How do we spend our money: US vs. rest of the world

American consumers spend more on health care and housing, less on food and clothes than consumers in Canada, Britain, and Japan..  From the NYT's Catherine Rampell, economix blog:

As we know, it's a lot more on health care:

The Guy Trying To Save A Broke City Just Quit

From NPR, a follow up on a story I posted last week on the city of Harrisburg, whose receiver just quit:

The guy in charge of getting the city of Harrisburg out of debt has left the building. His one assistant is no longer answering her phone.

He came up with a 200-page recovery plan to get the city out of debt. He shopped it around Harrisburg, taking suggestions and negotiating union contracts.

He seemed like a pretty mellow guy. Bowtie. Glasses. Surrounded in his office by tiny busts of Lincoln's head. Someone very driven by ideas of right and wrong.

Corporate Tax Rate Myth and Reality

Another reminder not to be fooled by the headline tax rate, no matter how loudly politicians trumpet it.  From TJN:

...[A] comprehensive study from Citizens for Tax Justice and the Institute on Taxation and Economic Policy that analyzed 280 of America's most profitable companies found that 78 of them paid no federal income tax in at least one of the last three years. It's worth mentioning that the 280 companies also received a total of $223 billion in tax breaks. In fact, the report unearthed thirty companies that enjoyed a negative income tax rate over the three year period, while banking profits totaling $160 billion. ...

The Congressional Budget Office, an independent, non-partisan agency, has reported that the average corporate tax rate on domestic profits - meaning the share of profits that companies actually pay in taxes — is at 12.1%. This is less than half of the statutory rate of 35%, which will be held up as the raison d'etre for American corporations' inability to compete and continually referred to as the highest rate in the world.  In fact, the corporate tax rate is at the lowest level since the early 1970s. 

...Contrary to what will be heard on the campaign trail today, the U.S. collects less corporate taxes as a share of GDP than all but one of the 26 Organization for Economic Cooperation and Development (OECD) countries for which data are available. The contribution of corporate tax revenue to the federal government decreased from 30 percent in the mid-1950s to 6.6 percent in 2009.

It's the base, stupid.

OECD vs. UN and the making of soft tax law

TJN recently ran a guest post on the UN's attempt to build an institutional rival to the OECD for international tax policy.  The UN's work is currently confined to a committee, and the G77 would like it "upgraded to an intergovernmental entity."  The OECD and the EU oppose.  The post gives an interesting account of the issues and interests at stake.

Take The Money And Run For Office

This American Life is doing a series on money in politics (here is a podcast) and finds that Congress members on the ways & means committee garner the most in contributions:

According to the story:

We imagine lobbyists stalking the halls of Congress, trying to influence lawmakers with cash. But often, it's the other way around: Members of Congress stalk lobbyists, looking for contributions.

"Most Americans would be shocked — not surprised, shocked — if they knew how much time a U.S. Senator spends raising money," Sen. Dick Durbin told us.

Not all of the events are boring. There are pheasant hunts, golf tournaments, sailing trips. This past week, for a thousand bucks, you could join South Dakota Senator John Thune at a Van Halen concert. Here's a count of fancy events from 2008 through early 2012:

The reporter quotes Barney Frank for the proposition that money doesn't always buy votes: "If the voters have a position, the voters will kick money's rear end every time." But a we know, voters are generally rationally ignorant about most issues.  Instead, "The only people who do care, or who even understand what the small print means are the lobbyists, and the industries and interests they represent."

Vodafone vs. India

India has been increasingly visible in international tax policy, both in terms of openly challenging the appropriateness of the existing soft law regime jealously guarded by the OECD and in terms of taking its own approach to things like transfer pricing and revenue safeguards.  Vodafone recently won a big case involving withholding capital gains taxes when it used a Dutch vehicle (with shares in an Indian company) to buy shares in a Cayman company.  India wanted $2.5 billion in capital gains taxes on the grounds that the purchase was set up offshore merely to avoid Indian tax liability.   The court disagreed, and it seems India responded by proposing new rules on cross-border transactions that it would retroactively apply to Vodafone.  Retroactivity in tax law is of course controversial, but the Indian SUpreme COurt has apparently held up prior retroactive amendment cases, so it's no surprise that Vodafone will likely fight it:

A Vodafone statement called India's proposal to change its tax law on mergers with retrospective effect "grossly unjust," and said the move seeks to apply tax liabilities "which explicitly were not countenanced under Indian law in force at the time" when the company bought an about 67% stake in the Indian operations of Hutchison Whampoa Ltd. for $11.2 billion.

Will be interesting to see how this comes out.

No more pennies for Canadian thoughts

Gone the way of the ha'penny.  It's part of the government's 2012 budget, tabled this week.  Thanks Christian O!  Hmmm...jobs, growth and prosperity, that sounds so familiar.

Sealand nationalizes its entire computer industry

My students and I love Sealand, that magical principality 6 miles off the coast of Britain with its own prince, flag, constitution, and currency:

As you know, you're not a country without a flag.

Always a great way to think about sovereignty, tax policy, and the social contract between individuals and government, Sealand became a preferred destination for "a crew of armed cypherpunks, amped-up networking geeks, and libertarian swashbucklers is seceding from the world to pursue a revolutionary idea: an offshore, fat-pipe data haven that answers to nobody" but it seems perhaps the dream has died.  The best part of the story is how Sealand nationalized its entire computer industry, by forcing a buyout and seizing control of HavenCo, a data hosting service company.  It seems Sealand's royal family felt that allowing HavenCo to operate as a data haven made things difficult for Sealand's relationship with Britain. So many interesting issues of international law, diplomacy, and policy going on in this--enough to write a law review article it seems!

Links

The fraud involved in the theory that tax cuts pay for themselves; "some lessons here to be learned about how people think and how they want to be convinced things work. When confronted with something they don’t like, like taxes, they are happy to believe a secondary effect, namely stifled growth, actually dominates a primary effect, namely tax revenue. It’s wishful thinking but it’s human nature."

Bolivia has transformed itself by ignoring the Washington Consensus

What causes inequality: institutions, culture, or taxes?

The health care system in the UK is pronounced dead, or nearly so.

Tax Activism

Activists around the world are taking on tax dodging as a threat to economic development in poor countries and to society in general in all countries.  I write about the movement and its prospects for involving NGOs and other non-business civil society groups into the rarefied world of international tax policymaking in my latest paper, Tax Activists and the Global Movement for Development Through Transparency.  In the paper I explore how the rise of concern about tax avoidance, especially by multinational companies, came about, and how the elite tax policy community is reacting to it (not particularly well).  Tax avoidance has been a staple of entity-level planning ever since we have had an income tax, and tax havens have existed for decades with tacit acceptance by governments.  It is only in the last decade or so that you could say a "movement" to bring multinational taxation to the public discourse as a matter of social justice began.  What happened to get the ball rolling and what turned it into a sustained force capable of disrupting the status quo?  The paper traces the movement and how it is faring as a means of contesting the established policymaking order.  If you're interested in the extractive industries transparency movement, country-by-country reporting, how tax connects to economic development, or how the OECD manages international tax discourse, you'll find the paper of interest.  It is forthcoming as a chapter in a book on tax law and development, edited by Miranda Stewart and Yariv Brauner.

Two interesting papers on the rule of law in tax

One by Wei Cui, on the Rule of Law of tax in China, and one by Kim Brooks on the Rule of Law of tax in Canada.  Each tries to grapple with the difference between law as it is written on the books and what people actually experience as the law plays out in practice, involving taxpayers, administrators, and decision-makers.

Dying for Growth

Jim Yong Kim edited a book called "Dying for Growth" that has some people worried about what he would do if given the helm at the World Bank.   The FT quotes William Easterly as a worrier, and Tim Geithner as a soother.  Easterly:

"Dr Kim would be the first World Bank president ever who seems to be anti-growth," said William Easterly, professor of economics at New York University. "Even the severest of World Bank critics like me think that economic growth is what we want."

Geithner:

"[Dr. Kim] has an incredible feel for what matters most in development and recognizes that for economies to grow they have to invest in expanding opportunities for their people, in healthcare and in education. Those are lessons that the most successful emerging and developing countries have learned and been forced to learn, and in that sense he has the ideal feel. His experience comes from what he has done in the field, not just from his academic research."

Yves Smith is scathing:

"It isn't hard to see how self serving these attacks are. Notice who is making them: economists! When I was at the Atlantic Summit the week before last, Larry Summers made a remarkably transparent "why you need economists" pitch: all the problems the US was facing (big military commitments, need for more healthcare spending, perceived need to reduce the deficit as a percent of GDP) could all be solved with one magic bullet: growth!" 

 Yves mentions that Joe Stiglitz, Amartya Sen, and Jean-Paul Fitoussi are working on a "better measure of economic performance than GDP," with sponsorship from France.  Is that the Commission on the Measurement of Economic Performance and Social Progress?    Then there's the gross national happiness project (which tries to measure "psychological wellbeing, health, time use, education, culture, good governance, ecology, community vitality and living standards").  It's a tough sell because GDP is so nice and numerical and gives us confidence that we know what we're supposed to be trying to achieve.

Children's arts tax credit

Oh, Canada :-)

The big money gender gap

From the IRS statistics of income (these really are just fascinating data sets), we get the personal wealth statistics, which show a pretty big gender gap at the very top of the top (but perhaps not as much as one might expect just underneath):

Female vs Male Top Wealth Holders by Size of Net Worth, numbers in millions, source IRS SOI Personal Wealth Stats (2012).

What this chart shows is that among those with estates suggesting net wealth of over $20m, men have a net worth that's double that of women (2,638,888,000 vs. 1,323,051,000); but look at the 3.5 to 5 million bracket, there the net worths are much closer together (784,506 vs. 726,538).

These numbers are estimated based on estate tax returns; from the website:

"The Personal Wealth Study uses information reported on Form 706, United States Estate (and Generation Skipping Transfer) Tax Return, to estimate the wealth of the living population. These estimates, based on the Estate Multiplier technique, appear every three years. The estimates are limited to that segment of the population for whom personal wealth is at least equal to the estate tax filing threshold in effect for the estimation period."

To go along with the amount gap, though, let's add how many people are in each category:

At the very top, men outnumber women 2.6 to 1 (324,000 to 125,000). (These numbers are in thousands, according to the IRS website).  Is that really right, are there really 324,000 men and 125,000 women in America, each of which have a net worth exceeding $20 million?  That seems amazing--I don't think I know any.

IRS Tax Stats-2011

IRS just released the IRS Data Book and updated corporate research credit statistics; no doubt there will be plenty of analysis (and spin) coming out on both of these.  I took a quick look at the corporate research credit stats and came up with this chart, which shows dramatic increases over the last twenty years, with only a slight drop off during the financial crisis:

Annual Percentage Changes in Corporate Research Credit Claims for Tax Years 1990-2009, in millions; source: IRS Statistics of Income (2012).

That's a lot of credits...a.k.a. tax expenditures.  Where is the chart that shows the economic growth attributable to these credits?  (Only kidding.  We know there is no such chart.)

Here's the raw data from the IRS website (Figure A: Annual Percentage Changes in Research Credit Claimants and Amounts for Tax Years 1990-2009):

Year	Number of Credit Claimants	Percentage Change	Credits Claimed (in milliions of dollars)	Percentage Change
2009	12,359	-3.0%	7,774	-6.4%
2008	12,736	1.5%	8,303	0.5%
2007	12,548	16.3%	8,260	13.0%
2006	10,788	-4.4%	7,311	14.9%
2005	11,290	10.2%	6,363	14.6%
2004	10,244	-1.2%	5,554	1.2%
2003	10,369	1.1%	5,488	-3.0%
2002	10,254	-1.3%	5,656	-11.0%
2001	10,389	-1.0%	6,356	-10.2%
2000	10,495	4.7%	7,079	34.0%
1999	10,020	1.7%	5,281	1.4%
1998	9,849	-7.7%	5,208	18.4%
1997	10,668	9.9%	4,398	106.1%
1996	9,709	23.3%	2,134	50.1%
1995	7,877	-13.9%	1,422	-41.3%
1994	9,150	-7.9%	2,423	30.5%
1993	9,933	28.2%	1,857	22.5%
1992	7,750	-13.9%	1,515	-4.4%
1991	9,001	3.5%	1,585	2.4%
1990	8,699		1,547

Check out the percentage change from 96 to 97 (orange highlight)!

Does America needs a 2-page tax code?

Emphatically, no.  I just absolutely disagree with Fareed Zakaria on this, as I do with anyone who thinks that the measure of a tax system is the shortness of its tax code.  We live in a complex and intricate world, in which transacting involves complex relationships involving the allocation of risks and rewards in seemingly endless ways, using any number of entities, structures, and contractual arrangements.  Moreover the job of a tax system is complex: it must determine a government's right to tax a person as a taxpayer, and it must assess the resources available to its taxpayers in a way that is both accurate and complete to some degree, lest its entire project be undermined by the ability of those with means to escape their obligations.

I don't disagree that the U.S. tax code, like its counterparts in Canada and I am sure all over the world, is unduly long and burdened by provisions that could or should be excised.   I am constantly exasperated by provisions that bear the distinct mark of lobbying, and would be happy to see these disappear overnight.  I am annoyed as anyone else by lengthy regulations with multi-factor tests and multi-tiered analyses.  But to suggest that the Code could be so simple as to fit on "2 pages" is preposterous.  Even if the U.S. eliminated every tax expenditure anyone could care to identify, it would still run into hundreds of pages, and that is appropriate for the social complexity we live in every day.

Zakaria says "You have to understand, complexity equals corruption."  But quite the opposite is equally true.  As Charlie Kingson once wrote, "Simplicity lumps: It disregards distinctions such as categories, and puts the wolf with the lamb. When a large corporation says it wants simplicity, it wants money."  (The article, The Great American Jobs Act Caper, 58 Tax Law Rev. 327 (2005), is well worth a read and a re-read). That is only too true.  As Kingson pointed out, taxpayers seem to have no trouble dealing with complexity when it yields a lesser tax burden.

Of course, it's also true that for many individuals, navigating the code can be tremendously difficult and we may rightly lament the rise of a tax preparation industry that benefits too much from complexity in the tax code (or even the perception thereof), but again, the solution is not to shrink the code to 2 pages.  First, there is an available solution already: it is Ready Return, an effective response to complexity that has been vigorously resisted...but not by taxpayers.

Second, we can be sure that in a 2-page code, those with the least ability to pay would be counted on to pay much, much more.  That's because what Zakaria wants, as it seems is typical of those who begin a tax policy discussion with the length of the tax code or the number of words it contains, is to get rid of income taxation all together and replace it with a consumption tax.  Bruce Bartlett has made a compelling case for why anyone contemplating reinventing the wheel might benefit from thinking about how we got the wheel we already have.   Any problem identified as problematic for the income tax will persist in a consumption tax: we will still have lobbyists and congress members, all of whom benefit mightily from their ritual dances, and it is folly to think that a change in the form of taxation will change that.  It won't.

More can be said and many have said it.  But it bears repeating that in tax policy discourse, what matters is not the length of the code but the system it describes and how that system allocates the tax burden among a society's members, as defined by their connections to each other through the mechanism of government.  That is not a simple question or a simple equation and it defies a simple answer.

How does a city go broke?

In this case, through capital-intensive investment in an incinerator.

This is a sad story, because municipal investment in trash management seems both necessary and worthwhile.  It seems from the description that the city borrowed a lot of money for this capital-intensive project, on the theory that user fees would service the debt.  Then the EPA shut it down because it failed to meet standards.  That's a big problem.  So it seems they borrowed more to get it up to standards, but now there is no way for the anticipated fees to pay off the debt.  So what's the solution: the city goes into receivership and they privatize the facility.  Now you have an unelected official deciding whether to pay the debts or the salaries of police and firefighters (can't do both), plus a taxpayer-funded investment that will be sold at likely a deep discount to a private sector company (such as Bain Capital) that will no doubt manage to eke a profit out of it, since they need not deal with its true cost.

Even though I know that waste management is a big private business, it still seems to me that dealing with waste is a public issue, so that a city can be expected to invest taxpayer money in it.  Part of the reason I think that is that a private market would tend to want more garbage (more volume, more profit), while a public system might try to minimize garbage in order to reduce costs or meet other social goals such as conservation.  Admittedly this is negated by the goal in this case, which was to pay for the facility through user fees, which would follow the more volume, more profit model, at least for the term of the debt.  Maybe I need to read this.  In any event, the failure here seems to be connected to cash flow--if the city had more cash flow, it could carry the debt until the facility came to break even or at least come close enough to justify its cost.  But the story suggests that the user fees will never be sufficient to pay off the debt.  This suggests two things: first, waste management really is a public good that needs to be supported by public money, and (2) that a private buyer can only expect to make a profit by getting the facility at a discount, which means that taxpayers are subsidizing any future profits which are going in to private hands.

Tax dodging: African edition

Three related stories on tax policy in Africa:

This one on the theme of how much Africa loses to tax evasion in comparison to how much it gets in international aid; and

This one on how so many cash-poor but resource-rich countries give away the farm to multinationals in order to attract foreign investment; and

This one on South Africa's recent signing of the Joint International Tax Shelter Information Centre (JITSIC) and related efforts to curb tax dodging.

From Two Santas to the Two-Part Pledge

Bruce Bartlett discusses the Two Santas theory, which started Republicans down the supply side path and led them to the party of tax cuts for every social problem:

The essence of the Wanniski argument was that each political party needed to be a different sort of Santa Claus. The Democrats were the spending Santa Claus, promising more government benefits. The Republicans should be the tax-cut Santa Claus, he said. 

... Republicans didn’t immediately embrace the two-Santa theory, but began to after Ronald Reagan’s victory in 1980, when he ran mainly in favor of a big tax cut, with far less emphasis on deficit reduction. In office, Reagan pushed for domestic spending cuts but also sharply raised spending for favored programs such as the military.

Although the budget deficit rose to 6 percent of gross domestic product in 1983 from 2.7 percent in 1980, Reagan easily won re-election in 1984. This further convinced Republicans that the deficit was a losing issue and only tax cuts mattered for political success.

The final straw was George H.W. Bush’s support for a tax increase in 1990 to reduce the deficit, which many Republicans say sealed his defeat in 1992 by Bill Clinton.

Since then, fealty to tax cuts and lip service to deficits has become Republican dogma.

Norquist picked up the idea and ran with it, though apparently "thought of the same idea himself when he was in the seventh grade."  If you haven't yet seen Samantha Bee's interview of Norquist and her exploration of his other grade school epiphany, the two-part pledge that has become the tax policy equivalent of an American flag lapel pin for Republican lawmakers, it's a must-see.

What do Americans do for a living?

They mostly work in government, trade, education, health care, and professional services.  From NPR:

Compare to 1972:

Proposals to curb inequality in America

Timonthy Noah has a new book entitled the Great Divergence: America’s Growing Inequality Crisis and What We Can Do About It; Tyler Cowan reviews it and summarizes Noah's suggestions:

1. Soak the rich 

2. Fatten government payrolls 

3. Import more skilled labor 

4. Universalize preschool 

5. Impose price controls on colleges and universities 

6. Reregulate Wall Street 

7. Elect Democratic Presidents 

8. Revive the labor movement

Cowen calls the book "a useful survey of left-democrat points of view on the problem" but doubts very many of these suggestions will have the intended effects, and then offers his own list.  He wants innovations that benefit everybody, i.e., the kind he says led to the last "great equalization," 1870-1970.

Of course that period was a time in which income taxes were first adopted as a class tax, then expanded to a mass tax while becoming sharply progressive and featuring marginal rates as high as 90% before falling down to a more reasonable 70% by the end of the period.  As a result, I like to think tax policy has something to do with the good things that happened in that period, like America's highest annual economic growth and, as Cowen puts it, its great equalization.  If I had a wish to add to the list, I suppose it would be, figure out a way for workers to capture more of the gains from their contributions to aggregate economic growth.  This could be but need not necessarily be imagined as a tax policy problem.

Why do taxes get such a bad rap?

Neil H. Buchanan asks, "Why do we simply accept on faith that taxes are always harmful?"  His answer: because economists and tax scholars--i.e., those who know better, or should know better--don't speak up enough in defiance of the conventional wisdom that holds that taxes are inherently bad.  This conventional wisdom represents a "mass delusion about the effects of taxes":

Although economists and other tax scholars occasionally acknowledge the so-called “income effect”—the possibility that people will need to engage in more of an activity, rather than less, in response to a tax increase—the basic story always begins with “Taxes reduce incentives.”

From there, it is a rather straight path to condemning all taxes.  Because of the particular (and, to be honest, quite peculiar) set of assumptions that have now become standard in most economic analyses, tax scholars will typically assume that the effects of a tax increase are bad—that is, that it would have been better to have allowed people to do what they would have done in the absence of the tax.

The column then goes through a number of assumptions and misconceptions about how taxes impact behavior and the economy, as well as recent work that is pushing against the "tax is bad" meme, and concludes:

To economists’ credit, some among us have finally begun to speak up about the weak empirical case against taxes.  It might be too much to hope that we might also begin to challenge the idea that it is always bad to “distort” behavior, but at the very least, we should certainly insist on describing the big-picture consequences of cutting taxes. 

Banks vs Transaction Taxes

The EU is contemplating a financial transactions tax, with two thirds of Europeans in support and the banking lobby against.  From a recent article in Der Spiegel:

Speaking directly after Schäuble, Luxembourg Finance Minister Luc Frieden showed why the lobbyists, and not democracy, were going to win out on that day. "We have to think about the competitiveness of the financial industry," he said. The small country between the Mosel and Sauer Rivers earns 24 percent of its gross domestic product with banking products. 

"There are many good reasons to exempt the investment industry from a tax on the financial sector," the Association of the Luxembourg Fund Industry had told the country's finance minister before the meeting. In addition to Luxembourg, the Maltese finance minister also voiced concerns. The banking system is the blood veins of the global economy and must be treated with caution, he said.

The article discusses the predicted effects of broader or narrower transaction taxes on the European and American markets, and concludes:

It is considered certain -- and desirable -- that a general tax would change practices in the financial industry. The European Commission, the EU's executive, forecasts that 15 percent of securities and 75 of derivative deals would be eliminated in the future because, with the new tax, they would simply not be profitable anymore.

Critics of the financial system, like London economist Paul Woolley, view this as the most important benefit of a financial transaction tax. "It's critical that we increase the cost of potentially dangerous transactions that are also highly questionable from a social standpoint."

The EU continues to negotiate over the tax without the benefit of Britain's participation, as David Cameron is solidly against:  ''I will block it unless the rest of the world all agreed at the same time that we were all going to have some sort of tax.'' 

Dan Shaviro discusses the merits of a financial transactions tax versus a financial activities tax here, or you can use a short cut and just watch him talk about it.

Lobbying pays off, re-election edition

We've seen that lobbying pays off, big time, in terms of tax breaks achieved per dollar spent. It also pays off for Congress members leaving office, who get big raises going into the business.  Now from a new study we see that it also pays off for congress members seeking re-election:

280 profitable Fortune 500 companies collectively received $223 billion in tax breaks between 2008 and 2010 while contributing $216 million to Congressional candidates over the last four election cycles.  

The thirty most aggressive tax dodging corporations—dubbed the “Dirty Thirty”— collectively paid a negative tax rate between 2008 and 2010 while spending $41 million on Congressional campaign contributions.  

Of the 534 current members of Congress, 524(98 percent) have taken a campaign contribution from one or more of these thirty corporations since the 2006 election cycle.

Everybody's happy!

A Buffet rule for Canada?

From the Star today, a story about doctors calling for the rich to pay a greater share of income taxes in Canada.  This may come as a surprise to many Americans, who assume the Canadian system is naturally much more progressive than in the U.S.

A new organization of well-paid doctors thinks that they — and other high-income earners — should pay more in taxes.

“Who knows?” physician Michael Rachlis, one of the founders of Doctors for Fair Taxation, told me Wednesday. “Maybe we’ll start a trend. Maybe we’ll see a Lawyers for Fair Taxation start up.”

The reporter says he is not going to hold his breath.  He continues:

Most governments don’t have the nerve to scrap progressive taxation entirely. So they’ve been doing it gradually by reducing the number of income-tax brackets and by raising more money through user fees and consumption levies like the HST.

The upshot of this, as a recent study from the Canadian Centre for Policy Alternatives demonstrates, is that the poor in Canada now pay a greater share of their income to government in the form of taxes than do the ultra rich.

Which is the antithesis of the bargain made when governments first began to levy income taxes almost 100 years ago.

Doctors for Fair Taxation argues that a more progressive tax system would be good for human health. 

I'm not sure what the angle for Lawyers for Fair Taxation would be.  Americans for fair taxation of course have the opposite goal.

Transfer pricing: sketchiest of the sketchy?

Reuters reports on the uncertain tax position (UTP) filing requirement, under which big corporate taxpayers (those with more than $100,000 in assets) must inform the IRS if they are taking a position that they view as "uncertain or vulnerable to challenge."  In other words, if you're taking a position you know is a little bit sketchy or a little bit dodgy, you're obligated to alert the IRS to it.  According to the IRS commissioner, the two biggest disclosure issues are transfer pricing and research & development credits.  Transfer pricing represents 19% of these disclosures:

IRS Commissioner Doug Shulman said at a congressional hearing that, since the beginning of the year, about 1,900 businesses have filed "Schedule UTP" information.

"A lot of the large business issues are international issues - the most serious one is transfer pricing. That's where we're shifting our large business operation," Shulman said.

...This is an area of frequent and intense international tax disputes between businesses and the agency.

Others have suggested that transfer pricing is basically impossible to police; here is a recent take from Brazil.

Links

Will the US really increase scrutiny for the tax practices of multinationals?  Passed in Dodd-Frank, but regulations are a year late and hotly contested.

Canada to sign a free trade deal with Europe, which will serve it better if the US doesn't follow suit.

Canada's fossil subsidies should end, says a former Conservative MP.

A fascinating interview with a U.S. economist you might not know about, who does field work in India and Africa.

U.S. Congress hasn't passed a budget in almost three years....  Is that really surprising?

On FATCA and hedge funds [gated]

Health care spending: US vs the rest of the world

A series of visual depictions compiled by the Atlantic, the first one showing the U.S. as an outlier in terms of cost:outcome ratio:

That's quite a tale of U.S. exceptionalism.  Also, this, which tells a slightly more conservative story of administrative costs (13%) than Zakaria's 20-30%:

A few more charts at the link breakdown health care spending by sector, and the article ends with this chart of U.S. federal spending:

Defense spending: US vs the rest of the world

The picture is quite stark:

From Military Balance 2012, an annual report from the International Institute for Strategic Studies.  Of the U.S., it says:

The United States, too, has begun to reduce defence spending after a period of substantial expansion. A reassessment of policy and strategy is under way. The goal is that the long stability operations of the past decade will not be undertaken in future. ... American troop numbers in Europe will fall by 10,000 to around 70,000, while Marines are to deploy to Australia and Littoral Combat Ships to Singapore.

The Pentagon is being forced by Congress to make hard choices. In manpower terms, the army and Marines will see the largest cuts, but all services will have programmes curtailed, cancelled or delayed. Still, the extent of these cuts should not be exaggerated: the US will remain by far the world’s major military power and the only NATO member capable of sustaining large air–sea operations or of projecting substantial ground forces on a global scale for a sustained period.

No mention of Canada but by extrapolating from the circle charts at bottom, it looks like a share of about 1.3% of the global total.  Canada has at least one attack plane.

Using taxes to correct trade imbalances

John Whalley, who has done a lot of work on tax, trade, and development, has a new paper with Chunding Li entitled Indirect Tax Initiatives and Global Rebalancing, in which the authors suggest that value added taxes can be used strategically to correct the global trade, current account, savings, debt and deficit imbalances that led to the 2008 financial crisis.  Exchange rate policies have been the main tool for rebalancing, but Whally and Li suggest that with cooperation, the US, Germany, and China could use VATs to achieve it.  From the abstract:

We suggest that if China and Germany (as major surplus countries) switch their present VAT systems from a destination principle to an origin principle, and the US (as the major deficit country) adopts a VAT on a destination principle, jointly these actions can significantly reduce the three countries’ joint imbalances and so contribute to global rebalancing.  ... VAT structures are not only good for global rebalancing but also the changes we consider are beneficial for welfare and revenue collection. 

And from the paper:

both China and Germany (and the EU more broadly) operate destination based value added taxes under which imports are taxed but exports leave the country tax free. Both have large trade surpluses of about 5% of GDP. Switching to an origin basis which taxes exports and allows imports tax free entry will, given these significant imbalances, raise taxes and effectively also tax imbalances potentially lowering their size. The long claimed neutrality of origin/destination basis switches for the VAT ... only holds for balanced trade, and not for today’s world. In the US there is no VAT, but revenue pressures given the debt and deficit situation could in the next few years potentially result in its adoption. Were this to happen, given the large US trade deficit a VAT in the US introduced on a destination basis could similarly serve to reduce the US imbalance. We also suggest that an internationally coordinated indirect tax change involving China and Germany switching to an origin based VAT, and the US introducing a destination based VAT could potentially lead to a significant change in global external sector rebalancing. 

There are plenty of formulas, charts, and jargon-filled paragraphs in the paper, but it also includes a straightforward explanation of how VAT works.   I'm not a proponent of VAT in general, but am interested in how these taxes might impact trade.  I think the political appetite for new taxes in the U.S. is too low to produce a federal VAT even if it could promise to reverse the trade imbalance, but the authors argue that "any individual country’s VAT changes will significantly reduce world total and individual country’s imbalances, improve individual country’s welfare and increase revenues."

Health care as a public good

Fareed Zakaria says private health insurance is inefficient and health care should be seen as a public good:  in the U.S., "an estimated 137,000 people died over seven years because they were uninsured," while in Britain (for now), "irrespective of what you afford, irrespective of your illness, you will be able to access health care."  Zakaria discusses the "health care behemoth" in the UK:

The NHS is Europe's largest employer, with well over 1 million people on the payroll. So you'd think it would be inefficient. 

T.R. Reid, a former overseas bureau chief with The Washington Post toured the world's health care systems for his recent book, The Healing of America. Reid says: 

"That seems sensible, right? The private sector can do things more efficiently?  It doesn't work in health care. The least efficient payers in the world are the American private insurance companies.  They have administrative costs of 20 to 30%.  That's a 30% tax on every dollar you spend on health care. Britain is totally socialized medicine [and its] administrative costs [are] 5%.  Canada is private doctors and public payers - 6% administrative costs. So it turns out, for some reason in health care, governments are doing this more efficiently than our private sector."

What is the reason?  Is it that the government need not strive to maximize returns to shareholders?  Zakaria has a program this evening on CNN, perhaps he will discuss it.

Global Food Disparity in Pictures

Daily Kos links to a fascinating series of photos in which families pose by what they eat in a typical week, from a book by Peter Mentzel called "Hungry Planet: What the World Eats."  A few of the more startling contrasted:

In Egypt...

In Chad...

in China...

In America...

More at the link, all fascinating.  The surroundings and family compositions are equally as interesting as the food choices.  The pictures immediately reminded me of a series of photos I saw in an airport once that showed families from all over the world posing with their entire household possessions, displayed out in their front yards.  I thought that must be the same author/photographer, and indeed, here it is, entitled Material World: A Global Family Portrait.

Links

In the UK: a big political battle over budget austerity, street protests over the dismantling of the national health service (NHS), and the effects of austerity and economic malaise on one working family in Britain.

Another argument that capital gains should be treated the same as any other source of income, to preserve horizontal equity.

Another discussion about tax rates that shows why rates by themselves tell us very little about anything.

Springtime for Tax Deregulation

Like spring blossoms, stories about the failures of the U.S. income tax begin to sprout at this time of year.  President Obama’s blueprint represents only the latest attempt to address those problems using a playbook that is 25 years out of date.  Although the problem remains the same as in Reagan’s day (big corporations, high profits and tiny taxes) today the solution must be different. 

President Obama’s approach must be different because tax deregulation has given corporations extraordinary abilities, talents that some have exploited to reduce—and in some cases eliminate—their tax bills.  The same deregulatory impulse that provided bankers with the freedom to nearly destroy the global financial system now makes a mockeryof the U.S. income tax.  How?  In some ways, it’s surprisingly simple.  For example, deregulation allows anyone to make a corporation disappear in the blink of an eye, leaving only what is known as a “tax nothing” behind.  As a result, corporations wield the sort of power one might expect from supervillains.

Neutralizing the impact of tax deregulation is not as simple as limiting the influence of lobbyists.  Nor will closing loopholes or changing tax rates bring taxpayers’ newfound powers under control.  To understand why, consider the case of Wal-Mart.  After years of playing the corporate bad guy, Wal-Mart recently found itself playing a (tax) victim.  Tax deregulation is to blame because it disproportionately benefits Wal-Mart’s more cosmopolitan peers.  A corporation like Wal-Mart that earns its income selling t-shirts and hardware to U.S. consumers gets left out.   

The tax rules governing multinationals used to be feared.  Those once-formidable laws served as potent guardians of the American tax system, ensuring that corporate taxpayers could not avoid U.S. tax by shifting income offshore.  Now, multinationals can avoid the reach of the U.S. income tax simply by making boxes disappear on a corporate chart.  Wal-Mart can only stand on the sidelines as others use the freedom deregulation has given them to artificially shift profits to more welcoming locales. 

Addressing this problem raises the fundamental question of whether any rule can withstand an assault by corporations able to achieve the tax-planning equivalent of leaping a tall building in a single bound.  Although all taxpayers would love to ignore inconvenient requirements, it isn’t clear that Congress should be in the business of granting superpowers to particular taxpayers (or that ordinary Americans should be forced to foot the bill when it does). 

In the 1980s, Reagan joined a bipartisan Congress by eliminating tax breaks and lowering corporate tax rates.  They achieved an extraordinary—but short-lived—victory.  For a time, corporations paid taxes consistent with their profitability and, no less important, non-corporate taxpayers.  Obama wants to do the sametoday, but old-fashioned loopholes are no longer the key problem.  In 1986, Obama might have been right to say that “a parade of lobbyists” had “rigged the tax code to benefit particular companies and industries” so that “those with accountants or lawyers to work the system” could “end up paying no taxes at all.”  Today—unless Wal-Mart has been abandoned by its lobbyists, accountants and lawyers—he is missing the point.

Pricing Obamacare & the trouble with projections

It's often difficult to understand what a social program costs each year or over the years, and it seems that the science of projecting these costs stumps even those who apparently ought to know better...or, from an alternate view, the difficulty creates political opportunities for those who would sway us one way or another regardless of what the projections suggest.  I discussed the anti-Obamacare litigation earlier; it seems that fuel is being added to the fire as commentators take apparently opposite views of the CBO's recent modification to the projected cost estimates.

An article in the Hill tells us "CBO says Obama's latest budget would add $3.5 trillion in deficits through 2022" and then confuses us mightily.

Krugman pulls the article apart and suggests that this is not just poor reporting but an attempt to spread misinformation, since "What the CBO report actually says is that it expects deficits to be a bit smaller than Obama projects."

He adds that "people who can’t read numbers making dumb claims about Obamacare," with a link to Johnathan Cohn, who says "No, Obamacare’s Cost Didn’t Just Double. Sigh".  (Cohn, it appears, is also tired of trying to reason with you people.)  Cohn says:

Sorting through the deceptive attacks on health care reform gets old, even for me. But on Wednesday the Republicans and their allies made a claim so obviously misleading that they, and the media outlets parroting them, must have known they spreading false information. 

...If CBO had truly determined that health care reform’s cost will be twice the original estimates, it would be huge news. But CBO said nothing of the sort. 

...The real news of the CBO estimate is that, according to its models, health care reform is going to save even more taxpayer dollars than previously thought. 

I want to be clear about something. The Affordable Care Act has flaws: Among other things, it reaches fewer people and provides less financial protection than I would prefer. The revised CBO report actually suggests this problem will get mildly worse, since it also expects slightly fewer people to end up with insurance. That’s one reason why the law will cost less; it’s helping fewer people. Another reason is that more employers pay penalties for not offering insurance and more people pay penalties pay penalties for not obtaining it. That’s obviously not great, either.

Cohn explains more about how to understand budget projections, worth reading.

International tax gangsters?

If you ever wondered how tax evasion works, it seems to look a lot like this.

Swiss “Tax Evasion Advisers” Hid Assets, Used Kids:

Two Swiss men who acted as “full service tax evasion advisers” helped U.S. clients hide hundreds of millions of dollars from tax authorities, while delivering cash in hotels and through a child courier, prosecutors said.

... Both Thomann, 61, and Beck, 46, met clients in Manhattan hotels to hand them cash they couldn’t withdraw without visiting Switzerland and pick up money to deposit in their undeclared accounts, according to the indictments.

...A person identified as “Client 2” faxed Beck a letter to withdraw $150,000 in 2009 from Wegelin, according to the indictment. An “unknown person” told him to go to an address in Brooklyn, New York, at a particular time, the indictment said.

...Upon Client 2’s arrival, “a small child of approximately five years of age exited from the home located at the specified address, walked up to Client 2’s car, and handed Client 2 a brown paper bag containing approximately $150,000 in cash,” according to the indictment. 

Netherlands to share more tax info with the US

From TJN:

U.S. hunts for black money in Europe Financial Times Netherlands 

A few days ago, the Netherlands announced that it joins the FATCA implementation agreement between the US and Germany, France, the UK, Italy and Spain. Under this agreement, foreign banks and other financial institutions do not need to report information directly to the IRS, but they will be obliged by national legislation to report it to the government of their home country, which then exchanges it on reciprocal terms with the US. This reduces the reporting burden for the banks and other institutions and for that reason, the agreement is supported - somewhat grudgingly - by the Dutch Banking Association. See the government press release Netherlands prepared to join U.S. and G5 on FATCA. 

The links take you to articles in Dutch.  Google tries hard to translate but I think we'll have to take the TJN's word for it.  This implies that automatic information exchange is in the works between the U.S. and a country it called a tax haven (but quickly took back); here is the implementation agreement.  Of course all we're doing right now is agreeing to agree:

"the United States, France, Germany, Italy, Spain and the United Kingdom have agreed to explore a common approach to FATCA implementation through domestic reporting and reciprocal automatic exchange and based on existing bilateral tax treaties."

The market's need for a strong state

From Richard Murphy:

Fascinating comment in the Guardian this morning:

Willie Walsh, the British Airways chief executive, will launch an excoriating attack on the government on Thursday for the absence of a coherent growth plan, accusing ministers of "warm words and cold action". 

At the British Chambers of Commerce conference in London, he will say this government and the last Labour administration "produce a growth strategy every week, but none of them up add up to anything".

...he's saying he wants the state to have a growth plan. Now that's an interesting admission.
Second, he says that it's been a failure of neoliberal  governments not to have one. Another interesting admission.   Third, he's implicitly saying as a result that without the state taking the lead then the private sector goes nowhere. That's true. 

Fourth, in that case he admits the state needs the resources to deliver such a plan. That means paying tax is essential. And yet he argues business taxes must be cut. That's absurd: that makes him guilty of thinking much worse than any government. 

Fifth, he implicitly says that the state has to do the things the market never can universally to make this work. That includes supplying the private sector with educated, housed, healthy workers who can afford to take the risk on working for the private sector because there's an adequate safety net to let them do so. The state's failed in that role for too long too.

The real cost of the U.S. health care system

In American if you are not an employee, you will not have health insurance but must seek it out in the private market if you want it.  If you don't have insurance, you will be billed directly for the costs of any health care you end up using.   Without the (much maligned) Affordable Care Act (aka Obamacare), getting health insurance is optional, so people who are not covered under an employer plan can choose to go without. But when things go badly, those who choose to forego insurance and bear the costs of whatever health care they actually use, do not in fact always bear these costs.   Instead, they can externalize these costs by filing for bankruptcy, throwing the unpaid cost onto health care providers, who in turn pass it on to insurance companies, and from there onto people who do pay for health care coverage.  Allowing people to both under-insure themselves and then discharge health care costs in bankruptcy thus creates a tremendous potential for free riding and externalizing costs onto others in society.

It seems the face of anti-ACA litigation has done just exactly that:

"As someone who chose not to purchase health insurance —and felt strongly that the federal government had no business telling her that she had to buy it whether she liked it or not—Mary had become an active and outspoken critic of the law. As a result, she was the perfect candidate to be a human face on the challenge to Obamacare.

Last fall, Mary Brown and her husband filed a petition of bankruptcy seeking relief for some $55,000 in debts the couple had run up . . . [including] $4500 worth of medical bills... 

Almost half of the medical debt run up by the Browns is owed to Bay Medical Center in Panama City, Florida. A spokesperson for the hospital had this say about their experience with the Browns and the many others who cannot pay their medical bills because they have chosen to remain uninsured.  “This is a very common problem. We cover $30 million in charity and uncompensated care every year,” “If it’s a bad debt, we have to absorb it.”

And related to that is this:

In America, when employment contracts, so does health care coverage:  "From 2007 to 2010, the share of children and working-age adults with employer-sponsored coverage fell  to 53.5 percent from 63.6 percent".

When a Congressman becomes a lobbyist he gets a 1,452% raise

That is a significant raise.  The revolving door is lined with pure gold it seems.

Conference on Tax Transparency-London

From Richard Murphy: International Tax Review's Annual Conference this year (London, May 2) is on the topic of tax transparency, i.e., country by country reporting.  He quotes the program:

"The financial crisis has changed everything. Now governments desperate for revenue are looking to close loopholes and claw back as much money as they can from taxpayers, through settlement or in court. 

Meanwhile, the public mood has turned against avoidance as people take to the street to demand companies pay their fare share of tax. ... 

Tax transparency, country-by-country reporting, information exchange and transfer pricing rules are becoming increasingly important issues for taxpayers to consider in terms of their investors, their reputation and their exposure to risk. The issue will only continue to grow in importance in the coming years and, as such, it will become an increasing concern for companies looking more nervously at their bottom lines.
International Tax Review has decided to place itself ahead of the curve and is inviting taxpayers and advisers to join this crucial debate. 

Links

Are Tax Havens Disappearing?  The OECD Says Yes, Critics Argue More Needs to be Done

In case you somehow missed it, the instantly infamous Goldman Sachs letter

EU struggling with the idea of a financial transactions tax

New Yorkers struggling with the idea of paying tax to New York (thanks Shane)

Notable International Tax Articles of 2011

I'm very pleased that my article, How Nations Share, is featured in Robert Green's Tax Notes column, Notable International Tax Articles of 2011. 

What America Sells To The World

Mostly goods. Also, services.  From NPR, some visual descriptions of the U.S. export market:

What the US exports in goods:

And in services:
 

And to whom:

More at the link.  Fascinating!

More on higher ed & taxes

Reich associates disengagement with public universities with the decline of the middle class.  The problem:

The US is already making it harder for young people of modest means to attend college. Public higher education is being starved and the middle class will shrink even more as a result. 

...The children of middle- and lower-income families are hardest hit. Remember: The median wage has been dropping since 2000, adjusted for inflation.

... public higher education isn't just a private investment. It's a public good. Our young people - their capacities to think, understand, investigate and innovate - are the US' future.  

...Public higher education has been the gateway to the middle class, but that gate is shutting - just when income and wealth are more concentrated at the top than they've been since the 1920s, and when the US needs the brainpower of its young people more than ever.

A solution:

A big part of the answer has to be more government support for public education at all levels. This requires more tax revenues - especially from Americans who are best able to pay. 

Most Americans still believe in the ideal of equal opportunity. And most harbour the patriotic notion that we have responsibilities to one another as members of the same society.

And here is a discussion of the growing problem of student debt, with this scary looking chart: