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Post 04 Nov 2017, 12:37 pm

Freeman:
The current corporate tax plan is a tax cut so trying to use the corporate tax increase plan of 1986 to argue that we will get great growth and it will be revenue neutral...is extremely dubious. If the corporate tax increase of 1986 caused economic growth...then we're doing the opposite thing here. Here, we are just cutting corporate taxes and hoping that will get some of that back in increased tax receipts. The supply-sider's dream...that never works.


The essential point is that lower corporate income tax rates improve economic activity. In the 30 years since the 1986 Act Western Europe and other developed countries have lowered their tax rates. Capital has become more mobile with increased technological capability. The US has to compete by lowering its corporate tax rate.

Although not as far reaching as the 86 Act -- and not nearly as good -- the House Plan is helpful because it does simplify (AMT, manufacturing preferences, worldwide taxation) and reduce rates.
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Post 04 Nov 2017, 12:42 pm

Freeman:
I gave an example of a couple making $200,000 a year combined who might carry a loan over $500,000. I then noted that the tax rate dropped for those making $400,000 to a million. I don't think those two points are contradictory as those are significantly different income levels.


The couple will do fine under the new legislation because their tax rate is going down (from 28% to 25%) and they are getting a better child tax credit. (assuming 2 kids from $2,000 to $3,800.)
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Post 04 Nov 2017, 1:48 pm

I don't get the LOGIC that cutting corporate rates is going to result in significant growth. How? Are they going to take that extra money and investment in equipment or R&D.? Business investment went down in 2015 and 2016, though it rebounded a bit this year.

https://fred.stlouisfed.org/series/W790RC1Q027SBEA

Business investment is not increasing even though companies have high amounts of cash and substantial retained earnings. This is probably due to the following:

"In the United States as well as in many of the other advanced economies, investment growth has largely been consistent with the recovery in business output. In the standard economic model of investment, a representative firm with constant returns to scale chooses the level of capital that will maximize its expected future profits. Investment, as an addition to the capital stock, then increases when output growth is expected to increase, hence the long-standing “accelerator” model of investment (Samuelson 1939). According to this view, businesses invest because they expect consumers to buy their products in the future, not simply because they currently have high profits or substantial retained earnings."

So business is not going to invest unless they think that is going to result in increased sales to consumers. Makes perfect sense.

And where is all that money going that could be going into business investment? Back to shareholders in the form of buy-backs and dividends which are at historic highs. See Figure 13 in below article.

https://obamawhitehouse.archives.gov/si ... states.pdf

Figure 16 of the above article shows that historically from 1948 capital intensity added a .9 percentage point to labor productivity. From 2010-2014 the lack of capital intensity was a negative drag on productivity. Remember 2015 and 2016 were terrible years for business investment. So it ain't got better...

To sum up: We need more business investment to increase economic activity and worker productivity. Businesses already have the money but are not willing to gamble on increased sales. They are using the money to do stock buy-backs and send more dividends to shareholders. So if we cut corporate rates...it will just be more of the same. DOW will go up even more. Corporate executives will make more money. Shareholders will make more money. More wealth stratification. But little positive effect on the economy as a whole.

If we want 3% economic growth then we need government to furnish more money for research into new technologies and businesses to invest more money. A corporate tax will not do that.

A revenue neutral tax corporate tax reform I am fine with. Reduce the number of 35% paying corporations and increase the number of those paying too little. But it needs to be revenue neutral at its inception.
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Post 05 Nov 2017, 5:43 am

Here's the Tax Foundation analysis of the plan. https://taxfoundation.org/2017-tax-cuts ... -analysis/

Freeman, if you keep an open mind I think it will answer many of your questions. For me the most interesting part is Table 3." Ten-Year Revenue and Economic Impact of the House Ways and Means Tax Plan by Provision". By using dynamic revenue scoring you get a better sense of the impacts. For reasons that I don't understand -- perhaps ideological or perhaps because it is hard -- the Joint Committee on Taxation does not score this way and thereby ignores the most important impacts of the plan.

Table 3 shows the importance of the corporate tax provisions. In fact, that really the vast majority of the pro growth part of the plan ... the rest is somewhat superfluous as it relates to economic growth. Obama should have done this 6 years ago and he would have had a much more successful presidency.

Also take a look at Table 5: "Static and Dynamic Distributional Analysis". It shows that when you score dynamically the economic benefits flow to all income groups.
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Post 05 Nov 2017, 5:49 am

geojanes wrote:
Ray Jay wrote:3% growth is not extraordinary
in a growing labor market.

The problem with growth over the next 10 years is entirely demographic. People turning 65 next year were born in 1953, which was the last year that births were under 4 million in the USA, until 1964, that is. After which births didn't reach that total again until 1989.

The pig is reaching the end of the python:


The demographics are certainly important but they are more complex than you describe. Countervailing factors are (1) the 1989 age group is now within the work force and subsequent generations are comparable to the baby boomers, (2) white collar workers are often staying employed through their 60's and beyond. (3) there will continue to be labor saving advancements that put workers out of jobs. In 5 to 15 years we will see self driving cars and trucks take over the transportation sector. We will need growth to accommodate the resulting job loss. Google and others are not investing billions for fun.

But I totally agree with you that more immigration is important to realize economic growth and avoid undue inflation.
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Post 05 Nov 2017, 6:33 am

I will look at reasonable arguments even if they differ from my beliefs. Obviously, we have our idelogies and those are resistant to change, but I think I can change my mind if convincing evidence is provided. I did not really question the idea that the cutting of corporate tax rates in 1986 led to more tax revenue until actually looked into the details and realized that it was an overall 120 billion tax hike on corporations, so it was no surprise that corporate tax revenues went up.

Table 3 reflects conclusions. I have no way to assesss those conclusions. What I did is look at business investment as a way that will most likely lead to growth. And since businessses are not investing right now when they have plenty of cash to do so..that tells me they will not invest more if we cut rates. And if they don't invest more then how we are going to have more economic activity and more labor productivity and more development of new technologies than we do now? And we will have 2 trillion dollars less money to spend on infrastructure and on government supported research into new technologies that would help growth. And since much of the benefits of the tax plan will go to the wealthy, it will have a minimal effect on consumer demand.

Conclusions are not very convincing. Complicated economic analyses that I cannot really delve into and have assumptions built into them are not convincing to me, either. What I need is a rational explanation as to how this tax plan will cause economic growth.

I put forth a logical explanation as to why this plan will have a minimal effect on growth. Businesses are already not investing because they just don't see that there will be customers to buy those goods. Given low wage growth with most wealth going towards the top, businesses are probably justified in thinking that their investments will not result in increased sales as consumer demand is not likely to sustain it. So giving corporations more cash will not result in more investment nor will it increase consumer demand. What is your logical explanation for how this tax plan will cause more than minimal economic growth?
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Post 05 Nov 2017, 7:00 am

Well we all have our biases; I read Al Jazeera to challenge my own. :)

Business is not a closed system. Many corporations have moved headquarters to Ireland, Canada, the UK, etc. because of our tax system. New investments by existing corporations have been made overseas instead of the US.

Also, lower costs of capital result in dynamic economic improvements. From the 2nd bullet point on my link:
According to the Tax Foundation’s Taxes and Growth Model, the plan would significantly lower marginal tax rates and the cost of capital, which would lead to 3.9 percent higher GDP over the long term, 3.1 percent higher wages, and an additional 975,000 full-time equivalent jobs.


Here's an explanation on the importance of a low cost of capital:

http://news.morningstar.com/classroom2/ ... 101&page=4
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Post 05 Nov 2017, 7:06 am

Frankly, I think part of the issue is that you see "business" and "corporations" as monoliths. But they are comprised by numerous companies with a wide variety of impacts, sizes, industries, circumstances, and decision inputs.

Also note that the employees are not just fat cat CEOs and investment bankers, but are many individual actors. Also note that the stockholders are not just the rich, but they are individuals and institutions and who service the entire world via pensions and foundations and educational institutions.
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Post 05 Nov 2017, 8:32 am

You have any way to quantify corporations investing overseas than here due to higher corporate tax rates? Otherwise, it just becomes an article of faith rather than having a significant economic impact . It seems to me companies invest overseas primarily due to lower labor costs.

As for lower costs of capital increasing economic growth I am thinking why this would be so. Companies have more money, they have better cash flow, and therefore banks would be more willing to lend to them at a lower rate because banks assume a lower chance of default. Do I have that right? So more loans, means more economic activity. Two things: (1) businesses as a whole are already reluctant to invest even though they are flush in cash and costs of capital will not change that calculus, and (2) large businesses havd access to credit, it's small businesses that are having trouble getting credit and the tax plan will not change that. http://www.thirdway.org/report/to-grow- ... -to-credit.

The big corporations who are making lots of money and have access to credit don't want to invest and take on any more projects and will simply send extra money to executives and shareholders and banks are not going to take on more risk to lend to small businesses due to this tax plan. If businesses is not seeing the potential for more sales and that is not why they are not investing, then why is a lower cost of capital going to get them to expand, or invest in new equipment, or hire more people--all of which depend on an assessment that there will be more sales to justify taking on more debt?

You had me convinced that the Corporate tax cut of 1986 somehow raised more revenue even though it cut rates until I looked at it closely and I realized that it was a 120 billion five year tax increase on corporations. (I assume that you had not looked at it closely yourself, just saw rates had decreased and revenues gone up and derived a reasonable inference from that---but the devil is in the details) I am willing to be persuaded by convincing arguments.. Nothing I have seen indicates that this plan will significantly impact growth. I would far more favor increasing access to credit for small businesses and cutting of taxes for those who make $100,000 or less as a way of creating growth. This top-down approach does not logically work here.
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Post 05 Nov 2017, 2:45 pm

You are right about the corporate tax increase in the 80's. It was designed to increase total corporate taxes by $120 B over 5 years or 24B per year. Corporate tax receipts in 1986 were $63M. Their range in the next 5 years was $84B to $103B per annum and the average was $95B. That looks to be a $33B annual increase. There's a lot of complexity in those numbers, but keep in mind that many corporations shifted to S Corps and Partnerships in those years because individual rates came down substantially.http://www.taxpolicycenter.org/statisti ... nue-source

Your analysis keeps looking at the average small business or the average large corporation. But these decisions are made by individual companies with their own separate inputs.

Freeman:
You have any way to quantify corporations investing overseas than here due to higher corporate tax rates?
https://en.wikipedia.org/wiki/Tax_inversion

Notable inversions[edit]
McDermott International to Panama, 1982
Helen of Troy to Bermuda, 1994
Tyco International to Bermuda, 1997
Fruit of the Loom to the Cayman Islands, 1998
Transocean to the Cayman Islands, 1999
Ingersoll Rand to Bermuda, 2001
Ensco plc to the United Kingdom, 2009
Eaton Corporation to Ireland, 2012
Actavis to Ireland, 2013
Liberty Global to the United Kingdom, 2013
Burger King to Canada, 2014
Medtronic to Ireland, 2015
Mylan to the Netherlands, 2015
Arris Group to the UK[25][26](2016)
Johnson Controls to Ireland, (2016)[27]


It's a thing.

Check out where software and pharmaceutical intellectual property is located. Where do all those royalties go and which government is getting the tax money?
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Post 05 Nov 2017, 5:58 pm

We don't need a corporate tax reduction to stop inversions. What we need are reasonable regulations to stop them.

Which we got last year.

https://www.treasury.gov/press-center/p ... l0404.aspx
https://www.google.com/amp/amp.timeinc. ... egulations

Inversions technically only allow a US company to not pay the US corporate rate on its operations outside the US. But the new regs required that the foreign company be at least 20% the size of the US subsidiary. Also stopped US companies from sending their US income to the foreign subsidiary in the form of interest payments in order to have income taxed at foreign rate.

Since US companies don't pay any tax on overseas operations until they bring it home...not sure how great inversions would be unless they can cut taxes on their US operations. Which hopefully the new regs stopped.
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Post 06 Nov 2017, 7:14 am

Inversions are only one way to move income overseas. There are many others. Tax lawyers and accountants bill over $1,000 per hour for a reason. IRS agents don't make that much, and they don't have as many people to go after them. It would be better for the US to encourage companies to stay and form in the US then try to force them to retain their income here.

While I'm writing this I'm listening to the BBC discussing Google having its profits booked in Bermuda.
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Post 06 Nov 2017, 9:03 am

Why pay 20% when you can pay $0?

The companies that cheat will still want to cheat. There are plenty of companies that pay the top rate. They still feel a civic obligation to pay taxes. Starbucks does so. Obama wanted to reduce it to 28%. I could live with that. 20% is ridiculous.And these companies moving overseas to avoid taxes are not really moving much economic activity to do so. It's illusory. It's a tax fiction. And again the companies that do that will keep doing that even if the tax is 20%.

Here is an analysis of the effective tax for corporations. It notes that US corporations avoid 270 billion in taxes due to deductions for investments allowed in the tax code. In 1986 we cut corporate rates but raised revenues by taking away certain deductions. If we are going to cut rates...we should do the same here. Tax reform...not tax cuts.

https://www.cbpp.org/research/federal-t ... -countries
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Post 06 Nov 2017, 10:32 am

freeman3 wrote:Why pay 20% when you can pay $0?

The companies that cheat will still want to cheat. There are plenty of companies that pay the top rate. They still feel a civic obligation to pay taxes. Starbucks does so. Obama wanted to reduce it to 28%. I could live with that. 20% is ridiculous.And these companies moving overseas to avoid taxes are not really moving much economic activity to do so. It's illusory. It's a tax fiction. And again the companies that do that will keep doing that even if the tax is 20%.

Here is an analysis of the effective tax for corporations. It notes that US corporations avoid 270 billion in taxes due to deductions for investments allowed in the tax code. In 1986 we cut corporate rates but raised revenues by taking away certain deductions. If we are going to cut rates...we should do the same here. Tax reform...not tax cuts.

https://www.cbpp.org/research/federal-t ... -countries


Are you saying everyone should pay 28%?
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Post 06 Nov 2017, 11:00 am

Ray Jay wrote:
geojanes wrote:
Ray Jay wrote:3% growth is not extraordinary
in a growing labor market.

The problem with growth over the next 10 years is entirely demographic. People turning 65 next year were born in 1953, which was the last year that births were under 4 million in the USA, until 1964, that is. After which births didn't reach that total again until 1989.

The pig is reaching the end of the python:


The demographics are certainly important but they are more complex than you describe. Countervailing factors are (1) the 1989 age group is now within the work force and subsequent generations are comparable to the baby boomers, (2) white collar workers are often staying employed through their 60's and beyond. (3) there will continue to be labor saving advancements that put workers out of jobs. In 5 to 15 years we will see self driving cars and trucks take over the transportation sector. We will need growth to accommodate the resulting job loss. Google and others are not investing billions for fun.

But I totally agree with you that more immigration is important to realize economic growth and avoid undue inflation.


Labor force is projected to grow about about 0.5% a year to 2024. You aren't gonna consistently get 3% GDP growth when your labor force is growing at 0.5% a year and you're almost already at full employment. There's only so much productivity can do. You may get some good quarters, but there just isn't the growth in people to sustain that type of growth.

https://www.bls.gov/opub/mlr/2015/article/labor-force-projections-to-2024.htm