked the law to exempt only the first $320,000 per year, U2 and Bono moved all of their assets into an offshore trust (story).)

In 1948 we started laughing at Wile E. Coyote, but perhaps over time we have become him. Wile E. Coyote, unable to run as fast as the Road Runner, came up with elaborate schemes that invariably backfired. A Martian looking down at the Earth might think “the only way for the U.S. government to collect more taxes is to have a larger economy from which to slice off a share; the only way for the U.S. to grow is to work harder, improve education, streamline transportation, stop paying $1 trillion every year for oil that is mostly imported, etc.” Here in the U.S., though, we can’t get organized for the tough jobs. We watch kids come out of the school system barely able to write or do arithmetic and argue over whether or not their teachers should get a 5% raise or 10% pension increase. We watch cars burn millions of barrels of imported oil sitting in traffic jams and never ask ourselves why we can’t put down a wireless Internet along our road system so that the cars would have routed themselves around the problem. We watch our money and ownership of our assets disappear overseas to fill up cars whose engines operate almost exactly the same as the engine in a 1908 Model T Ford (25 mpg; somewhat more efficient than today’s average passenger vehicle) instead of thinking about investing our oil budget in technological innovation.

Let’s look at Barack Obama’s economic policy idea page:

  • he will raise the minimum wage, an action that economists find serves mostly to discourage the employment of teenagers
  • he will give a mortgage credit to people who are not currently able to write off mortgage expenses, further transferring money from the pockets of renters to the pockets homeowners and further inflating the cost of buying a house in the U.S.
  • he will “create a fund to help people refinance their mortgages”, i.e., more money taken out of the pockets of renters
  • “ensure freedom to unionize”; our public school teachers have the freedom to unionize, but it doesn’t seem to have helped students learn anything; autoworkers in Michigan have the freedom to unionize, but it doesn’t seem to have made Detroit a vibrant growing city
  • “fix NAFTA”; presumably this is cutting down on imports from Canada and Mexico
  • “Obama will invest in rural small businesses”; tax people who walk around energy-efficient cities to help encourage folks to settle in places where the supermarket is a 30-mile drive away
  • “Expand the Family Medical Leave Act”; companies with 25 employees will now be required to read through the fine print of this law
  • “Obama will initiate a strategy to encourage all 50 states to adopt paid-leave systems. Obama will provide a $1.5 billion fund to assist states with start-up costs”; Americans who are working will be taxed to give money to Americans who aren’t working. Everyone will pay for the lawyers who draft and read these new regulations. Government employees who are currently paid not to work at their desks will now be paid not to work at home.
  • “Obama will also make the federal government a model employer in terms of adopting flexible work schedules and permitting employees to request flexible arrangements.” Government employees who currently do no work 9-5 will be doing no work 10-4. Maybe this will cut down on traffic in D.C.
  • “Obama will enforce the recently-enacted Equal Employment Opportunity Commission guidelines on caregiver discrimination.” More new regulations to read and argue over.

If one were considering emigrating to the U.S. to become a worker, some of this sounds pretty good, though maybe not as good as a 10 percent pay raise or 10 percent income tax cut. If one were trying to figure out where to set up a new business, it is tough to see how these proposals would provide an incentive to locate in the U.S.

Obama is supposedly our nation’s best hope and these are his best ideas.

How about McCain? His economic plan starts off with a section by Wile E. Coyote. He is going to cut gas taxes. He wants to tax renters to help homeowners. He wants to put more money into student loans (most of which ends up inflating the cost of attending college). He wants to tax people who suffer from infertility to give big tax credits to parents blessed with a bunch of children (combined with the gas tax holiday, that family of six can finally help boost the economy by buying a 7-passenger SUV). Buried after a couple of pages is a section that Ronald Reagan might have written, proposing to cut taxes in order to generate economic growth. The apparent schizophrenia is not addressed.

8 Comments

  1. Bob

    June 2, 2008 @ 12:01 pm

    1

    I normally appreciate your insights, but I’m confused on this one.
    Are you saying that we should abolish all taxation? If not, what level
    do you see as appropriate? Who should pay, and what behaviors
    might change as a result?

    I’m hardly an economist, but the statement that all corporate taxes
    simply reduce wages seems weird to me. I thought wages represented
    the relative supply and demand of labor, or the relative political clout
    of labor/management. Beyond that, management will keep as much profit
    as possible, taxes or no taxes.

    On helping people re-finance homes, no doubt too much of that
    is bad, as you say. But too little could feed a crisis and end up worse.
    Surely you don’t regard the great depression as a beneficial object
    lesson in moral hazzard, that taught people not to invest in bubbles.
    How did that work out?

    I happen to agree with many of your points. But you mix notions
    of appropriate taxation (how much, who pays, and what behavior
    does it modify) with how those taxes are spent. To my mind, the
    two should be decoupled. I also miss a sense of balance; it kinda
    sounds like you want the money spent differently, but don’t want
    to pay for it, because taxes create incentives to do the wrong thing.

  2. philg

    June 2, 2008 @ 7:49 pm

    2

    Bob: I did not say that I agreed with Mankiw about eliminating the corporate tax, much less advocate eliminating all taxation. I merely was bringing these articles, which I thought were interesting because of the unintended consequences angle, to the attention of my friends who read this blog.

    Your theory of corporate taxes is at variance with Mankiw and the European study. Perhaps we could tax corporate profits at 100 percent and there would be no effect on wages.

    How could the government survive without a tax on corporate profits? It would somehow have to survive on federal personal income tax, state personal income tax, state sales tax, local sales tax, state property tax, local property tax, federal payroll tax, state payroll tax, federal automotive fuel excise tax, federal aviation fuel excise tax, federal tariffs on imported goods, federal excise tax on airplane charter, federal taxes on cigarettes, state taxes on cigarettes, federal taxes on alcohol, state taxes on alcohol, state taxes on restaurant meals, local taxes on restaurant meals, state taxes on hotels, local taxes on hotels.federal taxes on airline tickets…

  3. Vidar Svendsen

    June 3, 2008 @ 4:05 pm

    3

    Phil, you’ve been very pessimistic about the economical future of America lately. Cheer up and read this;

    http://www.foreignaffairs.org/20080501facomment87303-p0/fareed-zakaria/the-future-of-american-power.html

  4. philg

    June 3, 2008 @ 5:38 pm

    4

    Vidar: Thanks. That is a long article. I like “[the U.S.] political system is dysfunctional, unable to make the relatively simple reforms” and “The U.S. military, in contrast, dominates at every level — land, sea, air, space — and spends more than the next 14 countries combined,”.

    This Zakaria guy doesn’t put the Iraq war cost at $3 trillion, but only $125 billion for Iraq with Afghanistan thrown in.

    More good stuff: “[we] are selling off their assets to foreigners to buy a couple more lattes a day.”

    It is charming to find someone who has faith in the value of Computer Science PhDs as a source of economic growth (Zakaria points out that we graduate a lot more than other countries).

    Buried deep in the article… “For most of the last 30 years, the United States had the lowest corporate tax rates of the major industrialized countries. Today, it has the second highest.” Aha! Now I see the connection to my posting.

    “[everyone else] has better cell-phone service than the United State” — Amen

    “A can-do country is now saddled with a do-nothing political process” — I wish that the Massachusetts legislature would do a little less, since they seem to be rather energetically creating new taxes at the moment, including my pet peeve, the sales tax on aircraft that will force me to move to New Hampshire, take up smoking, and buy some guns.

    He says we “can stabilize the emerging world order by bringing in the new rising nations”. What does that mean? Isn’t that what we are trying to do with Iraq? He recommends “accepting a world with a diversity of voices and viewpoints”. We don’t have a choice, do we? Fidel Castro expressed his voice and viewpoints for 50 years from 90 miles off the coast of Florida and there was nothing that we could do about it. Hugo Chavez says whatever he wants even if we don’t like it.

    My conclusion is that this article is lame. He consumes nine pages and has hardly a single concrete recommendation. He says that American politics is captured by big money interests but doesn’t say how to fix it. He says that we have the 2nd highest corporate tax rate but doesn’t explicitly propose eliminating it (as Mankiw does).

    Anyway, his premise is questionable. Why should Americans want to be the dominant world power? Let’s say that the only way to be dominant is to grow the country to 2 billion in population and accept very tight housing, a degraded environment, and continuous traffic jams on highways and sidewalks. How would that benefit us as ordinary citizens?

  5. lunz

    June 4, 2008 @ 12:36 pm

    5

    Speaking of taxation vs. growth: have you heard of Hauser’s Law? The graphic in this article came as a surprise to me.

    http://online.wsj.com/article/SB121124460502305693.html

  6. dominik

    June 5, 2008 @ 9:22 am

    6

    You might find some common ground in Ron Paul’s writings. While his book is not online, a whole host of essays and articles spanning his congressional career is online here:
    http://www.ronpaul2008.com/articles/

    In particular, this piece might resonate:
    http://www.ronpaul2008.com/articles/104/taxes-spending-and-debt-are-the-real-issues/

    An excerpt: “Lower taxes benefit all Americans by increasing economic growth and encouraging wealth creation. I’m in favor of cutting everybody’s taxes – rich, poor, and otherwise. Whether a tax cut reduces a single mother’s payroll taxes by forty dollars a month, or allows a business owner to save thousands in capital gains and hire more employees, the net effect is beneficial. Both either spend, save, or invest the extra dollars, which helps all of us more than if those dollars were sent to the black hole known as the federal Treasury.”

  7. dominik

    June 5, 2008 @ 9:36 am

    7

    Also, for comparison, Ron Paul’s economic plan:
    http://www.ronpaul2008.com/prosperity/

    Highlights:
    # Accelerate Depreciation on Investment. We need to help companies grow and create jobs.
    * Pass H.R. 4995 to amend the Internal Revenue Code of 1986 to reduce corporate marginal income tax rates.

    # Eliminate Taxes on Capital Gains. Investment should be embraced and rewarded.
    * Pass H.J. Res 23 (The “Liberty Amendment”), proposing an amendment to the Constitution of the United States relative to abolishing personal income, estate, and gift taxes and prohibiting the United States Government from engaging in business in competition with its citizens.

  8. Preston L. Bannister

    June 12, 2008 @ 4:12 pm

    8

    “Obama will invest in rural small businesses”; tax people who walk around energy-efficient cities to help encourage folks to settle in places where the supermarket is a 30-mile drive away.

    Ignoring the politician – the other part of the statement bugs me.

    What exactly qualifies as “energy-efficient cities”? Are all cities energy-efficient? Why is this notion so common and so unquestioned?

    We are talking about real cases – not some rarely realized ideal.

    If cities are so “efficient”, why does it usually cost more to live there? If the “free market” were truly efficient, then overall cost-of-living should be less – at least so one might think. If cities are too expensive (and/or lousy) as a place to live, then you get folk commuting. With lots of traffic comes lots of congestion – which is not remotely efficient.

    In fact I do believe cities (and dense suburbs) are efficient – at moving money from the economic majority to a minority.

    I do also believe that there is or could be a “sweet spot” where a city is not over-expensive or over-congested … but that is not the usual case. I suspect that most or all larger cities fail this test.

    Think a bit about that supermarket trip. In the country you might be able set the cruise-control for most of the 30-mile trip, get there in about 30 minutes, and not burn a lot of gas. In a denser area with poor traffic, a 30 minute trip may involve a lot of stop-and-go driving, burn a lot more gas, and not get you nearly so far.

    So which is “efficient”??

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