tag:blogger.com,1999:blog-34714712897448254282024-03-14T01:00:51.409-07:00The Oregon Economics BlogPatrick Emersonhttp://www.blogger.com/profile/17242234148546323374noreply@blogger.comBlogger1725125tag:blogger.com,1999:blog-3471471289744825428.post-5331027205140659712017-01-24T14:33:00.003-08:002017-01-24T14:33:37.044-08:00Rents are Too Damn High! Populist Answers are Rarely the Correct AnswersSo Portland has a problem with affordable housing. Rents are high and increasing, which sucks for all those looking for rental housing (and is great for those with property to rent) and property values are soaring which is great for those who own homes but bad for those that want to buy. Politicians hear the complaints and want to avoid being seen as passive so they try to come up with policies that sound good to voters. Unfortunately, these ideas are generally half-baked and done without nearly enough research and thought. And poor policy can have bad consequences. <br />
<br />
Thus we have <a href="http://www.wweek.com/news/city/2017/01/24/city-council-releases-plan-to-make-portland-landlords-pay-moving-costs-for-renters-they-evict-for-no-cause/">this</a> proposal from City Commissioner Chloe Eudaly with the support of Mayor Ted Wheeler. This proposal would require landlords to pay the moving costs of tenants evicted for "no-cause." The idea is to discourage such evictions. The actual result is most likely to make the rental housing situation worse.<br />
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How so? Well first let's start with the premise that no-cause evictions are part of the problem of unaffordable housing. Perhaps, but Oregon has a statewide ban on rent control policies, so why is getting a new tenant any better than raising the rent on an existing tenant? Especially when you factor in the cost of a vacant apartment or house, the cost of getting it ready for a new tenant, etc. It is not at all clear why this policy would help at all.<br />
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Second, rental housing is a market and markets adjust to distortions created by policymakers. This policy clearly raises the cost of doing business for landlords. So who pays for these increased costs? All students of economics learn from their very first class that the incidence of taxes and other distortions are shared. Increased costs shift the supply curve back and a new equilibrium results. How does that new equilibrium compare to the old one? Higher price and fewer properties rented. Exactly the opposite of what commissioners say they want to see in the rental market. <br />
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Third, there is the incentive to create more rental housing. What Portland needs more than anything are new rental units to increase supply or shift the supply curve out. More units would do the opposite of the above: it would lower price and increase units rented. <br />
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Finally, this policy creates advantages for sitting tenants and disadvantages those looking for rental housing. If landlords are less likely to evict tenants, tenants are prone to stay longer in rental housing and those wanting housing will find less to rent. Why are we placing the interests of one group above another group? <br />
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And by the way, I know a little of what I speak. I have two papers on these types of 'soft' rent control policies that are designed to protect sitting tenants:<br />
<br />
"<a href="http://people.oregonstate.edu/~emersonp/rentcontrol/rentcontrolej.pdf">The Economics of Tenancy Rent Control</a>." (w/ Kaushik Basu) The Economic Journal, October 2000, Vol. 110, No. 466, pp. 939-962.<br />
<br />
"<a href="http://people.oregonstate.edu/~emersonp/rentcontrol/rc2.pdf">Efficiency Pricing, Tenancy Rent Control and Monopolistic Landlords</a>." (w/ Kaushik Basu) Economica, May 2003, Vol. 70, No. 278, pp. 223-232.<br />
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If you really want to help the rental housing market the first thing you should do as a policy maker is to do no harm: don't start distorting markets without considering the consequences. The second is to promote the creation of new rental housing if you really want to help. But I have a message to policy makers: the good news is that the market is promoting the creation of new housing right now without your input at all - it is called high rents. So by all means do what you can to speed the construction of new housing, especially housing targets to lower income renters, but please don't resort to bad populist ideas.Patrick Emersonhttp://www.blogger.com/profile/17242234148546323374noreply@blogger.com1tag:blogger.com,1999:blog-3471471289744825428.post-18613869154801608242017-01-18T17:19:00.002-08:002017-01-18T17:19:50.019-08:00Yes, January Was Cold, But...<div class="separator" style="clear: both; text-align: center;">
<a href="https://3.bp.blogspot.com/-NBxxSu3NiUI/WIATNSkUJZI/AAAAAAAA0oo/WNMJUO1aHHwY3KPMdAYoIF1dImuST71PwCLcB/s1600/temppdx.tiff" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="320" src="https://3.bp.blogspot.com/-NBxxSu3NiUI/WIATNSkUJZI/AAAAAAAA0oo/WNMJUO1aHHwY3KPMdAYoIF1dImuST71PwCLcB/s320/temppdx.tiff" width="307" /></a></div>
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This <a href="https://www.nytimes.com/interactive/2017/01/18/world/how-much-warmer-was-your-city-in-2016.html#pdx">graph from <i>The New York Times</i></a> shows the daily high and low temperatures for Portland, Oregon and compares the yearly average temperature to the historical average to find that Portland last year was, on average, more than 2 degrees hotter than normal in 2016.<br /><br />
My other adopted hometown, São Paulo, Brazil was more than 5 degrees hotter and precipitation was more than 19 inches less than normal. Ouch.Patrick Emersonhttp://www.blogger.com/profile/17242234148546323374noreply@blogger.com0tag:blogger.com,1999:blog-3471471289744825428.post-1124837167767733532017-01-17T15:35:00.000-08:002017-01-17T15:35:23.936-08:00School Choice and Efficiency: A NoteThe nomination by Donald Trump of Betsy DeVos for Education secretary has put school choice and vouchers back in the forefront of the national debate about school reform. Vouchers are often touted by more conservative groups as a way to bring competitive pressures and market discipline to education by empowering families to make choices regarding their children's education. <br />
<br />
This is simply a note to point out that a key, even crucial, component of market efficiency is complete information. Consumers must know everything about the product they are purchasing including hoe beneficial it is to themselves, the prices of all goods in the market and so on. <br />
<br />
Education is far from this. Education experts are still trying to figure out the critical components of educational outcomes, how can uninformed families, who only observe schools from the tousled make well-informed decisions for their kids? Simply put, they can't. Thus there is absolutely known reason to believe that we will improve efficiency through the introduction of vouchers, school choice or charter schools. <br />
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This is not to say that there could not be beneficial outcomes from such reforms, I remain open-minded, but don't tout the creation of an education market as the answer for it is likely to be inefficient. Patrick Emersonhttp://www.blogger.com/profile/17242234148546323374noreply@blogger.com0tag:blogger.com,1999:blog-3471471289744825428.post-48036495305707489382017-01-05T10:13:00.000-08:002017-01-05T10:13:03.582-08:00Happy New Tax Year<div class="MsoNormal" style="margin-bottom: 6pt; text-align: center;">
<i style="font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; text-align: start;"><a href="http://www.willamette.edu/~fthompso/" style="text-decoration: none;">Fred Thompson</a> checks in with a New Years post</i></div>
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With the start of another
legislative session, calls for wholesale tax reform are again being heard.
Frankly, most state tax-policy specialists are dubious of big reforms. My
Georgia State University colleague, Carolyn Bourdeaux, for example, boils the typical
reform process down to the following seven steps: <o:p></o:p></div>
<div class="MsoListParagraphCxSpFirst" style="margin-bottom: 6.0pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;">
<!--[if !supportLists]--><span style="mso-bidi-font-family: Cambria; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: Cambria; mso-fareast-theme-font: minor-latin;"><span style="mso-list: Ignore;">1.<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Form a commission <o:p></o:p></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-bottom: 6.0pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;">
<!--[if !supportLists]--><span style="mso-bidi-font-family: Cambria; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: Cambria; mso-fareast-theme-font: minor-latin;"><span style="mso-list: Ignore;">2.<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Develop “Principles of Tax Reform” <o:p></o:p></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-bottom: 6.0pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;">
<!--[if !supportLists]--><span style="mso-bidi-font-family: Cambria; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: Cambria; mso-fareast-theme-font: minor-latin;"><span style="mso-list: Ignore;">3.<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Hold hearings <o:p></o:p></div>
<div class="MsoListParagraphCxSpLast" style="margin-bottom: 6.0pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;">
<!--[if !supportLists]--><span style="mso-bidi-font-family: Cambria; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: Cambria; mso-fareast-theme-font: minor-latin;"><span style="mso-list: Ignore;">4.<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Make a proposal based either on the “grass is
greener assumption” or the “bold new thinking on taxes notion.” <o:p></o:p></div>
<div class="MsoNormal" style="margin-bottom: 6.0pt; margin-left: .25in; margin-right: 0in; margin-top: 0in;">
The former looks like this:<o:p></o:p></div>
<div class="MsoListParagraphCxSpFirst" style="margin-bottom: 6.0pt; margin-left: .75in; margin-right: 0in; margin-top: 0in; mso-add-space: auto; mso-list: l1 level1 lfo2; text-indent: -.25in;">
<!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->If your state does not have an income tax, propose
an income tax <o:p></o:p></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-bottom: 6.0pt; margin-left: .75in; margin-right: 0in; margin-top: 0in; mso-add-space: auto; mso-list: l1 level1 lfo2; text-indent: -.25in;">
<!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->If your state does not have a retail
sales/consumption tax, propose a sales tax<span style="mso-spacerun: yes;">
</span><o:p></o:p></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-bottom: 6.0pt; margin-left: .75in; margin-right: 0in; margin-top: 0in; mso-add-space: auto; mso-list: l1 level1 lfo2; text-indent: -.25in;">
<!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->If your state has a corporate income tax, propose
a gross receipts tax <o:p></o:p></div>
<div class="MsoListParagraphCxSpLast" style="margin-bottom: 6.0pt; margin-left: .75in; margin-right: 0in; margin-top: 0in; mso-add-space: auto; mso-list: l1 level1 lfo2; text-indent: -.25in;">
<!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->If your state has a gross receipts tax, propose
a corporate income tax <o:p></o:p></div>
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The latter looks like this:<o:p></o:p></div>
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<!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->If your state relies on personal and/or
corporate income taxes, propose the elimination of all exemptions, credits, and
deductions <o:p></o:p></div>
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<!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->If your state relies on retail sales taxes,
propose to tax services and internet sales<o:p></o:p></div>
<div class="MsoListParagraph" style="margin-bottom: 6.0pt; margin-left: .75in; margin-right: 0in; margin-top: 0in; mso-list: l1 level1 lfo2; text-indent: -.25in;">
<!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->If your state relies on both sales and income
taxes, propose to replace them with a value-added tax or mess with local
government revenues<o:p></o:p></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-bottom: 6.0pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;">
<!--[if !supportLists]--><span style="mso-bidi-font-family: Cambria; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: Cambria; mso-fareast-theme-font: minor-latin;"><span style="mso-list: Ignore;">5.<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->If you choose from the first list, your state
will probably be no better off than it was before and possibly worse; from the
second, you will probably see your proposal go down in flames<o:p></o:p></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-bottom: 6.0pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;">
<!--[if !supportLists]--><span style="mso-bidi-font-family: Cambria; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: Cambria; mso-fareast-theme-font: minor-latin;"><span style="mso-list: Ignore;">6.<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Wait 5-10 years until the next fiscal crisis <o:p></o:p></div>
<div class="MsoListParagraphCxSpLast" style="margin-bottom: 6.0pt; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;">
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</span></span></span><!--[endif]-->Repeat. <o:p></o:p></div>
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The fact is that wholesale tax
reform is more often than not a mug’s game, especially in Oregon, which has one
of the country’s best state and local tax systems. At least that is the
consensus among state and local tax specialists. It’s not by any means perfect;
what is? But it’s better than what you find elsewhere.<o:p></o:p></div>
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<a href="https://2.bp.blogspot.com/-WSHio4QwCN8/WG6MVyR8g1I/AAAAAAAA0Jk/EFZwiDoePNoR16YhdyZBzwpy0LFPwuUygCLcB/s1600/ft2.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="195" src="https://2.bp.blogspot.com/-WSHio4QwCN8/WG6MVyR8g1I/AAAAAAAA0Jk/EFZwiDoePNoR16YhdyZBzwpy0LFPwuUygCLcB/s320/ft2.png" width="320" /></a></div>
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So, instead of talking about
wholesale tax reform, what should we talk about? The answers are simple: first,
fix the things that need fixing, we know what those things are; second, if the
state needs more money, increase the rates on existing taxes; third, funds are
inherently limited, set spending priorities and stick to them.<o:p></o:p></div>
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What needs fixing? More than
anything else, <a href="http://oregonecon.blogspot.com/2015/08/kickers-rainy-days-and-rising-seas.html">Patrick
Emerson</a> and I have written <a href="http://oregonecon.blogspot.com/2016/01/fred-thompson-kickers-redux.html">about
the Kicker</a> and <a href="http://oregonecon.blogspot.com/2015/01/fred-thompson-stuffing-oregons-kicker.html">its
folly</a> here at the Oregon Economics Blog. In what is largely an exemplary
state and local tax system, Oregon’s kicker is an embarrassment, or, more
correctly, the legislature’s unwillingness to deal with it is simply shameful.
There is also the problem of kicking the can down the road with respect to <a href="http://oregonecon.blogspot.com/2014/12/fred-thompson-you-can-pay-now-or-later.html">maintaining
and upgrading state and local transportation infrastructure</a>, where the best
that can be said is that <a href="http://oregonecon.blogspot.com/2015/01/fred-thompson-capitol-eyes-gas-tax-yet.html">Oregon
is probably better than many places, but that still isn’t very good</a>.
Moreover, the state has emphasized its needs at the expense of local
governments, which, given the <a href="http://oregonecon.blogspot.com/2013/07/fred-thompson-does-oregon-need-mileage.html">network
aspects of our transportation grid</a>, is foolishly suboptimal. Finally, the
legislature has handed out tens of billions of dollars in business and personal
income tax deductions and exemptions, usually with the best of intentions –
promoting economic development, conservation, or other worthwhile activities –
but tax expenditures are all too often ineffective and excessively costly. <a href="http://www.oregonlive.com/opinion/index.ssf/2016/11/the_path_forward_after_measure.html">Many
if not most of these loopholes/subsidies should be repealed</a> (which is, of
course, easier to say than to do).<o:p></o:p></div>
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Beyond these measures, if more
funds are needed, raise income and business tax rates. By far the worst thing
about Measure 97 was the size of the jump it proposed – a 2,500 percent rate
increase. It makes sense to consider a more incremental <a href="http://oregonecon.blogspot.com/2016_02_01_archive.html">increase in the
alternative minimum turnover tax rate</a>, while <a href="http://oregonecon.blogspot.com/2016/04/fred-thompson-where-oh-where-has.html">retaining
the offset provision for C-corps.</a><o:p></o:p></div>
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Boosting taxes requires
compromise. Oregonians care about schools and roads, but they are also
inherently thrifty, if not actually cheap. At a minimum, support for K-12 and
highway spending must be prioritized ahead of other state programs and initiatives.
Moreover, cost-saving reforms to the state’s public pension system probably ought
to be on the agenda as well. Upholding contracts is one thing, guaranteeing
unanticipated windfalls another. If kicker reform, together with other tax
increases, are on the table, pension inflation adjustments, especially those which
exceed the realized rate of inflation, probably ought to be as well.<o:p></o:p></div>
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Holding broadly valued, highly
esteemed programs hostage to special interests is often a winning legislative
tactic, but, in the longer run, it’s bad politics, one that the governor
acquiesces to at her peril.<o:p></o:p></div>
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Patrick Emersonhttp://www.blogger.com/profile/17242234148546323374noreply@blogger.com1tag:blogger.com,1999:blog-3471471289744825428.post-36340629003646581512016-12-14T15:09:00.003-08:002016-12-14T15:10:31.817-08:00Fred Thompson: Steve Novick's First-of-Its-Kind CEO Tax<i><a href="http://www.willamette.edu/~fthompso/">Fred Thompson</a> checks in with another well researched post (unlike mine)</i><br />
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<a href="https://1.bp.blogspot.com/-5j9melaL5kE/WFHQjFO9K6I/AAAAAAAA0Fg/HdHDRJnigXs4aRxO4HVdy9DUDRS6IdNIwCLcB/s1600/ft1.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="163" src="https://1.bp.blogspot.com/-5j9melaL5kE/WFHQjFO9K6I/AAAAAAAA0Fg/HdHDRJnigXs4aRxO4HVdy9DUDRS6IdNIwCLcB/s400/ft1.png" width="400" /></a></div>
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</v:shape><![endif]--><!--[if !vml]--><a href="https://4.bp.blogspot.com/-gNr8VEvmy1k/WFHQijgWIgI/AAAAAAAA0FY/ycFMHuq90fg2hS4T1aXTEYot6MOIsezWQCLcB/s1600/ft2.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="213" src="https://4.bp.blogspot.com/-gNr8VEvmy1k/WFHQijgWIgI/AAAAAAAA0FY/ycFMHuq90fg2hS4T1aXTEYot6MOIsezWQCLcB/s320/ft2.png" width="320" /></a>Portland’s
so-called <a href="https://www.portlandoregon.gov/mayor/article/433747">Business
License Fee</a> (BLF) levies a 2.5 percent tax on the adjusted net profits of
about 43,000 companies operating in the city. Starting in 2018, Portland will impose
a surcharge to this tax on some large, publicly owned C-corporations. The
surcharge will apply to businesses, which are subject to the <a href="https://www.sec.gov/news/pressrelease/2015-160.html">Dodd-Frank
requirement that they disclose the ratio of their chief executive’s (CEO)
compensation to the compensation of their median employee</a> and which also
have high compensation ratios. Portland’s department of revenue estimates that about
550 Portland businesses will be subject to this reporting requirement. Where reported
compensation ratios are equal to or greater than 100, businesses will pay a 10
percent surcharge on their BLF (2.75 percent tax rate); equal to or greater
than 250 times, a 25 percent surcharge (3.125 percent). <o:p></o:p></div>
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Portland’s BLF generates about
$60 million in revenue<i style="mso-bidi-font-style: normal;"> per annum</i>. The
municipal revenue office estimates that the >500 businesses subject to Dodd-Frank
compensation-ratio reporting contribute about one-third of BLF revenue, nearly $20
million <i style="mso-bidi-font-style: normal;">per annum</i>, and that the
surcharge will boost municipal revenue by $2.5-$3.5 million per year, which
implies that nearly all the reporting businesses will be subject to the
surcharge, at least one-third of them at the 3.125 percent rate.<o:p></o:p></div>
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This is a novel tax experiment.
As Branko Milanović explained: “<a href="https://www.theguardian.com/us-news/2016/dec/05/portland-ceo-salary-tax-vote-wealth-inequality">What
I find quite interesting is that it seems [to be] the first tax that targets
inequality as such</a>.” For Milanović, it’s novel because “it treats
inequality as having a negative externality, like taxing carbon emissions.”
Moreover, it isn’t at all clear how Portland’s experiment will play out, which
makes it interesting, albeit probably still not in itself materially significant.
Policy experimentation is cool, especially elsewhere. <o:p></o:p></div>
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The remainder of this post will
focus on two issues: <o:p></o:p></div>
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<!--[if !supportLists]--><span style="mso-bidi-font-family: Cambria; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: Cambria; mso-fareast-theme-font: minor-latin;"><span style="mso-list: Ignore;">1.<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->What is the purpose of this measure? Will it work?<o:p></o:p></div>
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</span></span></span><!--[endif]-->Are the municipal revenue estimates realistic?<o:p></o:p></div>
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Portland spends about $30
million <i style="mso-bidi-font-style: normal;">per annum</i> on low-income
housing and homeless services. The revenue from the surcharge will be
contributed to fighting homelessness, where presumably every bit will help.
Moreover, this use of the funds, when combined with its source, ought to
reinforce the symbolic power of the measure.<o:p></o:p></div>
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There is an implicit
presumption that the measure will cause businesses (some C-corps, anyway) to moderate
CEO compensation or boost median earnings. No doubt executive compensation
plays a major explanatory role in the explosion in income inequality that has
occurred over the past 30-40 years. <i style="mso-bidi-font-style: normal;">Forbes</i>
magazine recently reported that the average annual total compensation for a <i style="mso-bidi-font-style: normal;">Fortune</i> 500 CEO was $10.5 million. This
breaks down to $3.5 million in salary and bonus, $3.8 million in other
compensation such as personal perk packages, and $3.2 million from exercising
vested stock options and awards. <o:p></o:p></div>
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<tr><td style="text-align: center;"><a href="https://4.bp.blogspot.com/-TljgoLxxAVk/WFHQiwbcDdI/AAAAAAAA0Fc/gjv5gRgxrn0KdSksB7zUAhTFgd457iu8gCLcB/s1600/ft3.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="203" src="https://4.bp.blogspot.com/-TljgoLxxAVk/WFHQiwbcDdI/AAAAAAAA0Fc/gjv5gRgxrn0KdSksB7zUAhTFgd457iu8gCLcB/s320/ft3.png" width="320" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-size: 10pt; text-align: right;">Source: </span><a href="http://www.epi.org/publication/ceo-and-worker-pay-in-2015/" style="text-align: right;"><span style="font-size: 10pt;">Economic Policy Institute</span></a></td></tr>
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However, compared to the
combined total compensation of <i><span style="font-family: "times"; font-size: 13.0pt;">Fortune</span></i><span style="font-family: "times"; font-size: 13pt;"> 500 </span>CEOs
of $5.2 billion, the $3 million that Portland expects to collect through this
measure looks like a drop in the ocean. Unless a lot other jurisdictions follow
Portland’s lead, it isn’t likely to meaningfully influence corporate
compensation practices, one way or the other.</div>
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<span style="font-family: "times"; font-size: 13.0pt;">Furthermore, it is possible that
Portland won’t even collect $3 million from this measure. As is the case with a
lot of things, CEO compensation tends to be characterized by a Pareto
distribution, i.e., 20 percent of CEOs get 80 percent of total compensation.
That implies an average compensation for the 400 CEOs at the bottom of the <i style="mso-bidi-font-style: normal;">Fortune</i> 500 list of about $2.5 million
each, well under the $4 million Portland used to estimate the cutoff for the
surcharge. When compared with the average median worker compensation in <i style="mso-bidi-font-style: normal;">Fortune</i> 500 companies of about $80,000,
which boosts the cutoff to $8 million, this implies that considerably less than
half of Portland’s top C-corps will be on the hook for the surcharge. Moreover,
looking only at the average median worker entirely omits from consideration the
possibility that </span><a href="http://web.stanford.edu/~djprice/papers/FUI_22OCT2016_FINAL_QJE_SUBMIT.pdf"><span style="font-family: "times"; font-size: 13.0pt;">Bloom <i style="mso-bidi-font-style: normal;">et al.</i></span></a><span style="font-family: "times"; font-size: 13.0pt;"> are correct, that
two-thirds of the rise in earnings inequality from 1978 to 2013 was due to increases
occurring between businesses, not within them – let alone all the shadier expedients
mandatory disclosers could avail themselves of to minimize reported compensation
ratios.<o:p></o:p></span></div>
Patrick Emersonhttp://www.blogger.com/profile/17242234148546323374noreply@blogger.com1tag:blogger.com,1999:blog-3471471289744825428.post-40998438382302198942016-12-01T13:21:00.001-08:002016-12-01T13:21:46.152-08:00Silicon Valley's Relentless Hype About Disruption is Questionable: The Case of UberDespite the hype, I have never been convinced by Uber, there is a reason taxi companies formed and is wasn't just radio dispatch. Other things such as ability to select and keep skilled drivers, economizing on capital stock, insurance and maintenance seemed to me party powerful economic forces. <br />
<br />
Uber's premise is essentially that there need be no more central control thanks to smartphones and that there is no such thing as economies of scale in taxi service. The former might be right, but the latter is questionable. <br />
<br />
Now there is <a href="http://www.nakedcapitalism.com/2016/11/can-uber-ever-deliver-part-one-understanding-ubers-bleak-operating-economics.html">this exposé</a> of Uber in the blog Naked Capitalism, <a href="https://ftalphaville.ft.com/2016/12/01/2180647/the-taxi-unicorns-new-clothes/">nicely covered</a> by the Financial Times' Alphaville blog. It appears that Uber is one, losing money at an astonishing rate, and two, engaging in predatory pricing - deliberately pricing below cost to drive competitors out of business. Patrick Emersonhttp://www.blogger.com/profile/17242234148546323374noreply@blogger.com0tag:blogger.com,1999:blog-3471471289744825428.post-63432646648748088982016-11-23T15:52:00.001-08:002016-11-23T15:52:18.336-08:00How You Get Away With a Lousy Public Education SystemBy many metrics Oregon has one of the <a href="http://www.oregonlive.com/education/index.ssf/2015/06/underachieving_oregon_state_ra.html">worst public education systems</a> in the Untied States. Oregon's per-pupil funding is 15% below the U.S. average, Oregon's low graduation rates are 48th worst in the nation, Oregon has the highest absentee rate, and one of the shortest school years in the nation and we have below average standardized test scores in math and reading. And yet, Oregon's economy is doing well, we have a tech sector and a creative sector that are doing well and we are constantly seen as an attractive place to locate. <br />
<br />
It is this last bit that is the key: if you are a complete failure in educating your own children, you better be good at importing educated young people from other states. Luckily, we are.<br />
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So next time you get all worked up about the relentless migration of young people and families from California and other parts of the U.S., remember that without them, we'd have to rely on the poorly educated sons and daughters of Oregon. Woe the thought.Patrick Emersonhttp://www.blogger.com/profile/17242234148546323374noreply@blogger.com0tag:blogger.com,1999:blog-3471471289744825428.post-54742085025700581552016-11-22T11:22:00.000-08:002016-11-22T11:22:23.776-08:00Back to Blogging.....about SoccerIt has been a very long hiatus - I have had a series of things that have demanded my time and taken me away from blogging. But through industry, time and fate I suddenly find myself (and by sudden I mean as of today) with a more manageable work-load and my thoughts drift to going back to doing some stuff I enjoy. I imagine that I have lost nearly all my audience, which is okay, it is actually a lot easier to write when I imagine no one is reading, but I thank Fred Thompson for single-handedly keeping this thing alive and preserving a small audience of super-wonks.... <br />
<br />
...which I will now do my best to alienate. I'd love to come back hard with a deep-dive into some state policy topic, an extended piece on my interpretation of the economic impacts of a Trump presidency but that would short-circuit my start before it even began because I would find it too daunting and not fun enough. So I come back with thoughts on one of my favorite pastimes: soccer. <br />
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Yesterday the US Soccer Federation decided to <a href="http://www.espnfc.com/united-states/story/3001177/jurgen-klinsmann-fired-as-manager-of-united-states-mens-national-team">fire the coach of the national team</a> and its Technical Director, Jurgen Klinsmann. Bruce Arena, onetime coach of the US National Team and current LA Galaxy coach <a href="http://www.espnfc.us/united-states/story/3001568/bruce-arena-hired-to-succeed-jurgen-klinsmann-as-united-states-coach">will be hired as his replacemen</a>t. To me this represents a switch back from the aspirational to the pragmatic and I, for one, am disappointed. I am not sold on Klinsmann being a great coach, in fact I am pretty sure he is not. But I think that is secondary to his role as an aspirational leader for the direction of the USSF. <br />
<br />
In the past, and continuing to the present, elite soccer in the US has been built on two things: pay-to-play and athleticism. Because of the socio-economic inequalities, this has caused the exclusion of youth from immigrant communities where technical ability and flair is prized and soccer IQ is extremely high. It has promoted the advancement of big-fast-strong soccer robots who are taught to play very directly, do a set few things and limit their independent thought. The problem with this approach is that the game based on direct-play, athleticism and lack of autonomy is boring to play, boring to watch and ever less competitive in top-flight professional soccer. And yet our entire national soccer mechanism incentivizes exactly this. This is a very coach-centric approach and is a spill over, I think, of the sports culture of the US which is based on coaches being in charge. But soccer is pretty unique in that it is not like that at all. Once the game begins the coach has almost no control- it is up to the players to figure it out themselves. <br />
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So the US National Team in the past has reflected this culture and the American coaches hired to coach the team have been very good, very pragmatic coaches. They know the talent they have and they know how to maximize it - play direct counter-attacking soccer that relies on athleticism. That is a fine an defensible approach but it reinforces the problem: there is too little emphasis on technical quality and intelligent play. As the US team is a model for kids in this country much more than the pro leagues (unlike most of the world) it only causes an exacerbation of the problem. It is an emphasis on winning, full stop.<br />
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What Klinsmann represented to me was the idea that we could and should strive to be more. That we should aspire to create intelligent technical players, that we could play an attacking style with flair and skill, that we could keep possession of the ball and complete with the best. What I think Klinsmann recognized is that without a native soccer culture and as the touchstone for all of US soccer, the National team had the unique power to be the agent of change in the US. To become an aspirational model for what US soccer could look like. This is why, I believe, he looked so hard for players in Europe who were more technical and intelligent, to show the way to younger players. <br />
<br />
He did a lot to move the USSF along behind the scenes as the Technical Director - from the youngest ages on up. As a youth coach myself, I have seen the changes first-hand and though I don't always agree, I mostly do and I see the results every weekend as every year (and this past fall in particular with a number of rule changes, the most important being that U11 and U12 players play 9v9) I see more and more teams playing a possession-style game and eschewing the direct play that used to be the norm. But there is a long way to go: the very elite levels of youth soccer are still results-based and thus the all too easy shortcut of selecting on aggressiveness and athleticism still wins the day. They are also extremely expensive and exclude the very best talent which is in poorer immigrant communities (largely Latin American but not exclusively). So we have still have a very long way to go and the youth clubs themselves, whose existence is based on the pay-to-play model, will resist change. This is why an iconic figure like Klinsmann was important - he had the power of persuasion to get all the thousands of clubs (and the USSF) itself moving on down the road. In other countries there are soccer clubs with senior teams that compete in an open system with promotion and relegation where there are incentives for the clubs to find and develop players, in the US it has to come from the top.<br />
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So now we are back to pragmatism. I hear the term 'American style' of play - as in 'Klinsmann did not understand the American style and thus players were uncomfortable and under-performed.' To me this is just saying that all American players are good at is running and fitness so don't ask them to do more or be more. Apparently, that is what we are going back to. If that is a good thing for soccer players, why are there so few Americans playing in European professional leagues? American exceptionalism does not translate to soccer and I lament the passing of the Klinsmann era. Patrick Emersonhttp://www.blogger.com/profile/17242234148546323374noreply@blogger.com0tag:blogger.com,1999:blog-3471471289744825428.post-87477250870311393822016-10-31T10:31:00.000-07:002016-10-31T10:31:51.650-07:00Fred Thompson: Last Thoughts on M-97 (if it is defeated)<i><a href="http://www.willamette.edu/~fthompso/">Fred Thompson</a> checks in with another post on M-97</i><br />
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I dislike M-97. Sufficiency aside, it violates all of the
criteria that for 40 years I have taught my students should be employed to
evaluate tax proposals: Neutrality, Efficiency, Horizontal and Vertical equity,
Transparency, and Certainty. Most tax proposals envision some tradeoffs between
these criteria. M-97 abuses them all.<o:p></o:p></div>
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Nevertheless,<b style="mso-bidi-font-weight: normal;"> Yes on
97</b> looks to be more right than not on three points. M-97 would be good for
small businesses (and big LLCs and S-corps), most of the new money will be
spent on education and health, and, going back to at least 2003, the state has
failed to prioritize education funding. Even where it has increased education
funding it has too often directed monies to special interest projects or
categorical programs, more frequently it has simply imposed mandates on
schools. These have often bled resources away from district priorities, but
have not measurably promoted student learning or welfare. What it has not done
is stabilize school funding or support it at a satisfactory level.<o:p></o:p></div>
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I think M-97 is a wretched mess, although I acknowledge it
could work out fine. Nobody knows; the simple fact is that state taxes <i style="mso-bidi-font-style: normal;">per se</i> usually don’t matter very much to
the health of state economies. My fellow economists, who have thought about the
effects of M-97, and I believe that the best real-world analogy to how it would
work is an <i style="mso-bidi-font-style: normal;">ad valorem</i> tariff.
Depending on market structure and the economic power of the businesses subject
to tariffs, they can be partly, fully, or more than fully passed through to
final (domestic) consumers. If they are high enough, they can cause foreign
competitors to exit domestic markets. On occasion, foreign businesses are
forced to eat the full tariff themselves, which is what <b style="mso-bidi-font-weight: normal;">yes on 97</b> says will happen, pretty much across the board. Of
course, M-97 would be good for non-C-corps, including small businesses, for
precisely the same reason that tariffs are good for some domestic producers:
they let them increase their prices without losing market share. <o:p></o:p></div>
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Finally. I have talked to folks who agree that M-97 is a train
wreck waiting to happen, but plan to vote for it nevertheless. Their logic goes
something like this: its threat will push the legislature to put together a
higher yielding (and perhaps sounder) tax system than the one we have now. I
see their logic, but I don't see a path from this ugly thing to a sound tax
system (historically, gross receipts taxes have simply devolved into retail
sales taxes). It's rather like M-47, which was a mess; in M-50 the legislature
made it into something OK, but by no means ideal, or even close. I also recall
that <i style="mso-bidi-font-style: normal;">Willamette Week,</i> in supporting
Measure 5 in 1990, argued that it would force the legislature to confront the
need for fundamental tax and school finance reform. Evidently, <i style="mso-bidi-font-style: normal;">Willamette Week</i> learned better. It
opposes M-97.<o:p></o:p></div>
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Patrick Emersonhttp://www.blogger.com/profile/17242234148546323374noreply@blogger.com0tag:blogger.com,1999:blog-3471471289744825428.post-37339088655375122552016-09-21T08:25:00.000-07:002016-09-21T08:25:03.779-07:00Fred Thompson: The LRO’S Research on Measure 97<br />
<i><a href="http://www.willamette.edu/~fthompso/">Fred Thompson </a>checks in with the forth in a series of posts on Measure 97 (IP28). </i><br />
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Proponents of Measure 97 deny that most of its burden will
be shifted forward to consumers and that it will thereby reduce the
progressivity of Oregon’s tax system. Moreover, <a href="http://www.statesmanjournal.com/story/news/politics/2016/09/11/closer-look-economic-research-measure-97/89941110/">they
have consistently questioned the expertise and impartiality of the Legislative
Revenue Office (LRO) for reporting that both claims are likely correct</a>. In
my opinion, their criticism of the LRO is entirely unjustified. If anything,
the LRO has bent over backwards to treat M-97 in an even-handed fashion.<o:p></o:p></div>
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It is very hard to address these issues without getting
wonky, but I’ll start by saying that economists who study tax questions agree
that taxes on sales (gross receipts, turnover, value-added, retail-sales, etc.)
are for the most part shifted forward to consumers. We would also insist that
this is not necessarily the case with all of the taxes that businesses remit to
the government. For examples, the incidence of taxes on property, business income
(profit or earnings), payroll, or the extraction of raw materials, tends to
fall on business owners or is shifted back to factor suppliers.<o:p></o:p></div>
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Nevertheless, M-97 is different from any known sales or
gross receipts tax. Typical sales taxes discriminate along jurisdictional lines
or by type of product. M-97 proposes to discriminate on the basis of the
seller’s identity, levying the tax ONLY on the sales of certain C-corporations,
those with Oregon sales in excess of $25 million. The LRO tried to deal with
this issue by making the portion of the tax that would be shifted forward to
consumers proportional to the concentration of affected businesses in each class
of business, so that, if big C-corps represented 50 percent of sales in that
market segment, only 25 percent of the tax would be shifted forward, 90 percent
of sales = 80 percent shifted, and 100 percent = all. Because affected firms
tend to dominate the business categories in which they operate, the LRO
concluded that overall more than 60 percent of the tax take of ≥$3 billion
would be shifted forward from business owners to consumers. <o:p></o:p></div>
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Maybe this is an overestimate, maybe even a big one. Perhaps,
most of the burden of M-97 really will be born by the shareholders of extremely
large, mostly out of state companies or even out of state consumers. We
really cannot know for sure until M-97 is put into effect – which is in my
opinion a bug not a feature. But on theoretical grounds, it can be argued with some
justification that the LRO has, if anything, underestimated the amount of
forward shifting M-97 will induce. In imperfectly competitive markets,
economists usually assume that market leaders are price setters: that, when
their cost of goods-sold increases, they will raise their prices and, depending
on their market power, the increase may be less than the cost increase, but may
also be MORE. Since market power is usually assumed to be a function of
concentration, this is essentially the logic that underlies the LRO’s very
reasonable position. <o:p></o:p></div>
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What the LRO’s position rules out is the possibility of
over-shifting and, especially, over-shifting due to the behavior of the
competitive fringe, in this instance the businesses not facing the M-97 induced
cost increase. The standard assumption in competitive analysis is not, as
proposed by M-97 supporters, that they will undercut the price of the dominant
businesses in the area, but will, instead, tend to meet the price increase of
the market leaders. Where this is the case, the price increase borne by
consumers as a result of a tax may and, in some cases, will exceed the tax
take. <o:p></o:p></div>
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Moreover, this is generally what the evidence shows happens.
The closest analogy to M-97, that I know of, occurs at borders, where one
jurisdiction has a higher embedded excise than another, typically on things
like motor fuels, alcohol, or tobacco products. Not surprisingly, prices just
across the border in the higher taxing jurisdiction tend to be higher on
average than in low-tax jurisdiction, but not by as much as in the rest of that
jurisdiction, where various studies show that between 80 and 400 percent of the
tax take tends to be recouped by businesses. What might seem surprising,
however, is that prices just across the border in the low-tax jurisdiction are
also typically higher than elsewhere in that jurisdiction – and, of course,
retail booze, cigarettes, and gas sales are probably characterized by more
price taking than one is likely to see in a lot of affected business segments
under M-97.<o:p></o:p></div>
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My point is not that the LRO has underestimated the amount
of tax shifting likely to occur under M-97. Rather, they have made a prudent,
middle-of-the-road estimate, which is their job. The extreme estimates? They
come from M-97’s supporters, and are based neither on economic theory nor
independent evidence.<o:p></o:p></div>
Patrick Emersonhttp://www.blogger.com/profile/17242234148546323374noreply@blogger.com0tag:blogger.com,1999:blog-3471471289744825428.post-81322545968395054022016-08-29T10:52:00.002-07:002016-08-29T10:53:10.585-07:00Measure 97: Any Pinocchios Yet?<br />
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<i style="font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif;"><a href="http://www.willamette.edu/~fthompso/" style="text-decoration: none;">Fred Thompson</a> checks in with an third post on Measure 97 (IP28). </i></div>
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<span style="text-align: center;">So far, my </span><a href="http://oregonecon.blogspot.com/2016/08/more-background-on-ip28-measure-97-cont.html" style="text-align: center;">criticisms</a><span style="text-align: center;">
have been directed to the pro-97 camp – to claims like Gov. Brown’s that “there
is a basic unfairness in our tax system that makes working families pay an
increasing share for state and local services.” </span><a href="http://oregonecon.blogspot.com/2016/07/more-background-on-ip28-measure-97.html" style="text-align: center;">Not
so</a><span style="text-align: center;">. Oregon has long had one of the US’s least regressive state and local
tax systems and recent changes have increased its progressivity. For example,
the state already has the nation’s highest capital-gains tax rate. And, even if
it were so, Measure 97 wouldn’t make the tax system fairer, but would cause
‘working families’ to pay more for government services and to pay for them more
regressively.</span></div>
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<o:p></o:p></div>
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I acknowledge that most of the claims I have criticized are at
least somewhat arguable – mostly wrong, not Pinocchios. For example, the
pro-camp claims that some of the $3 billion or so that Measure 97 will collect
each year “<a href="http://registerguard.com/rg/opinion/34675016-78/corporations-paying-fair-share-would-ease-states-struggles.html.csp#.V7JILLU3Mhg.facebook">will
come out of CEO pay, some out of dividends, some out of consumers in other
states</a>.” But, they acknowledge, “<a href="http://registerguard.com/rg/opinion/34675016-78/corporations-paying-fair-share-would-ease-states-struggles.html.csp#.V7JILLU3Mhg.facebook">Some
will come from some of us</a>.” That’s basically the position of the Legislative
Revenue Office, except that they estimate that the “some [that] will come from
some of us” is about 2/3 the total, that most of the rest will be shifted to
the IRS, with the remainder borne by shareholders (about $200 million a year,
which is enough to explain a lot of opposition) and corporate employees (about
$100 million).</div>
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<o:p></o:p></div>
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Think what it would look like, were Measure 97 truly a tax
on corporations: total Oregon profits run about $20 billion a year. The share
earned by C-corps, the only businesses subject to the tax under Measure 97, is
about half that, or $10 billion, of which 70 percent comes from corporations
with more than $25 million a year in Oregon sales, or about $7 billion, from
whom the state currently collects about $375 million a year. If Measure 97 were
to increase the tax take from these corporations by $3 billion a year, we would
be talking about an average effective state corporate income tax (CIT) rate of nearly
50 percent – five times the highest state CIT rate in the US. Because gross
receipts taxes are recorded as ordinary expenses and reduce ‘‘earnings from
operations,’’ remittances to the state would cut federal CIT obligations by
about $1 billion (given the 35 percent federal CIT rate), but, even so, this implies
an average combined CIT rate of over 60 percent. <span style="mso-spacerun: yes;"> </span>Bizarrely, however, this tax only hits
businesses with low profit rates (as a proportion of turnover); really high
profit businesses would continue to be unaffected by it. How credible is that?
And, if it’s credible, imagine what this could do to the state’s economy.<o:p></o:p></div>
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This is also an area where Measure 97’s opponents have
crossed the line. Many of them condemn Measure 97 as unfair because unprofitable
businesses, which appear to have no ability to pay, are nonetheless obliged to
pay the tax. They express similar concerns with respect to low-margin,
high-turnover businesses, for example, grocery stores. However, as <a href="http://www.taxpolicycenter.org/sites/default/files/alfresco/publication-pdfs/1001134-Emerging-State-Business-Tax-Policy.PDF">Fox,
Luna, and Murray</a> observe, economists generally do not share these concerns,
“because the base is not intended to be profits and the tax is likely shifted
forward to consumers.” Arguably, these anti-claims merely take the pro-side’s
argument about who pays seriously, but it’s probably not how this would play
out.<o:p></o:p></div>
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Of course, gross receipts taxes, like most taxes, create tax
wedges. In this instance the wedges affect both interstate and intrastate commerce.
They arise because some of the goods and services providers that are subject to
the tax must compete with those that are not. This may induce them to shift
activities out of state or to purchase out-of-state inputs to avoid the tax. Compared
with a retail-sales tax say, Measure 97’s distortions are potentially more
severe, both because of pyramiding and because of the discrepancy between the tax
rate faced by C-corps (2.5 percent) and the implicit rate (zero) faced by pass-through
entities. But this looks to be a matter of degree, not of kind.<o:p></o:p></div>
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Measure 97’s supporters make a big deal of the fact that
only about a 1,000 businesses will be directly affected by it: “<a href="http://registerguard.com/rg/opinion/34675016-78/corporations-paying-fair-share-would-ease-states-struggles.html.csp#.V7JILLU3Mhg.facebook">It
will raise taxes on only the largest corporations, affecting one-quarter of 1
percent of the companies doing business in Oregon</a>.” (Of course, many more,
probably most, will be indirectly affected by it through their supply chains –
for example, most businesses in the state will face higher utility costs). However,
$3 billion doesn’t grow on trees – to give some idea of the magnitude of what
we are talking about here, <a href="http://oregonecon.blogspot.com/2016/05/fred-thompson-update-on-ip28.html">that’s
about what a 6.5 percent retail sales tax would produce</a>. If the businesses
affected by Measure 97 weren’t major players in the state’s economy, a 2.5
percent tax wouldn’t yield $3 billion. They are, The 1,000 corporations directly
affected by Measure 97 employ 40 percent of the state’s business labor force, account
for over half of the state’s value added and over half of its private-sector
wages. In other words, they comprehend the state’s most productive enterprises
and those that pay the best salaries.<o:p></o:p></div>
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Following up on the last point, in performing its analysis
of the effects of Measure 97, both the Legislative Reference Office and the
analysts at PSU presumed that the financial services industry would be largely
unaffected by it. That is the case for two reasons. First, this industry is
heavily weighted to pass-through entities, which are exempt from the gross
receipts tax under Measure 97 (see Figure 4 from <a href="https://owenzidar.wordpress.com/2016/08/11/financial-firms-make-large-share-of-pass-through-income/">Owen
Zidar</a>). <o:p></o:p></div>
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<o:p> </o:p>Second, both explicitly assumed that Oregon would exclude
the sale of real property, investment receipts, including interest, dividends,
and capital gains, and sales of financial instruments, including bonds,
mortgages, debentures, etc., in calculating gross receipts. Consequently, most
financial service companies would only be on the hook for their management fees.
And, given that the gross receipts tax under Measure 97 is an alternative
minimum tax and that, where financial transactions are excluded, financial
service companies tend to be high-margin, low-turnover businesses, this means
that, for the most part, they will be unaffected by Measure 97 – C-corps in the
financial services industry tend to pay fairly high corporate income taxes now,
they would continue to do so under Measure 97.</div>
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<o:p></o:p></div>
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Excluding sales of financial instruments is standard
practice where financial services are concerned, since financial transactions
vastly exceed state product. This issue hadn’t come up in Oregon previously because
it’s irrelevant to defining the corporate-income tax base or to determining the
existing alternative minimum tax, which is capped at $100 thousand. But it is
inconceivable that the legislature wouldn’t address this issue if Measure 97
were to pass. Otherwise the results could be pretty scary. Interestingly, there
is one financial service industry where this exclusion typically doesn’t apply,
insurance. Presumably, Measure 97’s gross receipts tax would apply to insurance
premiums purchased by Oregonians – indeed, the LRO estimates that 20 biggest
insurers doing business in Oregon would see their state tax remittances
increase from average of $200,000 to $3.5 million per annum.<o:p></o:p></div>
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This quasi-anomaly is partly due to the distinction between
apportionment on the basis of “market” or “activity.” Oregon’s CIT
apportionment is currently governed by the taxpayer’s principal business
activity (PBA) code on their federal tax returns – and these codes are largely
based on the NAICS code, which classifies business activities as goods or
services – goods are currently apportioned on a market basis (defined in terms
of their customers location) and services on an activity basis (where the bulk
of the work is performed). Consequently, PBA codes control which apportionment
method applies to a taxpayer when computing Oregon’s business tax. Most finance
services, for example, take a service code. However, this isn’t necessarily the
case. Grant Thornton offers the following illustration: “A company that
processes financial transactions using advanced technology has all of its
employees located in Oregon. It determines for Oregon tax purposes that a
‘technology’ NAICS code is most appropriate. Businesses that use the
‘technology’ code apportion receipts to Oregon based on the location of the
business’s customers, which often results in apportionment of less than 100
percent.” In contrast, if the company chooses a ‘financial’ code, the apportionment
percentage would be based on the company’s payroll in Oregon, which for this
business would be 100 percent. However, because the federal PBA code disclosure
doesn’t affect the computation of federal tax, the feds don’t require businesses
to choose a code with any precision or consistency (one important caveat aside,
where the selection of NAICS codes affects tariffs paid on goods/services
crossing international borders, customs authorities strictly constrain gaming
by multinational corporations of NAICS codes) – this is important because state
administration of income taxes piggybacks on federal reporting, and playing
with these codes is one of the ways that C-corps currently shift their tax
liabilities away from higher-tax jurisdictions, like Oregon, to those with
lower CIT rates, like Washington.<o:p></o:p></div>
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<a href="https://1.bp.blogspot.com/-AXmuUqetZQ8/V8R18fBO2_I/AAAAAAAAt3M/1rlPFLy6O04f77LRu0nccqiybmYJaP4OwCLcB/s1600/ft3.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="120" src="https://1.bp.blogspot.com/-AXmuUqetZQ8/V8R18fBO2_I/AAAAAAAAt3M/1rlPFLy6O04f77LRu0nccqiybmYJaP4OwCLcB/s320/ft3.png" width="320" /></a></div>
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Gov. Brown has proposed to fix this anomaly, should Measure
97 pass, by basing all business taxes on the location of the customer buying
the service, rather than the location of the company selling the service. <span style="mso-spacerun: yes;"> </span>Unfortunately, the state doesn’t have a
mechanism for tracking in-state sales or following them back up the value chain.
Right now, we pretty much rely on businesses to tell us what their Oregon sales
are. Unfortunately, it is easy for businesses with out-of-state sales to fiddle
this figure. Indeed, our inability to track in-state sales is one reason for
Measure 67’s adoption of dollar limits for its alternative minimum tax.
Consequently, the claim made by the pro-97 camp, that, because the measure targets
sales rather than profits, businesses will find it harder to avoid Measure 97
taxes, may, in fact deserve a couple of Pinocchios. <o:p></o:p></div>
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Patrick Emersonhttp://www.blogger.com/profile/17242234148546323374noreply@blogger.com0tag:blogger.com,1999:blog-3471471289744825428.post-9809273075825742132016-08-01T18:08:00.001-07:002016-08-01T18:08:32.629-07:00More Background on IP28 (Measure 97?), cont. <i style="font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif;"><a href="http://www.willamette.edu/~fthompso/" style="text-decoration: none;">Fred Thompson</a> checks in with another post on IP28. </i><br />
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<span style="text-align: center;">Is it true, as asserted by </span><a href="http://www.ocpp.org/media/uploads/pdf/2016/06/rpt20160629-corporate-tax-shift_fnl_.pdf" style="text-align: center;">OCPP</a><span style="text-align: center;">
and </span><a href="http://uauoregon.org/wp-content/uploads/2016/01/ABO-Fact-Sheet-November-2015.pdf" style="text-align: center;">Our
Oregon</a><span style="text-align: center;">, “that businesses benefited greatly from seismic changes to Oregon’s
property tax system in the 1990s,” which caused a “shift in property taxes away
from businesses and onto households.” This claim is an important part of the
justification for IP-28 (Measure 97?), at least insofar as enactment of this
measure is supposed to redress corporate tax gains made at the expense of the
citizenry at large, but, in fact, it is probably not true that businesses
benefited disproportionately from Measures 5 and 50.</span></div>
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<o:p></o:p></div>
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<br /></div>
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So, let’s start with what is certain.<o:p></o:p></div>
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It is certain that <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2449338">Oregon used
to be a high property tax state and that now, because of Measures 5 and 50, it
is a middling one</a>. Prior to Measures 5 and 50, Oregon property taxes
averaged about 5 percent of disposable income; nowadays they’re more like 3.5
percent, as depicted in the following figure from the Research Section of the Oregon
Department of Revenue. As a result of these measures, Oregon’s property tax
growth is also a lot <a href="http://escholarship.org/uc/item/6469r55r">more
stable (less volatile).</a><o:p></o:p></div>
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<a href="https://2.bp.blogspot.com/-hVw7fhM7IEU/V5_yISngylI/AAAAAAAAMSQ/W6I4qdAXMA4b63eH1N55b9X2ODIquPX7QCLcB/s1600/ft1.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="137" src="https://2.bp.blogspot.com/-hVw7fhM7IEU/V5_yISngylI/AAAAAAAAMSQ/W6I4qdAXMA4b63eH1N55b9X2ODIquPX7QCLcB/s320/ft1.png" width="320" /></a></div>
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It is also certain that in
2014-15 taxes on residential properties accounted for the lion’s share of
property-tax payments, about 57.6 percent, and for about the same share of the
state’s net assessed property value. However, it is also certain that Measure
50 caused assessed value to deviate from real market value (or, perhaps, more
correctly restored the discrepancies between assessed value and real market
value that were commonplace before Measure 5) – over time the faster the growth
in real market value, the greater the discrepancy. Evidently, the real market
value of residential property has grown faster than the values of other kinds
of property. As a result, the average effective tax rate (tax payments/real
market value) on residential property is only now 1.06 percent and on owner
occupied housing it’s even lower, while the effective tax rate on all other
property is significantly higher at 1.32 percent.<a href="https://www.blogger.com/blogger.g?blogID=3471471289744825428#_edn1" name="_ednref1" style="mso-endnote-id: edn1;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><!--[if !supportFootnotes]--><span class="MsoEndnoteReference"><span style="font-family: Cambria; font-size: 12.0pt; mso-ansi-language: EN-US; mso-ascii-theme-font: minor-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: "MS 明朝"; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-fareast; mso-hansi-theme-font: minor-latin;">[1]</span></span><!--[endif]--></span></span></a> If
anything, this suggests that Oregon’s current property tax system is biased in
favor of the owners of residential properties rather than businesses, although
the fact that businesses get more than half of the property tax exemptions
granted by state and local jurisdictions offsets this bias somewhat.<o:p></o:p></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://1.bp.blogspot.com/-m_hNEmnJWEk/V5_yId9Wn_I/AAAAAAAAMSY/dykuQhckJPYsX7Xc18cBfZtE6u-fekGowCLcB/s1600/ft2.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="288" src="https://1.bp.blogspot.com/-m_hNEmnJWEk/V5_yId9Wn_I/AAAAAAAAMSY/dykuQhckJPYsX7Xc18cBfZtE6u-fekGowCLcB/s320/ft2.png" width="320" /></a></div>
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Finally, it is certain that,
over time, residential real-estate wealth has assumed an increasing portion of
the burden of the property tax. Prior to Measures 5 and 50, owners of
residential properties remitted less than 45 percent of all property tax
payments; today they pay well over half.<o:p></o:p></div>
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<a href="https://1.bp.blogspot.com/-Hzj75ASF4fM/V5_yIVcnNTI/AAAAAAAAMSU/C0D4-5cTLfYXB9J-vQfxz1o96aOEJhHvQCLcB/s1600/ft3.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="236" src="https://1.bp.blogspot.com/-Hzj75ASF4fM/V5_yIVcnNTI/AAAAAAAAMSU/C0D4-5cTLfYXB9J-vQfxz1o96aOEJhHvQCLcB/s320/ft3.png" width="320" /></a></div>
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However, it is by no means certain that this is due to
Measures 5 and 50. It is entirely possible, for example, that the real cause is
<a href="http://www.oregonencyclopedia.org/articles/land_use_planning/">Oregon's
system of land-use regulation</a>, which has, over time, <a href="http://www.buildingthepride.com/faculty/blgordon/445%20Documents/Article%20-%20Managing%20Urban%20Growth,%20Lessons%20from%20Portland.pdf">increased
residential real estate values faster than it has commercial real estate values</a>.
One interpretation of the figure above is that the shift, which OCPP attributes
to Measures 5 and 50, is simply the result of long-term trends in the relative growth
and value of residential real estate, which would have occurred even if
Measures 5 and 50 had never happened. This view is entirely consistent with the
conventional wisdom, which holds that, by tying residential property taxes directly
to booming real market values, Measure 5 inadvertently gave businesses
(commercial, industrial property owners) a lot more tax relief than it gave
homeowners, that Measure 50’s cuts were aimed at redressing this imbalance and,
that, by rolling back residential property tax assessments and restraining
assessment growth, they were largely successful. <o:p></o:p></div>
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<i style="mso-bidi-font-style: normal;">Other property tax considerations
relevant to IP-28<o:p></o:p></i></div>
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Most local jurisdictions have compensated for the loss of
property-tax revenue wrought by Measures 5 and 50 by increasing user fees. Consequently,
to the plurality of economists who see property taxes, at least those levied in
support of local services (which may or may not include public schools), as
user fees, this shift is largely a matter of complete indifference. Furthermore,
most of the increased user fees are remitted by businesses, which suggests that,
even if Measures 5 and 50 had had the effect of shifting a portion of the
burden of property taxes from businesses to residences, user fee increases
probably more than made up for the difference (although, as is the case with
property taxes, the ultimate incidence of certain of those user fees remains
somewhat unsettled, so that is by no means necessarily the case).<o:p></o:p></div>
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There are two important caveats
that should be raised here. First, these conclusions do not apply to public
schools. Instead, Measure 5 shifted responsibility for school funding from
local districts to the state, which has failed to fully offset the effects of
Measures 5 and 50, and, over the past 15 years, the state has allowed things to
get progressively worse. Second, the state has imposed property-tax rate caps
on local tax districts in a dozen or so counties that are not subject to
Measure 5 compression (i.e., have combined statutory rates of less than 1.5
percent). Those caps have caused a lot of unnecessary hardship and are stupid.<o:p></o:p></div>
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<a href="https://www.blogger.com/blogger.g?blogID=3471471289744825428#_ednref1" name="_edn1" style="mso-endnote-id: edn1;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><!--[if !supportFootnotes]--><span class="MsoEndnoteReference"><span style="font-family: Cambria; font-size: 12.0pt; mso-ansi-language: EN-US; mso-ascii-theme-font: minor-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: "MS 明朝"; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-fareast; mso-hansi-theme-font: minor-latin;">[1]</span></span><!--[endif]--></span></span></a><span style="font-size: 10.0pt;">I calculated an effective tax rate for industrial and
business and commercial property as well, 1.41 percent. However, for that
purpose I used a different data set, from the census rather than from the DoR,
which may or may not be consistent with the figures reported above. <o:p></o:p></span></div>
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Patrick Emersonhttp://www.blogger.com/profile/17242234148546323374noreply@blogger.com0tag:blogger.com,1999:blog-3471471289744825428.post-88976567903129528182016-07-18T09:00:00.003-07:002016-07-18T09:00:19.052-07:00More Background on IP28 (Measure 97?)<div class="MsoNormal" style="text-align: left;">
<i style="font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif;"><a href="http://www.willamette.edu/~fthompso/" style="text-decoration: none;">Fred Thompson</a> checks in with another post on IP28. </i></div>
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<span style="font-family: Verdana;">Over
the next 3 months, proponents and opponents of this Measure will make a lot of
wild, unsubstantiated claims about </span><a href="http://oregonecon.blogspot.com/2016/05/fred-thompson-update-on-ip28.html"><span style="font-family: Verdana; mso-bidi-font-family: Verdana;">what it will or won’t
do</span></a><span style="font-family: Verdana;">.
My purpose it to try to distinguish sense from spin, as honestly and objectively
as I can. Frankly, this is not easy. Not only because IP28 is unlike anything
found in the public finance universe and is, therefore, extremely hard to parse,
but also because it appears to be nearly everything a good tax is not. Tax
experts believe that good taxes should treat the things being taxed more or
less equally, that they should be fair, broad based, transparent in incidence
and effects, and straightforward in administration. IP28 is unequal, probably regressive,
narrow, opaque, and likely to encourage further avoidance. Consequently, every
fiber of my being as student of public finance wants to say it’s spinach, to Hell
with it. But I’ll do the best I can, starting with claims made about the
existing tax system.</span></div>
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<span style="font-family: Verdana; mso-bidi-font-family: Verdana;">Proponents
of IP28 claim that “<span style="mso-bidi-font-weight: bold;">Oregon has the
lowest corporate taxes in the country.”</span> What that means to an economist
is that Oregon ranks dead last in corporate income tax (CIT) collections or
that the growth of its CIT collections have lagged those of all other states.<a href="https://www.blogger.com/blogger.g?blogID=3471471289744825428#_edn1" name="_ednref1" style="mso-endnote-id: edn1;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><!--[if !supportFootnotes]--><span class="MsoEndnoteReference"><span style="font-family: Verdana; font-size: 12.0pt; mso-ansi-language: EN-US; mso-bidi-font-family: Verdana; mso-bidi-language: AR-SA; mso-fareast-font-family: "MS 明朝"; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-fareast;">[1]</span></span><!--[endif]--></span></span></a> Clearly,
neither of those claims is true.<o:p></o:p></span></div>
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<a href="https://1.bp.blogspot.com/-YWS9IjQbcMs/V4z84x5NAQI/AAAAAAAAMRw/eLAkS-suskAQooq_wvEkOpJqN9wHwQpUgCLcB/s1600/ft1.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="397" src="https://1.bp.blogspot.com/-YWS9IjQbcMs/V4z84x5NAQI/AAAAAAAAMRw/eLAkS-suskAQooq_wvEkOpJqN9wHwQpUgCLcB/s400/ft1.png" width="400" /></a></div>
<br />
<span style="font-family: Verdana;">This
figure shows the composition of each state’s tax portfolio in 2008 by tax type.
CITes are represented in powder blue, personal income taxes (PIT) in light
pink. Oregon’s CIT receipts as proportion of disposable income ranks 25</span><sup style="font-family: Verdana;">th</sup><span style="font-family: Verdana;">
out of 50 states – right smack dab in the middle of the pack.</span><a href="https://www.blogger.com/blogger.g?blogID=3471471289744825428#_edn2" name="_ednref2" style="font-family: Verdana;" title=""><span class="MsoEndnoteReference"><span class="MsoEndnoteReference"><span style="font-size: 12pt;">[2]</span></span></span></a><span style="font-family: Verdana;"> The most
distinctive thing about OR compared with other states is its heavy reliance on
the PIT – the fairest and most transparent of the tax types used widely by
state governments.</span><br />
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<span style="font-family: Verdana; mso-bidi-font-family: Verdana;">Nor
is it true that Oregon has a “very low corporate tax rate.” Oregon’s statutory
CIT rate is above the national average. Nevertheless, there is no question that
CIT collections have lagged the growth in business profits over the past 40
years. That is true at the national level, it’s </span><a href="http://oregonecon.blogspot.com/2016/01/fred-thompson-why-are-state-corporate.html"><span style="font-family: Verdana; mso-bidi-font-family: Verdana;">especially true at the
state level</span></a><span style="font-family: Verdana; mso-bidi-font-family: Verdana;"> – and it’s true </span><a href="http://oregonecon.blogspot.com/2016/04/fred-thompson-where-oh-where-has.html"><span style="font-family: Verdana; mso-bidi-font-family: Verdana;">in Oregon as well</span></a><span style="font-family: Verdana; mso-bidi-font-family: Verdana;">. But it isn’t true
that once upon a time Oregon relied heavily on the CIT or that its decline has
impoverished Oregon’s state government.<o:p></o:p></span></div>
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<span style="font-family: Verdana; mso-bidi-font-family: Verdana;">In
Figure 8e, Oregon’s CIT is shown in light pink. The key takeaway from this
figure is that Oregon’s CIT never really played a dominant role in Oregon’s tax
system. Other revenue sources have always overwhelmed the CIT, both in terms of
totals and even annual fluctuations. The one thing that this figure doesn’t
clearly show is the decline of the CIT relative to other revenue sources. Figure
8g shows the composition of Oregon’s revenue portfolio over time. Again the CIT
is depicted by the light pink and it clearly tells a story of relative decline
– that, relative to Oregon’s portfolio of revenue sources, the CIT is only
about half as important as it once was. Figure 8g also shows that weight of ‘other
revenue’ and severance taxes in the state’s revenue system has fallen even
faster.<o:p></o:p></span></div>
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<a href="http://www.ocpp.org/media/uploads/pdf/2016/06/rpt20160629-corporate-tax-shift_fnl_.pdf"><span style="font-family: Verdana; mso-bidi-font-family: Verdana;">The Oregon Center for
Public Policy (OCPP) recently reported on the causes of the relative decline in
Oregon’s CIT</span></a><span style="font-family: Verdana; mso-bidi-font-family: Verdana;">. Their analysis is entirely accurate, although puzzlingly they list
the causes in reverse order of their importance. In a previous blog I
attributed Oregon’s CIT base erosion to the following: 58 percent due to the
U.S. tax code’s expanded pass-through provisions, 31 percent to corporate tax
sheltering and planning, and 11 percent to state-specific deductions,
exemptions, and credits. Ironically, IP28 directly affects C-corps, the only
business class that cannot avail itself of the U.S. tax code’s pass-through
provisions. It is also probably the case, although OCPP denies the possibility,
that </span><a href="https://www.cbo.gov/sites/default/files/112th-congress-2011-2012/reports/43750-TaxingBusinesses2.pdf"><span style="font-family: Verdana; mso-bidi-font-family: Verdana;">a substantial portion
(1/2-2/3) of the CIT receipts lost to pass-through is recouped in terms of
higher PIT receipts</span></a><span style="font-family: Verdana; mso-bidi-font-family: Verdana;">.<o:p></o:p></span></div>
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<span style="font-family: Verdana; mso-bidi-font-family: Verdana;">Ultimately,
however, </span><a href="http://uauoregon.org/wp-content/uploads/2016/01/ABO-Fact-Sheet-November-2015.pdf"><span style="font-family: Verdana; mso-bidi-font-family: Verdana;">Our Oregon’s</span></a><span style="font-family: Verdana; mso-bidi-font-family: Verdana;"> claim that Oregon’s C-corps
are not paying their fair share of taxes isn’t based on state CITs or even the
tax liabilities specific to C-corps. Rather their claims are based on the Anderson
Economic Group’s (AEG) </span><a href="http://www.andersoneconomicgroup.com/Publications/StateBusinessTaxRankings.aspx"><span style="font-family: Verdana; mso-bidi-font-family: Verdana;">2016 State Business
Tax Burden Rankings report</span></a><span style="font-family: Verdana; mso-bidi-font-family: Verdana;">, which ranks states according to the remittances
of ALL businesses to state and local governments as a percentage of their pre-tax
gross operating margins – i.e., the sum of the Bureau of Economic Analysis’s
gross operating surplus measure plus ALL state and local sales, excise,
severance, property, corporate-income, and business-income tax payments,
license fees, and unemployment-insurance premiums.<o:p></o:p></span></div>
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<span style="font-family: Verdana; mso-bidi-font-family: Verdana;">That’s
a silly gauge, both from the standpoint of the numerator and the denominator. Mostly,
what the AEG report says is that the state of Oregon relies heavily on the PIT,
which is IMHO a feature, not a bug. Indeed, not all the items included in the
AEG report are taxes; some are fees for services rendered (UI premiums), but
AEG appears to arbitrarily include some charges and exclude others (most local
imposts, for example; these are relevant to us because Oregon’s are the highest)
in the US. More significantly, tax burdens don’t depend on who writes the
checks but on who suffers the consequent loss of buying power. Some of the
taxes remitted by businesses can be reasonably assumed to stick with their
owners (business income and corporate income taxes, mostly; property taxes,
probably); the incidence of the other taxes they remit is largely shifted
forward to final consumers (sales and gross receipt taxes) or backward to
employees (UI premiums) or other factor suppliers (severance taxes). <o:p></o:p></span></div>
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<span style="font-family: Verdana; mso-bidi-font-family: Verdana;">One
good thing about the AEG report is that it looks beyond state government,
recognizing that local taxes are part of the state system, even if they do so
in what I think is a wrong-headed and haphazard manner. In a future blog, I’ll
take a look at the claim made by supporters of IP28 that, as a result of
Measures 5 and 50, businesses in general and C-corps in particular are ducking
their fair share of Oregon property taxes.<o:p></o:p></span></div>
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<a href="https://www.blogger.com/blogger.g?blogID=3471471289744825428#_ednref1" name="_edn1" style="mso-endnote-id: edn1;" title=""><span class="MsoEndnoteReference"><span style="mso-special-character: footnote;"><!--[if !supportFootnotes]--><span class="MsoEndnoteReference"><span style="font-family: Cambria; font-size: 12.0pt; mso-ansi-language: EN-US; mso-ascii-theme-font: minor-latin; mso-bidi-font-family: "Times New Roman"; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: "MS 明朝"; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-fareast; mso-hansi-theme-font: minor-latin;">[1]</span></span><!--[endif]--></span></span></a>
They further say that Oregon “small businesses pay 8 times the tax rate of big
corporations.” Their reported source is the Department of Revenue, but I cannot
substantiate this claim one-way or the other. It is clearly not the case if one
looks only at the state’s CIT and business excise tax.<span style="mso-spacerun: yes;"> </span>They also claim that “[c]orporations with
more than $25 million in Oregon sales paying minimum taxes pay the equivalent
of only 3 cents for every $100 in sales,” citing the same source. Again, I can
neither confirm nor deny this claim, but it sounds credible, assuming that we
are talking only about the state’s CIT and business excise tax.<o:p></o:p></div>
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This would also appear to put paid to the claim that Oregon taxes corporations
at an unusually low rate “due in large part to the fact that most corporations
(72%) pay just the minimum, and those minimums are very low." In fact,
Oregon’s alternative minimum tax is the exception, not the rule. This claim looks
like question begging, pure and simple.<o:p></o:p></div>
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Patrick Emersonhttp://www.blogger.com/profile/17242234148546323374noreply@blogger.com0tag:blogger.com,1999:blog-3471471289744825428.post-84065931440866386782016-05-31T09:02:00.000-07:002016-05-31T09:02:34.137-07:00Fred Thompson: Update on IP28<div class="MsoNormal" style="text-align: center;">
<i style="font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; text-align: left;"><a href="http://www.willamette.edu/~fthompso/" style="text-decoration: none;">Fred Thompson</a> checks in with a post on IP28. </i></div>
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<a href="https://4.bp.blogspot.com/-tyxb5Q6K75E/V020nXgG2AI/AAAAAAAAMPA/WMh0_6SOmiAvfSE-UhmFtNAYxCh0_XJdwCKgB/s1600/ft1.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="246" src="https://4.bp.blogspot.com/-tyxb5Q6K75E/V020nXgG2AI/AAAAAAAAMPA/WMh0_6SOmiAvfSE-UhmFtNAYxCh0_XJdwCKgB/s320/ft1.png" width="320" /></a></div>
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Monday morning (May 23) the Legislative Revenue Office
released its <a href="https://olis.leg.state.or.us/liz/2015I1/Downloads/CommitteeMeetingDocument/90401">report
on Initiative Petition 28</a> – the proposal to levy a 2.5 percent tax on the
Oregon sales of C-corporations in excess of $25 million. The LRO report is the
closest thing to an authoritative, unbiased assessment of the proposal that we
are likely to see. Its big takeaway is that IP28 would increase state revenue
by a lot, about $6 billion in the next biennium. So, if you think that Oregon
needs a lot more ($3 billion a year) of your (mostly) money for education,
health, transportation, and other programs and activities, or, in the alternative,
you think the grasping hand of the state is already getting too much of your
hard-earned cash and dumping it down various rat-holes, that’s pretty much all
you need to know.<o:p></o:p></div>
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If, however, you are concerned about the nuances of tax
policy, this report should be of considerable interest, insofar as it addresses
a couple of additional questions: who pays, and with what consequences for the growth
and economic welfare of the state?<o:p></o:p></div>
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With respect to who pays, the main takeaway is that about
2/3s of IP28’s total tax burden, $2 billion, will be shifted forward to Oregon
consumers. This is an amount equal to nearly one percent of all the goods and
services produced in the state. As a point of comparison, that would be
equivalent to a retail sales tax on goods of about 6 percent, although IP28’s
effects would be more uneven and its incidence harder to suss out.<o:p></o:p></div>
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This is so, because the businesses that are responsible for
collecting/remitting the tax account for less than 60 percent of the state’s
commercial value-added, altogether about 25 percent of total state product.
Consequently, one percent across the board implies an <i style="mso-bidi-font-style: normal;">average</i> effective burden in the taxed sector of approximately 4
percent. However, the actual burden would vary greatly across final products,
with some drugs and packaged foods bearing burdens in excess of 7.5 percent,
while most services and products would weigh in at less than one. Not surprisingly,
the LRO punted on this issue, spreading the tax hike across the economy like
peanut butter.<o:p></o:p></div>
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<b style="mso-bidi-font-weight: normal;">Who Pays for IP28 (OR Households)?</b></div>
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<b style="mso-bidi-font-weight: normal;"><a href="https://4.bp.blogspot.com/-Rc_ZFdB1Zd0/V020nHwWVsI/AAAAAAAAMO8/rZz-_tPQ-A4XKuxxCMSCtdUX8xb3vUvlACKgB/s1600/ft2.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="183" src="https://4.bp.blogspot.com/-Rc_ZFdB1Zd0/V020nHwWVsI/AAAAAAAAMO8/rZz-_tPQ-A4XKuxxCMSCtdUX8xb3vUvlACKgB/s320/ft2.png" width="320" /></a></b></div>
<o:p></o:p><br />
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The LRO further argues that most of the remaining 1/3 of the
total will be shifted out of state. Remarkably, it estimates that the U.S.
Treasury will eat the lion’s share of this remainder, about $700 million, with
the balance of the annual burden of IP28 split between capital providers (75-80
percent or >$200 million) and employee wages (20-25 percent, >$40 million).
Like the LRO’s estimate of IP28’s dead weight loss (about $.5 billion), given
their other assumptions, this estimate of the hit to federal corporate-income-tax
receipts seems on the high side to me, but is entirely possible.<o:p></o:p></div>
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Which takes us to the other big takeaway from the LRO
report: that the dead weight loss associated with IP28 is nearly $.5 billion
per annum and is likely to increase over time, that it will cost 38 thousand private-sector
jobs. This is huge – it’s about the number of jobs Oregon’s business workforce added
last year. Since the LRO is working with a DGE model, this loss will be almost
entirely recouped by increased government sector activities (of presumably
equal or greater value?), so arguably, from the standpoint of the economy as a
whole, it isn’t a big deal. Nevertheless, it seems hard to square with the
notion that, while IP28 will hurt some businesses and help others, its net
effect on capital suppliers will be trivial. <o:p></o:p></div>
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<a href="https://3.bp.blogspot.com/-VAidmTYjAjk/V020ndKFWlI/AAAAAAAAMPE/sh3Ob1RhTqgWw1DNgKGoworrCWQlW496QCKgB/s1600/ft3.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="146" src="https://3.bp.blogspot.com/-VAidmTYjAjk/V020ndKFWlI/AAAAAAAAMPE/sh3Ob1RhTqgWw1DNgKGoworrCWQlW496QCKgB/s320/ft3.png" width="320" /></a></div>
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Many will say that the LRO report rebuts the claim of the proponents
of IP28 that its burden won’t be passed along to consumers or, if passed on to
consumers, since the businesses responsible for collecting/remitting the tax
are all big national corporations, they will pass 99 percent of the mark-up on to
customers out of state.<o:p></o:p></div>
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The second of these hypotheticals is clearly wishful
thinking. In the first place, it violates two basic premises of economics: that
businesses maximize free cash (after tax and interest) flows and that cross
subsidization is contrary to profit maximization. Maybe these reasons are
convincing only to economists, but they work fine for me. More persuasively,
perhaps, this hypothetical is flatly contradicted by commonplace fact.
Businesses everywhere add retail sales taxes and excises (like cigarette and
gas taxes) to their prices, which vary accordingly from state to state. Where
value-added taxes exist, businesses incorporate them directly into their prices,
and, where jurisdictions levy different rates, as in Europe and Canada, prices
reflect those differences. It is even the case that prices in Washington State vary
according to their B&O Tax rates, the closest analog I know of to IP28.<o:p></o:p></div>
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The first hypothetical is trickier. The LRO doesn’t really show
that most of the burden of IP28 will be shifted forward to final consumers; it
simply assumes that, because it is a fairly broad-based tax on sales, that’s
how it will behave. I sympathize: IP28 is <i style="mso-bidi-font-style: normal;">sui
generis</i> – we have absolutely no experience with a tax exactly like IP28,
from which we could extrapolate likely outcomes. None! In no other country, in
no previous time. As I noted, the best analog to IP28 is probably Washington’s
B&O tax; IMHO the LRO worked from the next best analog, Ohio’s gross
receipts tax, owing to the availability of recent data.<o:p></o:p></div>
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The problem is that this <i style="mso-bidi-font-style: normal;">may</i>
not be good enough. Big businesses have a lot of expertise when it comes to
managing costs. They deal with cost increases like IP28’s all the time. What this
means is that they find ways to avoid or mitigate costs, pass them on to
others, customers or employees, or, if the business is worth it, and they
cannot avoid the costs or shift them to others, eat them, but there is no
guarantee that their Oregon business will be worth it, especially where
low-margin, high-turnover businesses are concerned.<o:p></o:p></div>
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Nevertheless, if businesses cannot avoid the tax by means of
smoke and mirrors or pass it on to their customers, as the LRO presumes, the
real economic effects of IP28 will probably be bigger than predicted, and
mostly negative; the revenue increase from IP28 could also be substantially
smaller – i.e., more pain, less gain. <o:p></o:p></div>
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I am a cautious guy. I don’t like giant leaps into the dark,
which is what IP28 is. Moreover, Oregon is already running one big policy
experiment, the minimum-wage boost, which could interact with IP28 in a variety
of ways, mostly adversely.<span style="mso-spacerun: yes;"> </span>Of course, as
Paul Warner, the head of the LRO, reminds us, state tax policy rarely if ever
outweighs the main determinants of economic performance – the business cycle,
exchange rates, productivity growth, etc. All true. So, maybe, my anxiety is
misplaced. But some states – Kansas, Wisconsin, Oklahoma, Michigan – have experimented
with big tax changes and managed, as a consequence, to shoot themselves in the
foot. <o:p></o:p></div>
<table cellpadding="0" cellspacing="0" class="tr-caption-container" style="float: right; margin-left: 1em; text-align: right;"><tbody>
<tr><td style="text-align: center;"><a href="https://1.bp.blogspot.com/-wW24SqgjdSA/V020nstDPSI/AAAAAAAAMPI/RU5zRZYzdiAIEnY-sQryFbwD6XN2NqeEwCKgB/s1600/ft4.png" imageanchor="1" style="clear: right; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img border="0" height="194" src="https://1.bp.blogspot.com/-wW24SqgjdSA/V020nstDPSI/AAAAAAAAMPI/RU5zRZYzdiAIEnY-sQryFbwD6XN2NqeEwCKgB/s200/ft4.png" width="200" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Sen. Mark Hass</td></tr>
</tbody></table>
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<br /><o:p></o:p></div>
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There
are smart ways to boost state revenue: eliminate the PIT kicker, enact a carbon
tax, broaden the weight-use-mile tax to comprehend passenger cars, adopt a real
gross receipts tax (treating it as an alternative minimum tax for
C-corporations) or a value-added tax, etc. This is not one of them. Besides,
Oregon’s economy has performed relatively well over the past quarter century,
much better on average than the rest of the U.S. Why tempt fate? <o:p></o:p></div>
Patrick Emersonhttp://www.blogger.com/profile/17242234148546323374noreply@blogger.com6tag:blogger.com,1999:blog-3471471289744825428.post-18385845390480887542016-04-26T13:57:00.001-07:002016-04-26T13:57:16.025-07:00Fred Thompson: Where, Oh Where, Has Oregon’s Corporate Tax Gone? Where, Oh Where, Can It Be?<div class="MsoNormal" style="text-align: left;">
<i style="font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px;"><a href="http://www.willamette.edu/~fthompso/" style="text-decoration: none;">Fred Thompson</a> checks in with a post on Oregon taxes. </i></div>
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To hear some folks talk, one might think that Oregon had repealed
its business taxes. That hasn’t happened. In 2013 Oregon’s corporate excise and
income tax receipts were in excess of $600 million. Nevertheless, the growth in
state <a href="http://www.oregon.gov/DOR/programs/gov-research/Documents/Oregon-personal-income-tax-statistics-2016.pdf">personal
income tax receipts</a> has greatly outstripped the growth in <a href="http://www.oregon.gov/DOR/programs/gov-research/Documents/corporate-excise-income_102-405_2015.pdf">business
tax revenue</a>. Arguably, even <a href="http://www.oregon.gov/DOR/programs/gov-research/Documents/property-tax-stats_303-405_2014-15.pdf">statewide
property tax revenues</a> have grown faster.<o:p></o:p></div>
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<a href="http://www.oregon.gov/DOR/programs/gov-research/Documents/corporate-excise-income_102-405_2015.pdf"><b style="mso-bidi-font-weight: normal;">Oregon Corporation Excise and Income Tax
Net Receipts</b></a><b style="mso-bidi-font-weight: normal;"> </b><o:p></o:p></div>
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<a href="https://2.bp.blogspot.com/-4IcQORBfdGI/Vx_WCnBVmpI/AAAAAAAAMOQ/LjcpIiRCaLUqZetObZvueEJD-4MDCrRhgCLcB/s1600/ft1.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="199" src="https://2.bp.blogspot.com/-4IcQORBfdGI/Vx_WCnBVmpI/AAAAAAAAMOQ/LjcpIiRCaLUqZetObZvueEJD-4MDCrRhgCLcB/s320/ft1.png" width="320" /></a></div>
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There is a mystery here. Oregon’s statutory tax rate is unchanged
or even up slightly over the period. Moreover, its real state product (income) has
more than doubled (2.44 times) and profit’s share (pre-tax profit/GSY) of total
product, the CIT tax base, increased from about 7 to approximately 11 percent (1.57
times). Multiplying those figures together, one might expect real CIT receipts
be about 3.85 times what they were in 1980. In fact, they are only about half
that amount. What’s up?<o:p></o:p></div>
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To answer that question, I contrast Oregon CIT liabilities
accrued in 2013, $460 million, with a set of counterfactuals constructed using 2013
BEA and DOR data, which show what CIT payments would have been in the absence
of changes in the federal tax code, corporate tax avoidance, and state tax
credits, exemptions, and deductions. I also estimate the gross contribution to state
revenue due to the creation of the minimum alternative turnover tax put in
place by Oregon’s Measure 67 and improved CIT administration as a result of the
DOR’s core systems replacement.<o:p></o:p></div>
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</v:shape><![endif]--><!--[if !vml]--><a href="https://2.bp.blogspot.com/-yaC8NahjBn0/Vx_WCb9Aj-I/AAAAAAAAMOI/-HE0e0MsMMcSo_xcLP3RThEOS8cRNlEFQCLcB/s1600/ft2.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="320" src="https://2.bp.blogspot.com/-yaC8NahjBn0/Vx_WCb9Aj-I/AAAAAAAAMOI/-HE0e0MsMMcSo_xcLP3RThEOS8cRNlEFQCLcB/s320/ft2.png" width="248" /></a>The <a href="http://www.gao.gov/assets/660/654957.pdf">GAO reports</a> that over this
period, the primary change in the federal CIT code was the enactment of the
pass-through provision in 1986 and its subsequent <span style="mso-spacerun: yes;"> </span>expansion in 1994, which means that the income
of individually, family, employee owned businesses, LLCs and S-corps passes
directly to their owners’ personal income tax (PIT) returns, without first
being taxed as corporate income. Prior to this change, ¾ of all business
profits were subject to the federal CIT. Now, slightly less than half are.
Because the computation of Oregon’s CIT begins with federal taxable income,
this reduced Oregon’s CIT receipts (and also increased PIT and capital gains
receipts). Had this change not occurred and if ¾ of all $20 billion in profits
earned in Oregon in 2013 were subject to its CIT (i.e., there were no
state-specific tax credits, deductions, or exemptions and no tax
avoidance/evasion of the part of businesses), Oregon CIT receipts would have
been about $1,095 million. In fact, only about half of the profits earned in
Oregon were subject to its CIT, which implies receipts of about $730 million.
In other words, expansion of the federal pass-through provision cost the
state’s CIT about $365 million in receipts (and increased PIT receipts by a complementary,
albeit almost certainly a smaller, amount).<o:p></o:p></div>
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Other changes at the national level after 1980 couldn’t have
caused decreases in Oregon’s corporate income tax revenues, because, generally
speaking, they have had the effect of increasing reported corporate income.
There is, nevertheless, a substantial discrepancy between Oregon’s CIT base according
to the BEA’s Income and Product Accounts, approximately $10 billion, as above, and
the declared tax base of $7.3 billion. Applying Oregon’s statutory CIT rate to
the latter yields only $530 million, approximately $200 million less than the
$730 billion that would have obtained in the absence of this gap. Moreover, it
is common knowledge that this sort of CIT base erosion is <a href="http://oregonecon.blogspot.com/2016/01/fred-thompson-why-are-state-corporate.html">widespread
at the state level and increasing</a>. Presumably, CIT base erosion is primarily
due to what is euphemistically known as corporate tax sheltering and planning –
what the rest of us would call tax avoidance/evasion. <o:p></o:p></div>
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Finally, there is the $70 million discrepancy between the
$460 million CITes accrued in 2013 and the $530 million figure obtained by
multiplying the reported CIT base by the statutory tax rate, which is due to
Oregon-specific deductions, exclusions, and credits, the bulk of which ($50
million) are due to environmental and energy related tax credits enacted after
1991.<o:p></o:p></div>
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Breaking down the sources of CIT base erosion to its
component parts, 58 percent is due to the U.S. tax code’s expanded pass-through
provisions, 31 percent to corporate tax sheltering and planning, and 11 percent
to state-specific deductions, exemptions, and credits.<o:p></o:p></div>
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What should be done? Before turning to that question, it is
useful to look at what has already been accomplished. In 2010, under <a href="http://oregonecon.blogspot.com/2016/02/fred-thompson-tax-mavens-talk-about.html">Measure
67</a>, Oregon adopted a minimum-tax scheme whereby C-corporations are taxed on
profits (income) or on turnover (gross receipts or sales), whichever tax
liability is greater. One of the neat things about supplementary turnover taxes
is that they implicitly raise the cost of jurisdiction shopping, by making it
cheaper for multi-state businesses to pay the higher Oregon CIT than for them
to pay turnover taxes in Oregon <i>and</i> pay CITs in other states, even where
those CIT rates are lower. Consequently, as a result of Measure 67, Oregon
business tax receipts were at least $60 million more in 2013 than they would
otherwise have been and, perhaps, as much as $114 million more. Furthermore,
the DOR’s core systems replacement effort, perhaps the most successful IT
project in the state’s history, vastly upgraded the state’s ability to monitor
business tax liabilities and to collect taxes. As a result, CIT receipts
increased by an estimated $45 million in 2013 over 2012. These are noteworthy
accomplishments. They deserve to be recognized.<o:p></o:p></div>
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Oregon’s <a href="http://www.oregon.gov/DOR/programs/gov-research/Documents/tax-expenditure-report_2013-15.pdf">Department
of Revenue attributes</a> approximately $74 million of the $200 million missing
due to corporate tax sheltering and planning to single-factor apportionment. Before
tax year 1991, a corporation’s income was apportioned to Oregon by a
three-factor formula. The factors used in this formula were Oregon payroll relative
to total payroll in all states, Oregon property relative to total property, and
Oregon sales relative to total sales. These three percentages were equally weighted
to determine the apportionment percentage applied to total AGI of the
corporation. Since 2005, the apportionment percentage has been simply the ratio
of Oregon sales to total domestic sales.</div>
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<a href="https://2.bp.blogspot.com/-gVyTp0lqNEY/Vx_WCiU0q9I/AAAAAAAAMOM/OV6XW1WbqfcR2ebJUTyHGP9rkGz592QeACLcB/s1600/ft3.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="95" src="https://2.bp.blogspot.com/-gVyTp0lqNEY/Vx_WCiU0q9I/AAAAAAAAMOM/OV6XW1WbqfcR2ebJUTyHGP9rkGz592QeACLcB/s320/ft3.png" width="320" /></a></div>
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While there is plausible<a href="https://www.researchgate.net/publication/228281476_The_Disappearing_State_Corporate_Income_Tax">
evidence</a> that businesses manage these factors regardless of apportionment
percentages, most tax analysts believe that sales are somewhat easier to fiddle
than payroll or property. Hence, the nearly universal adoption of single factor
apportionment is often cited as <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2359724">one of the
reasons for the growing discrepancy between the BEA’s state profit totals and reported
state CIT bases</a>. However, it makes <a href="http://faculty.chicagobooth.edu/austan.goolsbee/research/apport.pdf">sound
tax sense</a> to apportion profits on sales rather than local employment or
investment. The proper response to the problem of tax base erosion is not to throw
the baby out with the bathwater, but to improve reporting, thereby making it
harder for businesses to hide sales or allocate them to low or no CIT states.<o:p></o:p></div>
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Michael Mazerov of the <a href="http://www.cbpp.org/">Center on Budget and Policy Priorities</a> has
authored <a href="http://www.cbpp.org/research/state-corporate-tax-disclosure-the-next-step-in-corporate-tax-reform">state
CIT disclosure legislation aimed at this problem</a>. Oregon is one of several
states that have considered his <a href="https://olis.leg.state.or.us/liz/2015R1/Downloads/MeasureDocument/HB2077/Introduced">proposal</a>.
My own preference would be a federal law that extended IRS Form 1120, Schedule
M-3, to require state-by-state disclosure of the following information:<o:p></o:p></div>
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<!--[if !supportLists]--><span style="mso-bidi-font-family: Cambria; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: Cambria; mso-fareast-theme-font: minor-latin;"><span style="mso-list: Ignore;">•<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->the nature of the corporation’s activities;<o:p></o:p></div>
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<!--[if !supportLists]--><span style="mso-bidi-font-family: Cambria; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: Cambria; mso-fareast-theme-font: minor-latin;"><span style="mso-list: Ignore;">•<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->its sales;<o:p></o:p></div>
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And to require businesses to file the expanded M-3 along
with their state tax declarations. My best guess is that this would be worth
$50-$100 million in additional CIT revenue to Oregon each year. However, in the
absence of federal action, which seems very unlikely at this time, Oregon
should promptly enact Mazerov’s proposal into law.<o:p></o:p></div>
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Patrick Emersonhttp://www.blogger.com/profile/17242234148546323374noreply@blogger.com3tag:blogger.com,1999:blog-3471471289744825428.post-90741722096338691252016-04-12T09:11:00.003-07:002016-04-12T09:12:13.649-07:00Fred Thompson: Hive Mind <div align="center" class="MsoNormal" style="text-align: center;">
<i><a href="http://www.willamette.edu/~fthompso/">Fred Thompson r</a>eviews:</i></div>
<div align="center" class="MsoNormal" style="text-align: center;">
<i style="mso-bidi-font-style: normal;">Hive Mind: How Your Nation’s IQ Matters So Much More than Your Own<o:p></o:p></i></div>
<div align="center" class="MsoNormal" style="text-align: center;">
By Garett Jones
(Stanford University Press, 2016)<o:p></o:p></div>
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<a href="https://2.bp.blogspot.com/-Jzfbg2L2-SM/Vw0dSUYxsnI/AAAAAAAAMNE/B7fxNpYtJ80BjM63SGNw-F9dwGPiIlrjQCLcB/s1600/ft1.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://2.bp.blogspot.com/-Jzfbg2L2-SM/Vw0dSUYxsnI/AAAAAAAAMNE/B7fxNpYtJ80BjM63SGNw-F9dwGPiIlrjQCLcB/s1600/ft1.png" /></a></div>
<br />
<br />
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Individual cognitive
ability scores aren’t good predictors of lifetime earnings. On average
individuals with high IQ scores earn about 60 percent more than the national
average. That premium is more or less constant over time and distance. But
nations with the highest scores are on average “about eight times more
prosperous than nations with the lowest scores” (p. 5, evidence in Chapter 2). <o:p></o:p></div>
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In <a href="http://www.sup.org/books/title/?id=23082"><i style="mso-bidi-font-style: normal;">Hive Mind</i>, Garett Jones</a> sets out to
explain why higher cognitive ability scores (which he argues in Chapter 1
reflects real underlying differences in skills) are so much more important for
collectivities than for individuals.<o:p></o:p></div>
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Human society is a
form of collective intelligence, in which the accumulated knowledge of the past
makes its members richer today, and in which the many small, daily cognitive
contributions of millions of their neighbors<span style="mso-spacerun: yes;">
</span>– in offices, in factories, in the halls of government, and elsewhere –
help to make their lives better.... . Members of society all draw on that
collective intelligence, they all get benefits from the hive mind they never
pay for... (p. 12)<o:p></o:p></div>
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<a href="https://2.bp.blogspot.com/-eKDoF-SH6f8/Vw0dSUVVa3I/AAAAAAAAMM8/gtxgQA-dISweXd3iR7lWOEfePPK_RX7TwCLcB/s1600/ft2.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="235" src="https://2.bp.blogspot.com/-eKDoF-SH6f8/Vw0dSUVVa3I/AAAAAAAAMM8/gtxgQA-dISweXd3iR7lWOEfePPK_RX7TwCLcB/s320/ft2.png" width="320" /></a></div>
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Jones doesn’t really tell where differences in cognitive
abilities come from. His story is mostly about why they matter. They matter
because higher because (p. 13):</div>
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<o:p></o:p></div>
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<div class="MsoListParagraphCxSpFirst" style="margin-left: .25in; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;">
<!--[if !supportLists]--><span style="mso-bidi-font-family: Cambria; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: Cambria; mso-fareast-theme-font: minor-latin;"><span style="mso-list: Ignore;">1)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->High scoring groups cooperate more effectively,
which is the key to making collective action more productive in all kinds of
enterprises, both by increasing throughput and by building capacity. (Chapter
5)<o:p></o:p></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: .25in; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;">
<!--[if !supportLists]--><span style="mso-bidi-font-family: Cambria; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: Cambria; mso-fareast-theme-font: minor-latin;"><span style="mso-list: Ignore;">2)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->High scoring groups work together better in
teams, which is critical to the performance of weakest-link, precision
activities – the kinds of activities that are characteristic of complex value
chains. (Chapter 7)<o:p></o:p></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: .25in; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;">
<!--[if !supportLists]--><span style="mso-bidi-font-family: Cambria; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: Cambria; mso-fareast-theme-font: minor-latin;"><span style="mso-list: Ignore;">3)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->High scoring groups are more patient and forward
looking. They save more and they invest more, not just in plant and equipment,
but also in organizational learning and technology. (Chapter 4)<o:p></o:p></div>
<div class="MsoListParagraphCxSpMiddle" style="margin-left: .25in; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;">
<!--[if !supportLists]--><span style="mso-bidi-font-family: Cambria; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: Cambria; mso-fareast-theme-font: minor-latin;"><span style="mso-list: Ignore;">4)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->High scoring groups make better citizens and
sustain more effective polities. (Chapter 6)<o:p></o:p></div>
<div class="MsoListParagraphCxSpLast" style="margin-left: .25in; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;">
<!--[if !supportLists]--><span style="mso-bidi-font-family: Cambria; mso-bidi-theme-font: minor-latin; mso-fareast-font-family: Cambria; mso-fareast-theme-font: minor-latin;"><span style="mso-list: Ignore;">5)<span style="font: 7.0pt "Times New Roman";">
</span></span></span><!--[endif]-->Cooperative, patient, well-informed groups
encourage their members to engage in cooperative, patient, information seeking
behavior. (Chapter 8)<o:p></o:p></div>
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At the same time, he insists that average cognitive ability
scores are increasing and that they can be improved (Chapter 3). The reason he
cannot tell us how best to do so is that there are far more plausible
explanations for increases in cognitive ability than there are observations
with which to test them. Consequently, his strongest conclusions have to do
with the provision of basic public health and nutrition. He’s moderately
hopeful for education as well, but only where students are physically present,
have access to books, and teachers teach. As he notes, years of formal
schooling is only weakly associated with cognitive abilities, whereas the
association between measured learning and cognitive ability is quite strong. Of
course, the causal arrow could go either way, but Jones plausibly suggests
that, over the long term and on average, educational effort drives cognitive
development.</div>
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<o:p></o:p></div>
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On balance this is a notable text – perhaps, 2016’s most
important economics book, both for the development specialist and the general
reader.<o:p></o:p></div>
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<br /></div>
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<!--StartFragment--><span style="background-color: white; color: #343434; font-family: "times"; font-size: 9pt;">Garett Jones is Associate Professor of Economics at the Center for Study
of Public Choice, George Mason University</span><!--EndFragment--> </td></tr>
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<o:p></o:p></div>
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<o:p> </o:p>As for its weaknesses, there are arguably three, none
particularly damning.</div>
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<o:p></o:p></div>
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Chapter 8 emphasizes monkey see monkey do, reminding us that
we humans are eager and able to copy the practices of prestigious others, to
the benefit of all. However, if Jones appreciates the degree to which social
segregation can short-circuit this mechanism, I missed it. This is a
potentially serious omission, since it suggests a important pathway to
enhancing the mechanism’s efficacy.<o:p></o:p></div>
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Second, Jones writes beautifully. For the most part this
book is a model of clarity and accessibility. Regrettably his explanation of
why both low skilled and high skilled workers are paid better and are also more
productive in rich nations than in poor ones is especially murky (Chapter 9).
As an economist, even if not a very good one, I think I understand what Jones
is saying, others might not.<o:p></o:p></div>
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Third, Chapter 9, on the benefits international migration,
seems tangential to the main argument of the book, not, I think, because it is,
but because the transition to this topic and its development are excessively
truncated. Indeed, so far as the last third of the book is concerned, this reader
found himself consistently wanting more.<o:p></o:p></div>
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For example, in Chapter 7, Jones talks briefly about
collective intelligence within enterprises. This is hugely important. A
nation’s productivity is merely the sum of the output of its enterprises. How
much does enterprise performance depend on the cooperative, patient,
information-seeking behavior of its members? Jones suggests that the answer may
be quite a bit. But he leaves the how sketchy. This is a pity for several reasons,
not the least of which is that it may be relevant to an understanding of
increased income inequality. We know that inequality has increased rapidly in
recent decades, nowhere more so than in the United States.<span style="mso-spacerun: yes;"> </span>According to <a href="http://www.nber.org/papers/w21199">Song, <i style="mso-bidi-font-style: normal;">et al.</i> (2015)</a>, most of this increase is due to increased
differences between businesses, not to increased inequality within businesses.
They claim, that over the past 30 years, wage distributions within businesses
have remained virtually constant, as has the wage gap between the highest paid
employees within enterprises and their average employees. It seems likely (see <a href="http://www.nber.org/papers/w22101">Bender, et al., 2016</a>) that some
enterprises systematically recruit and retain workers with higher average
cognitive abilities and that workforce selection and positive pay premiums
explain much of the observed differences in productivity and earnings at the
enterprise level. I’d really like to see a more developed discussion of this
topic.<o:p></o:p></div>
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Finally, Jones is primarily concerned about improving
outcomes in less-developed nations, he has little to say about boosting
cognitive abilities in developed countries, although in the special case of the
US, which is rather like a mosaic comprised of myriad middle–income communities
and very rich ones, his strictures regarding nutrition and public health retain
considerable relevance. Nevertheless, I wish that he had paid some attention to
the potential payoffs to expanding pre-kindergarten, especially for disadvantaged
children, and of the relationship between quality of childcare and the
development of cognitive abilities. <o:p></o:p></div>
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Overall, this is a very good book, it would be better if it
were about 100 pages longer.<o:p></o:p></div>
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Song, J., Price, D.J., Guvenen, F., Bloom, N. and von Wachter,
T., 2015. <i>Firming up inequality</i> (No. w21199). National Bureau of
Economic Research.<o:p></o:p></div>
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Bender, S., Bloom, N., Card, D., Van Reenen, J. and Wolter,
S., 2016. <i>Management Practices, Workforce Selection and Productivity</i>
(No. w22101). National Bureau of Economic Research.<o:p></o:p></div>
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Patrick Emersonhttp://www.blogger.com/profile/17242234148546323374noreply@blogger.com0tag:blogger.com,1999:blog-3471471289744825428.post-85995394552064686332016-03-17T10:11:00.000-07:002016-03-18T08:22:27.439-07:00Beer Taxes!<i>Update: The Tax Foundation sent out a corrected map this morning (3/18)</i><br />
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This was prepared for St. Patrick's Day, no doubt (thus the green):<br />
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<span id="goog_854140111"></span><span id="goog_854140112"></span><br />Patrick Emersonhttp://www.blogger.com/profile/17242234148546323374noreply@blogger.com0tag:blogger.com,1999:blog-3471471289744825428.post-63213725644052303112016-03-15T17:26:00.001-07:002016-03-15T17:26:12.474-07:00Fred Thompson: Minimum Wages and Childcare<i style="font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px;"><a href="http://www.willamette.edu/~fthompso/" style="text-decoration: none;">Fred Thompson</a> checks in with another take on minimum wages</i><br />
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Oregon’s leading economic blogger, <a href="http://economistsview.typepad.com/economistsview/">Mark Thoma</a>,
recently called for an <a href="http://www.thefiscaltimes.com/Columns/2016/03/08/Economics-Isn-t-Textbook-Why-We-Need-Raise-Minimum-Wage">increase
in the national minimum wage</a>. I have no problem with the thrust of his
proposal, but I do question some of his economic analysis. <o:p></o:p></div>
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Mark asks, “doesn’t an increase in the minimum wage reduce
employment?” And, answers, “No.”<o:p></o:p></div>
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No problem with that. It is entirely consistent with what we
know about the effects of moderate increases in wage floors: We know that moderate
minimum-wage hikes increase the wages of those earning minimum wages and those
just above the minimum (<a href="http://www.mitpressjournals.org/doi/abs/10.1162/REST_a_00039#.Vt4MLiSTTfg">Dube,
Lester and Reich, 2010</a>), although typically not much or for long (<a href="https://www.cbo.gov/publication/44995">Congressional Budget Office, 2014</a>).
It is likely that research being carried out on more aggressive minimum-wage
increases in Seattle or Los Angeles will show larger and longer wage increases
than those seen previously. We know too that moderate increases in wage floors <i style="mso-bidi-font-style: normal;">do not measurably reduce total employment</i>
(<a href="https://pup.princeton.edu/titles/5632.html">Card and Krueger 1995</a>;
<a href="http://mitpress.mit.edu/sites/default/files/titles/content/9780262515085_sch_0001.pdf">Neumark
and Wascher, 2008</a>; <a href="http://www.mitpressjournals.org/doi/abs/10.1162/REST_a_00039#.Vt4MLiSTTfg">Dube,
Lester, and Reich, 2010</a>; <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1467-8543.2009.00723.x/abstract;jsessionid=E600093E10A8560799D7FFC4AC727CED.f04t04?userIsAuthenticated=false&deniedAccessCustomisedMessage=">Doucouliagos
and Stanley, 2009</a>; <a href="http://oregoneconomicanalysis.com/2014/03/07/portland-city-club-inequality-and-minimum-wage/">Lerner,
2014</a>; <a href="http://onlinelibrary.wiley.com/doi/10.1111/irel.12106/abstract?userIsAuthenticated=false&deniedAccessCustomisedMessage=">Schmitt,
2015</a>).<span style="mso-spacerun: yes;"> </span><o:p></o:p></div>
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But then Mark goes on to note that: “This is just what you
would expect if minimum wage workers are paid less than the value of their
marginal products, i.e. less than their value to the firm. In such a case, an
increase in the minimum wage does not push workers’ compensation beyond the
point where they remain valuable to the firm. The main effect is to
redistribute income from managers and owners to workers in a way that better
reflects the contribution of each to the production of goods and services.”<o:p></o:p></div>
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Here Mark goes beyond the evidence: it appears that the <i style="mso-bidi-font-style: normal;">main responses</i> to moderate minimum-wage
hikes are (usually small) price increases (<a href="http://www.mitpressjournals.org/doi/abs/10.1162/003465301750160126#.Vt4QyCSTTfg">Aaronson,
2001</a>; <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1467-6419.2007.00532.x/full">Lemos,
2008</a>; <a href="https://www.chicagofed.org/~/media/publications/working-papers/2007/wp2007-23-pdf.pdf">Aaronson,
Agarwal, and French, 2011</a>; <a href="http://onlinelibrary.wiley.com/doi/10.1111/irel.12091/abstract?userIsAuthenticated=false&deniedAccessCustomisedMessage=">Hirsch,
Kaufman, and Zelenska, 2015</a>), wage compression (<a href="https://www.aeaweb.org/articles.php?f=s&doi=10.1257/app.20140073">Autor,
Mannning, and Smith, 2016</a>; <a href="http://onlinelibrary.wiley.com/doi/10.1111/irel.12091/abstract?userIsAuthenticated=false&deniedAccessCustomisedMessage=">Hirsch,
Kaufman, and Zelenska, 2015</a>, to be fair to Thoma, these studies support the
notion that employers may also compensate for boosting wages at the bottom by
cutting them at the top), and productivity improvements, in part due to
reductions in labor turnover (<a href="http://onlinelibrary.wiley.com/doi/10.1111/j.0019-8676.2004.00376.x/abstract?userIsAuthenticated=false&deniedAccessCustomisedMessage=">Howes,
2005</a>). Lemos (<a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1467-6419.2007.00532.x/full">2008</a>)
concludes that owners rarely if ever absorb minimum-wage increases in the form
of lower profits; evidently most of the burden is shifted forward to customers.
The only evidence I know of that would contradict Lemos’ conclusion is reported
by Draca, Machin, and Van Reenen (<a href="http://www.jstor.org/stable/25760249">2011</a>),
who concluded that the adoption of a minimum wage significantly reduced
profitability in the United Kingdom.<o:p></o:p></div>
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According to <a href="http://onlinelibrary.wiley.com/doi/10.1111/irel.12106/abstract?userIsAuthenticated=false&deniedAccessCustomisedMessage=">Schmitt
(2015</a>) minimum wage hikes have little or no effect on job totals because
“the cost shock of the minimum wage is small relative to most firms' overall
costs and only modest relative to the wages paid to low-wage workers.” In other
words, enterprises deal with cost shocks that are a lot bigger all the time.
Indeed, weighed against the economy as a whole, <a href="http://oregonecon.blogspot.com/2015/11/fred-thompson-raising-oregons-minimum.html">the
effects of minimum wage changes are tiny</a>. According to the Oregon State
Economist, the total wage premium associated with the current $9.25 minimum wage
floor accounts for less than .5 percent of the state’s total compensation pool.
The cost of the recently enacted legislation on wages (wages below the state
median) is estimated to be little more than $2 billion, where final output is
over $170 billion per annum. Consequently, it is hardly surprising that the
visible consequences of minimum-wage boosts are indistinct and exceedingly
difficult to discern, let alone measure.<span style="mso-spacerun: yes;">
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As a result, economists often focus their attentions on
bellwether populations (e.g., relatively low-skilled individuals, as described
by their ages and education levels, as in Clemens (<a href="http://www.nber.org/papers/w21830">2015</a>) or Sabia (<a href="http://dx.doi.org/10.1002/pam.20379">2008</a>)) or industries (usually
quick-service restaurants, although Howes (<a href="http://onlinelibrary.wiley.com/doi/10.1111/j.0019-8676.2004.00376.x/abstract?userIsAuthenticated=false&deniedAccessCustomisedMessage=">2005</a>)
looks at home healthcare and Draca, Machin, and Van Reenen (<a href="http://www.jstor.org/stable/25760249">2011</a>) at residential care homes
in the UK) to suss out the effects of minimum-wage hikes for individuals,
workers or service recipients, and enterprises.<o:p></o:p></div>
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This sort of analysis produces several results that are
inconsistent with the notion that low-wage workers are paid less than their
marginal revenue product. First, there is compelling evidence that minimum wage
hikes are associated with reductions in the employment of younger,
lower-skilled, and less-well educated employees (i.e., presumably less
productive workers) in favor of older, higher-skilled, and better educated
employees.<span style="mso-spacerun: yes;"> </span>There is also some evidence
of rationing inefficiency: higher minimum wages attract people with better
qualifications, who would not normally be in the workforce, to seek low-wage
employment, thereby displacing some of those in the labor force at the time of
the increase.<o:p></o:p></div>
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For example, in the bellwether
industry my colleagues (Kawika Pierson, Jon Thompson, and Robert Walker) and
have looked at here in Oregon, <a href="http://www.oregonlive.com/opinion/index.ssf/2016/02/dont_count_on_the_minimum-wage.html">childcare</a>,
where staffing, driven by regulations on caregiver-to-child ratios, accounts for
about 80 percent of expenses and nationally the minimum wage is also the median
hourly wage, it’s easy to see that Oregon’s high minimum wage results in a
relatively high median (and average) wage. For example, the median is nearly
two dollars an hour more than in Idaho, with no state minimum, a 26 percent
premium (this contrasts with the fast-food industry where wages account for
only 25 percent of costs and the median wage difference is only 11.5 percent). Not
surprisingly, Oregon also has among the highest childcare costs in the nation –
and among the best qualified childcare givers. For example, according to LEHD
data (the D stands for dynamics, so this statement is not inadvertently repetitive)
set, which comprehends information on worker education-employment by specific
industry and by quarter for all states from 1993 through 2012, there is no
significant difference in the education levels of fast-food workers in Oregon
and Idaho; in childcare the difference averages over one full grade level –
indeed, nearly half (42 percent) of the certified teachers in Oregon’s registered
child-care centers have BA degrees.<o:p></o:p></div>
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It might also be noted that when we used LEHD data to
estimate the relation between employment levels in Oregon’s childcare industry and
statutory wage floors over time (using employment growth in Idaho and
Washington as controls), we found a statisticlly and economically significant
negative relationship, with elasticities between .25 and .40.<o:p></o:p></div>
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What’s happening here? We don’t know for certain. It’s
complex; a lot of things are going on. But we’re pretty sure that the effects
of minimum wage hikes cannot be reduced to a simple story about redistributing income
from owners to low-wage workers to better reflect their marginal revenue
products. That looks to us more like a presupposition than an evidence-based
conclusion.<o:p></o:p></div>
Patrick Emersonhttp://www.blogger.com/profile/17242234148546323374noreply@blogger.com0tag:blogger.com,1999:blog-3471471289744825428.post-35987708908840142502016-02-03T11:34:00.001-08:002016-02-03T11:34:13.592-08:00Fred Thompson: Tax Mavens Talk About Disappearing State Corporate-Income-Tax Revenues; Oregon Did Something About It <i style="font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px;"><a href="http://www.willamette.edu/~fthompso/" style="text-decoration: none;">Fred Thompson</a> checks in with the second of his two-part post. The first one appeared last week.</i><br />
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In 2010, under Measure 67, Oregon adopted a minimum-tax
scheme whereby C-corporations are taxed on profits (income) or on turnover
(gross revenue), whichever tax liability is greater. <o:p></o:p></div>
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Measure 67 set the
alternative minimum turnover tax rate at approximately .1 percent (to a maximum
of $100 thousand). Measure 67 also increased Oregon’s marginal corporate-tax
rate on Oregon taxable income (profits earned in Oregon) over $10 million from
6.6 percent to 7.6 percent and increased the minimum tax on pass-through
businesses to $150.<o:p></o:p><br />
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Economists don’t like turnover taxes. The <a href="http://web.stanford.edu/~hammond/prodEff.pdf">Diamond-Mirrlees production-efficiency
theorem</a> is hostile to taxes on intermediate inputs, a predisposition I
appreciate and generally embrace. However, Diamond-Mirrlees presumes the
absence of widespread tax avoidance/evasion, an assumption that is clearly
violated so far as state corporate income taxes are concerned. In contrast<i style="mso-bidi-font-style: normal;">, turnover taxes are hard to avoid and
relatively cheap to enforce, much more so on both counts than state
corporate-income taxes.</i> Consequently, I found it fairly easy to support
Measure 67’s alternative minimum turnover tax, as <a href="http://eprints.lse.ac.uk/53553/1/__libfile_REPOSITORY_Content_Spinnewijn,%20J_Production%20vs%20revenue%20efficiency_Spinnewijn_Production%20vs%20revenue%20efficiency_2013.pdf">an
effective complement to the corporate income tax</a>, and would not rule out
further incremental increases in the turnover tax rate. Massive SCIT
avoidance/evasion provides ample justification for alternative minimum turnover
taxes.<o:p></o:p></div>
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But there’s more: Oregonians <a href="http://taxfoundation.org/article/state-local-tax-burden-rankings-fy-2012">pay
high taxes</a>, partly because we face fairly high tax rates, but a lot of the
taxes that we pay are actually paid <i style="mso-bidi-font-style: normal;">to
other states</i> (and to jurisdictions in other states). On a per-capita basis,
Oregon is one of the nation’s leading net tax exporters. Consequently, <a href="http://www.ocpp.org/2016/02/02/iss20160202-oregon-taxes-below-average-fees-high/">Oregon’s
per capita state and local tax <i style="mso-bidi-font-style: normal;">collections</i>
are actually below the average of the US as a whole. It’s only when one adds in
fees paid to state and local governments that Oregon’s collections come up to the
US average.</a> One of the neat things about supplementary turnover taxes is
that they implicitly raise the cost of jurisdiction shopping, by making it
cheaper for multi-state businesses to pay the higher Oregon CIT than for them to
pay turnover taxes in Oregon <i style="mso-bidi-font-style: normal;">and</i> pay
CITs in other states, even where those CIT rates are lower. Minimum alternative
turnover taxes tend, thereby, to reduce tax exports.<o:p></o:p></div>
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Moreover, it looks the minimum turnover taxes work the way
they are supposed to: under Measure 67, business tax revenues (the sum of
alternative minimum turnover tax and CIT revenues) increased from 1.9 percent
of total state cash inflows in the decade prior to its passage to 2.3 percent today.
Interestingly, most Oregonians, even those who pay attention to state fiscal
policy matters, are unaware of the apparent success of this experiment.<o:p></o:p></div>
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Nevertheless, there are a variety of proposals to increase
or extend Oregon’s turnover tax. The group, <a href="http://abetteroregon.org/">A
Better Oregon</a>, is seeking to put an initiative on the ballot that would <a href="http://oregonvotes.org/irr/2016/028text.pdf">leave its structure pretty
much unchanged, but increase the marginal tax rate on the Oregon sales of
C-corps in excess of $25 million from .1 percent to 2.5 percent, or <i style="mso-bidi-font-style: normal;">25 times</i></a><span class="MsoHyperlink"><i style="mso-bidi-font-style: normal;"> (2500 percent!)</i></span>.<span style="mso-spacerun: yes;"> </span>That’s a huge increase, so much so that, if
enacted, the turnover tax might no longer represent a supplement to the
corporate income tax, but would very likely behave more like a sales tax
(averaging about 4 percent on roughly half of all goods and services sold in
Oregon) than an income tax (i.e., a higher portion of it would be shifted to
final consumers rather than stick with shareholders).<span style="mso-spacerun: yes;"> </span>It would also probably have the effect of
shifting even more business activities from C-corps to pass-through entities,
encourage vertical integration, and advantage high mark-up businesses relative
to their high-turnover counterparts – in other words, do all the bad things
Diamond-Mirrlees warned us against. It is hard to say how much damage to
Oregon’s economy these things would do. It could be a lot; it could just as easily
be minimal. But whether the damage would be a lot or only a little, I seriously
doubt that it would <a href="http://www.oregonlive.com/opinion/index.ssf/2015/12/corporate_tax_proposal_would_s.html">strengthen
Oregon’s economy</a>. Personally, I’d prefer it if experiments like this were
performed in some other <a href="http://oregonecon.blogspot.com/2015/09/fred-thompson-laboratories-of-democracy.html">laboratory
of democracy</a>.<o:p></o:p></div>
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The <a href="http://oregonecon.blogspot.com/2015/10/fred-thompson-otim-new-improved.html">Oregon
Legislative Revenue Office</a> recently <a href="http://www.taxnotes.com/state-tax-notes/gross-receipts-tax/revenue-offices-restructuring-options-focus-establishing-cat/2016/01/04/18150526">assessed
the consequences of adopting a comprehensive turnover tax (called a commercial
activity tax or CAT)</a> that would apply to nearly all business transactions
and not just to the sales of large C-corps, as under the status quo. Its
analysis considered an array of rates from .4 percent to .65 percent of sales
and various uses of CAT revenue, most notably, repealing Oregon’s corporate
income tax, increasing the standard deduction on Oregon’s personal income taxes,
and creating a property-tax exemption for owner-occupied, primary residences. The
revenue office assumed that the CAT would behave pretty much like a consumption
tax (albeit on gross rather than final output). If so, <i style="mso-bidi-font-style: normal;">relative to repeal of the corporate income tax,</i> it should reduce
the progressivity of Oregon’s state and local tax system and, thereby, reduce
its short-term volatility somewhat, as well as its long-term growth rate; <i style="mso-bidi-font-style: normal;">relative to increasing the standard
deduction or creating a homestead exemption</i>, its effects should pretty much
be a wash. Seems like a lot of back and forth for not much practical payoff,
which is an extremely informative insight (although oddly, it’s not the finding
that has gotten the most attention).<o:p></o:p></div>
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Me? I’d like to increase the PIT standard exemption, but
otherwise my tastes run to the incremental: increasing the alternative minimum
turnover tax rate (to .4 or .5 percent) and, maybe, since I am a fan of tax
harmonization, finding a way to extend it to all businesses, partnerships
included, with revenues exceeding $500 thousand (<a href="https://www.youtube.com/watch?v=8M_kAeV8l4A&feature=em-uploademail">as
in the proposals assessed by the LRO</a>, but retaining the offset provision
for C-corps and creating one for other businesses) and, perhaps, not so
incrementally, to all non-governmental corporations and some special-service
districts as well (which is consistent with the logic of tax harmonization). <o:p></o:p></div>
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At a minimum, it is hard to see why pass-through entities
should be advantaged relative to C-corps. The owners of C-corps tend to be well
to do, but the owners of large pass-through entities are apparently even more
so. According to the NBER paper cited above, “<a href="http://www.nber.org/digest/jan16/w21651.html">over 66 percent of
pass-through business income received by individuals goes to the top 1 percent.
The concentration of partnership and S corporation income is much greater than
the concentration of dividend income (45 percent to the top 1 percent) which
proxies for income from C corporations (traditional corporations). While
taxpayers in the top 1 percent are eight times as likely to receive dividends
as taxpayers in the bottom 50 percent, the ratio for partnerships is more than
50 to 1.</a>”<o:p></o:p></div>
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<span style="font-size: 10.0pt;">......<o:p></o:p></span></div>
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Patrick Emersonhttp://www.blogger.com/profile/17242234148546323374noreply@blogger.com0tag:blogger.com,1999:blog-3471471289744825428.post-37780596995996856662016-01-29T10:29:00.002-08:002016-01-29T10:34:26.205-08:00Fred Thompson: Why Are State Corporate Income Taxes Disappearing?<i><a href="http://www.willamette.edu/~fthompso/">Fred Thompson</a> checks in with the first of a two-part post. I'll post the second one next week.</i><br />
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They are. <o:p></o:p></div>
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<a href="https://plot.ly/~governing/692.embed">https://plot.ly/~governing/692.embed</a><o:p></o:p></div>
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But why? The easiest explanation to discard is that, in a
race to the bottom, states have reduced corporate income-tax (SCIT) rates. They
haven’t. Marginal SCIT rates have been more or less constant for more than 30
years.<o:p></o:p></div>
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<a href="http://2.bp.blogspot.com/-1mgdR4MRpB0/VquvArVKWCI/AAAAAAAAMKA/TqegGJTHA4s/s1600/ft1.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="320" src="http://2.bp.blogspot.com/-1mgdR4MRpB0/VquvArVKWCI/AAAAAAAAMKA/TqegGJTHA4s/s320/ft1.png" width="319" /></a></div>
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Me? I attribute the decline in SCIT to increased tax
avoidance/evasion. Tax avoidance/evasion isn’t a new enterprise, but its
direction and focus changed dramatically after 1980 and it has been growing in
size and sophistication ever since. The simple fact is that it is ridiculously
easy for multi-state businesses to shelter profits from SCITs, reporting them
where state corporate income-tax rates are low (in states like Nevada or
Washington) and avoiding them in high-tax states (like Pennsylvania or Iowa).
These days, this can be done with a couple of mouse clicks (and some accounting
and legal legerdemain). Unfortunately, it’s hard to fix tax avoidance/evasion
mechanisms or even say which ones matter most at the state level. Multi-state
businesses are not required to publicly report the income taxes they pay in
each state, just the total.</div>
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<o:p></o:p></div>
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However, we know the nation’s <a href="http://www.governing.com/topics/finance/gov-corporate-tax-attacks-states.html">output-weighted
average state corporate tax rate is about 7 percent, while the average state
corporate income-tax rate paid by profitable Fortune 500 C-corps is less than half
that</a>, which is a lot of avoidance, if not evasion.<o:p></o:p></div>
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Many of our colleagues deny that the massive decline in the
weight of state SCIT revenue (which is itself unquestioned) is due to increased
tax avoidance/evasion. They note that enactment of the pass-through provision
in 1986 and its subsequent expansions have fundamentally transformed the
business landscape in America, leading to a decline in C-corporations relative
to pass-through businesses. <o:p></o:p></div>
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Under the U.S. tax code the profits (income) of publically
held or C-corps are taxed twice, first through corporate income taxes and then
again through personal income taxes on dividends and capital gains. Other
businesses – individually, family, or employee owned – are all eligible for
pass-through status, meaning that their income passes directly to their owners’
personal income tax returns, as are most partnerships (these businesses are not
necessarily small; there are nearly 1,000 of them in Oregon with over 100
employees).<span style="mso-spacerun: yes;"> </span>As a result, <a href="http://www.nber.org/digest/jan16/w21651.html">the owners (shareholders)
of C corps tend to pay higher tax rates on their businesses’ profits than do
the owners of other businesses.</a> That is generally also true at the state
level. It is almost certainly the case in Oregon.<o:p></o:p></div>
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Consequently, pass-through businesses now account for more
than 50 percent of all business income in the U.S., triple what it was in 1986.
In fact, there are only about 3,500 large publicly traded companies in the
U.S., down from more than 5,000 in the mid-80s. This goes a long way to
explaining the relative decline in the importance of the <i style="mso-bidi-font-style: normal;">federal</i> corporate income tax <i style="mso-bidi-font-style: normal;">vis
á vis </i>personal income tax receipts.<o:p></o:p></div>
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However, if that were the whole story, the decline in the
relative importance of state corporate income-tax revenues would have been
proportionate to the relative decline in the federal corporate income tax. <i style="mso-bidi-font-style: normal;">Instead, it has fallen nearly twice as fast.</i>
Or, perhaps, more clearly, <a href="http://www.governing.com/topics/finance/gov-disappearing-corporate-taxes.html">since
1990 total federal corporate tax revenues have grown about as fast as C-corp
profits; total state corporate tax revenues have grown only half as fast. As a
consequence, state corporate income-taxes now account for less than 2 percent
of annual state revenues nationwide, down from 2.7 percent in the decade of the
1990s and 3.5 percent in the 1980s.</a> In Oregon, the proportional decline has
been less dramatic, from 1.8 percent of total state revenue, to 1.9 percent,
and now 1.4 percent, according to <a href="http://www.governing.com/topics/finance/gov-state-corporate-income-tax-revenues.html"><i style="mso-bidi-font-style: normal;">Governing Magazine</i></a>. <o:p></o:p></div>
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The decline in the relative contribution of Oregon’s CIT is
proportionally less than in most states, especially places like Connecticut,
Louisiana, Michigan or Ohio, where <i style="mso-bidi-font-style: normal;">real</i>
corporate income revenues actually declined by more than 50 percent after 1990,
but it still looks to be significant (although, in reality, probably not, since
<i style="mso-bidi-font-style: normal;">GM </i>evidently excluded revenue from
turnover taxes from its figure – see my next post).<o:p></o:p></div>
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Others of our colleagues are more conspiratorially minded.
They tend to hold to an older view of corporate income taxes, which posits that
the incidence of the tax is entirely shifted to other, less mobile, factors of
production (labor and real property). Consequently, it follows that states
should not tax corporate income, that, to avoid adverse effects on investment,
output, and employment, it would be better to tax labor/land directly. While
this view cannot be entirely ruled out as a theoretical matter, it’s wholly inconsistent
with the best empirical evidence. For that reason, most tax economists now reject
it.<o:p></o:p></div>
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Nevertheless, it might be noted, that, under this view,
state elected officials choose to tax corporate income only because they are
forced to by popular sentiment ("I pay taxes, but big companies get away
Scot free?"). Bizarrely, some of those who hold this view assume a level
of rationality on the part of state tax authorities that beggars all belief:
they adopt high statutory tax rates to appease the public, but consciously
mitigate their effects through special tax breaks. Hence, one observes
persistent high state corporate income tax rates along with diminished
collections.<o:p></o:p></div>
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However, as the <a href="http://www.governing.com/topics/finance/gov-state-corporate-income-tax-revenues.html"><i style="mso-bidi-font-style: normal;">Governing Magazine</i></a>. article clearly
shows, the scale of SCIT tax breaks is nowhere close to accounting for the
relative decline in SCIT revenues. If nothing else, that should put paid to
this particular conspiracy theory.<o:p></o:p></div>
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If I am right, tax avoidance/evasion is at the heart of the
problem of the mystery of declining SCIT revenue, what can be done about it? I
offer one answer in my next post.<o:p></o:p></div>
Patrick Emersonhttp://www.blogger.com/profile/17242234148546323374noreply@blogger.com0tag:blogger.com,1999:blog-3471471289744825428.post-54981057529903437032016-01-21T09:39:00.000-08:002016-01-21T09:47:09.072-08:00BlogNo, I don't know why the blog's background has suddenly turned to light gray and, no, I do not know how to fix it. Maybe it is a sign that it is time for an overhaul...<br />
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Update! Okay, so now there is the Earth. Upgrade complete. Like a whole new site...Patrick Emersonhttp://www.blogger.com/profile/17242234148546323374noreply@blogger.com0tag:blogger.com,1999:blog-3471471289744825428.post-50019944132312797432016-01-20T09:08:00.002-08:002016-01-20T09:08:47.012-08:00The Tricky Problem of Child LaborOn NPR this morning there was <a href="http://www.npr.org/2016/01/20/463680916/amnesty-international-report-child-labor-used-to-gather-minerals-for-gadget-batt">a report</a> on an Amnesty International report on the child cobalt miners of DR Congo. Families can dig their own mines in mineral-rich DRC. Often, apparently, all or many members of the families take part in this household production, including children. The report suggests that this is a bad thing, that children should not be involved in mining and should instead be in school.<br />
<br />
On the face of it, this all makes sense. Children are not old enough to make these decisions for themselves and society must protect them. Mining is a difficult and dirty task, not suitable for small children. School is where they should be. <br />
<br />
But this ignores the fact that most parents in the world want what is best for their children and would prefer that they do not work. But if it comes to the stark choice of having the child work or not feed the family, families are forced send their children to work. <br />
<br />
Ironically, by calling on Apple, Samsung and Sony to ensure no children are used in the mining of the cobalt used in their products might be condemning these families to a worse fate - making these kids worse off not better. <br />
<br />
This was the point of a seminal paper by Basu and Van in 1999, only if, by banning child labor does the overall supply of labor decrease so much that adult wages rise enough to compensate, does a ban actually improve the welfare of the children. And if the local schools are poor - as they often are in rural parts of low-income countries - there maybe little benefit to sending children to them. <br />
<br />
Much of my work over the last decade and a half studies the consequences of children working so I am acutely aware of the problem. Enough to know that calls to ban child labor, though well-meaning, are often misguided. I prefer focusing on investments in education and social safety nets to create a situation where families have enough consumption to survive and where sending kids to school is a good long-term investment. Besides, bans are often essentially toothless without real enforcement, something that low-income countries do not have the resources to do. Better to focus on the incentives that cause children to work in the first place. Patrick Emersonhttp://www.blogger.com/profile/17242234148546323374noreply@blogger.com1tag:blogger.com,1999:blog-3471471289744825428.post-35904180679519934482016-01-08T11:50:00.000-08:002016-01-08T11:50:27.863-08:00Fred Thompson: Kickers Redux<br />
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<i><a href="http://www.willamette.edu/~fthompso/">Fred Thompson</a> once again keeps the blog alive with another insightful piece.</i></div>
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Patrick Emerson and I <a href="http://oregonecon.blogspot.com/search?q=kicker&max-results=20&by-date=true">have
written about the Kicker and its folly</a> often here at the Oregon Economics
Blog. In what is otherwise an arguably exemplary state and local tax system,
Oregon’s kicker is an embarrassment, or, more correctly, the legislature’s
unwillingness to deal with it is simply shameful.<o:p></o:p></div>
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<a href="http://4.bp.blogspot.com/-DYhefyR06wU/VpASUa8E7CI/AAAAAAAAMI8/w9LbACyMyYY/s1600/ft1.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="237" src="http://4.bp.blogspot.com/-DYhefyR06wU/VpASUa8E7CI/AAAAAAAAMI8/w9LbACyMyYY/s320/ft1.png" width="320" /></a></div>
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As it happens the kicker isn’t entirely unique to Oregon. At
least six other states – Colorado, Massachusetts, Missouri, New Hampshire,
North Carolina and Oklahoma – have “triggers” that automatically impose tax
cuts (i.e., give refunds, credits or a reduction in rates to taxpayers or
businesses) whenever cash inflows (real or expected) exceed planned outflows. Moreover,
Michigan’s Governor, Rick Snyder, recently signed a bill that will
automatically roll back personal income-tax rates whenever state revenue
exceeds 1.425 times the rate of inflation, although not until 2023.<o:p></o:p></div>
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All of these measures have a similar justification: the
widespread belief that governments are myopically imprudent, that when times
are flush they will spend like drunken sailors, thereby creating irresistible
pressures to raise taxes when times are tight to maintain otherwise unsustainable
current service levels. Moreover, automatic cuts are apparently politically
appealing. They promise tax cuts for voters, but grant them only when there is
enough cash to pay for the cut. <o:p></o:p></div>
<div>
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="http://3.bp.blogspot.com/-WCRiNk4d-Qs/VpASbQ4zE_I/AAAAAAAAMJI/0Pshp-jIPrs/s1600/ft2.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="226" src="http://3.bp.blogspot.com/-WCRiNk4d-Qs/VpASbQ4zE_I/AAAAAAAAMJI/0Pshp-jIPrs/s320/ft2.png" width="320" /></a></div>
<div>
<br /></div>
<br />
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From this standpoint, Oregon’s kicker could be worse. It
goes into effect retrospectively, when actual cash inflows exceed the budget
forecast. In Oklahoma, the kicker is prospective, based on the revenue forecast
itself. This year Oklahomans, like Oregonians, will get a big refund.
Unfortunately, forecasts are not reality. Oklahoma’s actual revenues are insufficient
to cover both its budget and the automatic tax cut. Moreover, Oklahoma has a
very strict balanced-budget law. It must bring its cash outflows into line with
inflows during the current year and it is prohibited from borrowing (even from
itself) to do so. In this instance, the automatic trigger caused precisely the
problem it was supposed to fix.<o:p></o:p></div>
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<br /></div>
<div class="MsoNormal">
<a href="http://3.bp.blogspot.com/-ZtGO2qsJ5ZA/VpASeeuf20I/AAAAAAAAMJU/R6Yx4g7k8h8/s1600/ft3.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="200" src="http://3.bp.blogspot.com/-ZtGO2qsJ5ZA/VpASeeuf20I/AAAAAAAAMJU/R6Yx4g7k8h8/s200/ft3.png" width="145" /></a>Economies are
cyclical; revenues are too. That’s not necessarily a bug. The problem is
stabilizing spending, but, as the Legislative Task Force on Restructuring
Revenue and Governor Ted Kulongoski’s reset team recognized, the solution is
straightforward: avoid myopic imprudence, i.e., <a href="http://www.keepeek.com/Digital-Asset-Management/oecd/governance/it-s-spending-that-matters_budget-14-5jrtl4wnp3mn#page1">grow
spending at a sustainable rate</a>, using saving and, when necessary,
borrowing, to smooth out spending. Were the legislature less pusillanimous,
repeal of the kicker law would allow this solution to be put into effect
without a foreseeable need for borrowing (actually, given my druthers, I would
base the revenue estimate on a sustainable, long-term growth rate, use the
kicker – revenues in excess of the estimate – to automatically pay down state
debt/build a sinking fund, and rely on borrowing whenever actual revenues dropped
below the revenue estimate, but that is a slightly different story).<span style="mso-no-proof: yes;"> </span><o:p></o:p></div>
<br />
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<a href="http://1.bp.blogspot.com/-3HsixWYnlcE/VpASheQN75I/AAAAAAAAMJg/uzV7pd0lkdA/s1600/ft4.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="239" src="http://1.bp.blogspot.com/-3HsixWYnlcE/VpASheQN75I/AAAAAAAAMJg/uzV7pd0lkdA/s320/ft4.png" width="320" /></a></div>
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<a href="http://3.bp.blogspot.com/-_c_5ay4OWFM/VpASoHQAVXI/AAAAAAAAMJs/Qun7q6194Tg/s1600/ft5.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="133" src="http://3.bp.blogspot.com/-_c_5ay4OWFM/VpASoHQAVXI/AAAAAAAAMJs/Qun7q6194Tg/s200/ft5.png" width="200" /></a>It might be noted that
other states have found the political cojones to repeal automatic triggers.
According to <a href="http://www.governing.com/topics/finance/triggers-cut-state-taxes-but-are-they-good-policy.html?utm_medium=email&utm_source=Act-On+Software&utm_content=email&utm_campaign=The%20Best%20Way%20to%20Prevent%20Drunk%20Driving%20That%27s%20Debatable.&utm_term=Automatic%20State%20Taxes%20Are%20Popular%2C%20But%20Are%20They%20Good%20Policy"><i style="mso-bidi-font-style: normal;">Governing Magazine</i>,</a> the trigger
trend began in California, but was laid to rest during the Schwarzenegger
administration. More recently, thanks to their Governor Brown, California voted
Proposition 2 into law. Proposition 2 amends the California Constitution to
require that the Governor make mid-term spending and revenue targets part of
the state budget process, requires the state to set aside revenues each year –
for 15 years – to pay down specified state liabilities, and substantially
revises the rules governing the state’s rainy day fund. In other words,
California’s legislature did pretty much what Oregon’s has consistently refused
to do. They referred a measure aimed at making state and local spending
sustainable to the citizenry. On November 4, 2014, 70 percent of the electorate
voted in its favor. It is downright shocking when California exhibits greater
fiscal responsibility than Oregon.<o:p></o:p></div>
Patrick Emersonhttp://www.blogger.com/profile/17242234148546323374noreply@blogger.com1tag:blogger.com,1999:blog-3471471289744825428.post-9384542174820237332015-11-16T13:19:00.002-08:002015-11-16T22:53:55.964-08:00Fred Thompson: Raising Oregon’s Minimum Wage to $15?<div class="MsoNormal" style="text-align: left;">
<a href="http://www.willamette.edu/~fthompso/">Fred Thompson</a> checks in again with this piece (I should really start calling this the "Fred Thompson Economics Blog). Thanks Fred for keeping this blog alive!</div>
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Recently Chuck Sheketoff of the Oregon Center for Public
Policy addressed a barrage of <a href="http://www.ocpp.org/2015/11/05/blog20151105-questions-minimum-wage-oregon/">questions</a>
to the opponents of raising the Oregon minimum wage to $13.50 and, then, $15.
Like a good attorney he asked only questions he knew and liked the answers to.
Some of the questions he didn’t ask are:<o:p></o:p></div>
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1. Who do minimum wages hurt? Someone pays. Who are the net
losers, and by how much?<o:p></o:p></div>
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2. How much do they increase the earnings of lower-wage
(<$20 per hour) workers and for how long?<o:p></o:p></div>
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3. Do employers reduce employer benefits or the quality of
working conditions when minimums are increased?<o:p></o:p></div>
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4. Do higher minimum wages enhance productivity and, if so, why
and how much?<o:p></o:p></div>
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5. Do they attract more qualified/more productive workers
into the low-wage labor pool, permitting employers to be more selective and, if
so, who gets displaced?<o:p></o:p></div>
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One thing that we know for certain is that the effects of
moderate minimum-wage boosts on total low-wage employment, when and where the
economy is healthy, are trivially small, maybe non-existent. What happens in
the macro-economy, boom or bust, swamps the direct effects of minimum-wage
increases. Consequently, Chuck’s claim that “a substantial minimum wage
increase can go hand-in-hand with solid economic growth” is undoubtedly true.<o:p></o:p></div>
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Moreover, even the direct employment effects that we have
observed from minimum-wage hikes are vanishingly small. Statutory wage minimums
work like taxes on low-wage labor, with their proceeds paid directly to
low-wage workers and most of their costs shifted forward to consumers in the
form of higher prices. This might have two kind of effects on the demand for low-wage
labor: an income effect, since consumers wouldn’t be able to afford to buy as
many goods and services as before (more or less fully offset in the aggregate
by the wage increases), and a substitution effect, as consumers shift away from
goods and services whose relative prices have increased as a result. <o:p></o:p></div>
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Consequently, moderate increases in the minimum wage should
raises the price of some things, e.g., services produced by the hospitality
industry, although, in the case of a 30% increase in the minimum wage, probably
by less than 3%, and also perhaps cause folks to substitute away from sit-down
restaurants, and toward fast-food restaurants. Nevertheless, so far as <a href="http://oregoneconomicanalysis.com/2014/03/07/portland-city-club-inequality-and-minimum-wage/">the
food preparation and service industry</a> is concerned, about 80,000 workers,
it would be really surprising if the net, one-time reduction in jobs caused by
Oregon’s current minimum wage were 1,000, statewide, This is the case primarily
because labor costs represent less than 40% of the total cost of sit-down hospitality
services and 25% of take-out food service. Moreover, while Oregon’s minimum
wage is 27 percent above the national rate, its <span style="mso-bidi-font-weight: bold;">median</span> wage for food preparation and service occupations is only
5.5 percent higher ($9.60 compared to $9.10 nationwide in 2014). More broadly,
the scale of this effect is undoubtedly far higher for food preparation and
service occupations than in most other Oregon industries that hire large
numbers of minimum wage workers, e.g., retail, where the low-wage, labor-added
component is typically ≥ 10%. <o:p></o:p></div>
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There is one industry, however, where one might see an effect,
if one is to be found: <a href="http://www.oregon.gov/OCC/docs/CC_Eco.pdf">child-care</a>.
The minimum wage is the median hourly wage in the child-care industry in most
states. Moreover, wages and salaries account for more than 60% of the cost of
service in this industry. Not surprisingly, Oregon, with one of the nation’s
highest minimum wages, also has the highest child-care cost in the nation.
Oregon has about 15K child-care workers. If Oregon’s current minimum wage has a
discernable effect anywhere, it should have one here. <o:p></o:p></div>
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This also points to another consideration often omitted in
these discussions: the effects of an increase in the minimum wage, both for
good and for ill, depends less on the existing minimum wage than on median wages
in low-wage occupations. Oregon’s minimum wage has raised median-wages in food
preparation and service occupations about 6% compared to the rest of the
country; in child-care, the effect is more like 25%. This is relevant to the chuck’s
claim that Oregon has previously made big jumps in our minimum wage previously
(42% in 1989 vs. a 43% proposed increase today) without harming the economy.
The last time Oregon did so, its state minimum wage was the <a href="http://www.oregonlive.com/business/index.ssf/2014/01/oregons_minimum_wage_1968_to_2.html">same
as the national minimum</a>; it is now 27% higher. <o:p></o:p></div>
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From this standpoint, an increase to $13.50, let alone $15,
would at this time be entirely unprecedented. We might end up in a very good
place, but we have no real basis for drawing such a conclusion. <o:p></o:p></div>
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Moreover, contrary to Chuck’s claim, the fact is that, over
the next couple of years following the 1989 minimum wage boost, Oregon unemployment
increased substantially (just as it did in the rest of the US). Eventually, the
economy picked up, but ever since, Oregon’s unemployment level has exceeded
that of the US, despite faster GDP growth overall. Of course, the 1990-92 recession,
not the increase in the minimum wage, caused the fall in employment. But there
is some <a href="http://econweb.ucsd.edu/~mwither/pdfs/Effects%20of%20Min%20Wage%20on%20Wages%20Employment%20and%20Earnings.pdf">evidence
of a possible link</a> between Oregon’s 1989 minimum-wage hike and the
persistence of higher levels of unemployment after the recession, i.e.,
evidence that the timing of minimum wage hikes matters, not just their size. <o:p></o:p></div>
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Some might argue, therefore, that, before taking a leap into
the dark, it might be better to see how things work out in Seattle, Los
Angeles, and Chicago. But such caution mostly applies to giant leaps. A
minimum-wage boost to $13.50 is not really a giant leap: we are talking about a
>$2 billion shift in a >$150 billion economy (with the net gain to below-median-income
households of $200-$600 million). <o:p></o:p></div>
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Of course, from a welfare standpoint, it is too bad that the
attention given to boosting minimum wages isn’t focused on policies that are
better targeted at low-income families and the working poor: the preservation
and expansion of the social safety net, especially foodstamps, aid to needy
families, and unemployment benefits. There is clear, unambiguous evidence that
these policies materially improve the welfare of low-income households. Moreover,
states that pursue these policies have lower rates of infant mortality, less crime,
higher earnings, and better education outcomes. There is even some evidence
that these policies are associated with greater social mobility, which is evidently
not the case for minimum wage policies.<o:p></o:p></div>
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It’s also too bad that those who are primarily concerned
with the working poor don’t concentrate on the expansion of Oregon’s earned
income-tax credits (EITC) or on <a href="http://www.ocpp.org/2015/11/05/fs20151105-oregon-eitc-participation/">increasing
participation of Oregonians in the federal EITC</a>. Unlike minimum wages, these
programs target their benefits exclusively to the working poor and are
implicitly financed by personal income taxes, which are progressive at both the
federal and state level, rather than consumption, which is not. Indeed, the
net-gain to low-income Oregonians from boosting participation in EITC to 100%
(i.e., if all of those eligible to participate did so) might be as much as half
the gain to low-income households from the proposed minimum-wage boost. <o:p></o:p></div>
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Because the most important reason for under-participation in
the EITC is the failure to file a tax return, which, as a result of
withholding, leads to over collections from low-income taxpayers of up to $200
million per year in Oregon and probably a comparable amount in federal income
taxes, we could be talking about net gains to low-income households from fixing
EITC participation that are actually larger than those of a minimum-wage boost.<o:p></o:p></div>
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The policies are not inherently rivals (indeed, a good case
can be made that they are complements). We could do both; but we probably
won’t. In this case the not-so-bad looks like the enemy of the pretty-good. I’m
not against increasing the minimum wage, but we could do better.<o:p></o:p></div>
Patrick Emersonhttp://www.blogger.com/profile/17242234148546323374noreply@blogger.com1tag:blogger.com,1999:blog-3471471289744825428.post-87135192386209810252015-10-07T12:36:00.004-07:002015-10-07T12:36:52.080-07:00Fred Thompson: The OTIM: New & Improved<i><a href="http://www.willamette.edu/~fthompso/">Fred Thompson</a> with another dispatch</i>:<br />
<br />
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I had thought about making this month’s contribution to
Oregon Economics on the <a href="http://www.epi.org/blog/disappointing-jobs-numbers-and-not-enough-teachers/">looming
teacher shortage</a> in Oregon or the misunderstandings reflected in <a href="http://www.ktvz.com/news/audit-state-debt-collection-falls-short-owed-nearly-double/35560318">the
public reaction</a> to the Secretary of State’s <a href="http://sos.oregon.gov/audits/Documents/2015-25.pdf">audit</a> of the $3
billion that citizens and businesses owe the State, but when I went looking for
numbers to back up my analysis on the first topic I found I was too late to say
much of anything new. Educators have been <a href="http://dianeravitch.net/2012/09/18/are-we-decimating-the-teaching-profession/">predicting
a crisis</a> for the past two years and even <a href="http://www.npr.org/sections/ed/2015/03/03/389282733/where-have-all-the-teachers-gone">PBS
has covered the topic</a>, although they haven’t taken account of the
implications of improving job prospects elsewhere for teacher recruitment and
retention. As for responding to the audit’s reception this is probably not the
best place for that.<o:p></o:p></div>
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Consequently, I decided to comment on the Legislative
Revenue Office’s (LRO) roll out of the updated Oregon Tax Incidence Model
(OTIM), which was presented by LRO’s head, Paul Warner, to the House Interim
Revenue Committee during legislative days at the end of September. I’ll briefly
describe the model and the simulations run by the LRO for the committee,
showing how OTIM works. (Disclosure, I am a member the Oregon Tax Incidence
Modeling team’s academic advisory board.)<o:p></o:p></div>
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://4.bp.blogspot.com/-9IptV1nndu0/VhVztg5mXpI/AAAAAAAAMG8/eP-uLCcbvZA/s1600/FT%2B10%2B7%2B2.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="239" src="http://4.bp.blogspot.com/-9IptV1nndu0/VhVztg5mXpI/AAAAAAAAMG8/eP-uLCcbvZA/s320/FT%2B10%2B7%2B2.png" width="320" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Paul Warner Testifying</td></tr>
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The <a href="https://olis.leg.state.or.us/liz/2015I1/Downloads/CommitteeMeetingDocument/80363">Oregon
Tax Incidence Model</a> is dynamic, general-equilibrium, simulation tool based
on a <a href="https://olis.leg.state.or.us/liz/2015I1/Downloads/CommitteeMeetingDocument/80362">dynamic-scoring
model</a> developed for the California State Department of Finance, modified by
the LRO and academics from Oregon State University and the University of
Washington. OTIM sits on an Impact Analysis for Planning (IMPLAN) software platform,
using current (2012) state-level data from the Departments of Revenue and
Employment. The model estimates the long-term equilibrium effects of tax
changes on state income and output in aggregate and by industry, state, local,
and federal tax revenue, and tax incidence by income group. The recent update
is the first comprehensive overhaul of the OTIM since 2001. <o:p></o:p></div>
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The LRO reported on the simulated effects of three
“revenue-neutral” tax changes. <a href="https://olis.leg.state.or.us/liz/2015I1/Downloads/CommitteeMeetingDocument/80386">The
first</a> looked at the effects of adopting a 0.4 percent gross-receipts tax
like Ohio’s Commercial Activities Tax, offset by an increase in the
personal-income-tax standard deduction to $14 thousand for a single person and
$28 thousand for a joint return. <a href="https://olis.leg.state.or.us/liz/2015I1/Downloads/CommitteeMeetingDocument/80385">The
second</a> looked at a 0.5 percent gross-receipts tax offset by a ‘homestead property-tax
exemption” of $125 thousand and <a href="https://olis.leg.state.or.us/liz/2015I1/Downloads/CommitteeMeetingDocument/80384">the
third</a> at restoring property tax assessments to Real Market Value (the
situation prior to the enactment of Measure 47) offset by a ‘homestead
exemption’ of <span style="mso-spacerun: yes;"> </span>$200 thousand. All three
of these changes would almost certainly tend to make Oregon’s state and local
tax system, arguably the most progressive/least regressive in the nation, even
more progressive. However, I’ll focus on the first of the simulations because
its results are probably more reliable than are the other two and, in any case,
more defensible, since they are, in fact, pretty straightforward.<o:p></o:p></div>
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The following Table shows the gross effects (in millions of
dollars) of a gross-receipts tax, offset by an increase in the standard
deduction. <o:p></o:p></div>
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Note that the main effect is to increase economic activity,
although not by a lot. This is primarily a result of a redistribution of income
to households with higher propensities to spend and, thereby, somewhat
increased aggregate demand. Since the model starts where we are now, i.e., with
some economic slack, it predicts that the tax changes will result in increased
economic activity rather than higher prices.<o:p></o:p></div>
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The distributional consequences of this change are shown in
the following graphics. They reflect the design of Oregon’s existing personal
income tax system and the effects of a gross-receipts tax under the proposed
changes. They are fairly noteworthy.<o:p></o:p></div>
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<a href="http://4.bp.blogspot.com/-FO_HfUvFGFU/VhVzuLUbVWI/AAAAAAAAMHA/gQAW8BLpGQc/s1600/FT%2B10%2B7%2B4.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="93" src="http://4.bp.blogspot.com/-FO_HfUvFGFU/VhVzuLUbVWI/AAAAAAAAMHA/gQAW8BLpGQc/s320/FT%2B10%2B7%2B4.png" width="320" /></a></div>
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What’s a gross-receipts tax? Ohio’s commercial activity tax
(CAT) is, for example, a tax imposed on gross receipts from all business
activities, including most commercially provided services. The CAT applies to most
businesses located within the state and also to out-of-state businesses that
have ‘minimum contacts’ with the state, but not to non-profit organizations,
governmental entities, public utilities, dealers in intangibles, financial
institutions, or insurance companies. While <a href="http://taxfoundation.org/article/gross-receipts-taxes-state-government-finances-review-their-history-and-performance.">not
exactly sales taxes</a> (gross-receipts taxes are levied at each stage in a
product or service’s value chain creating effective rates for some goods that
are many times higher than others), it is <a href="https://en.wikipedia.org/wiki/Gross_receipts_tax">not unreasonable</a> to
treat gross-receipt taxes as if they were (as does the OTIM) or to presume that
their cost will fall entirely to consumers, more or less proportionally to
purchases of goods and services that are subject to the tax. The income-tax
consequences of increased standard deductions are estimated directly from
household tax records, understanding that most high-income taxpayers will
continue to itemize rather than take the standard deduction. Hence, like
everyone else, they will pay their share of the gross-receipts tax, but would
not benefit from the personal-income-tax break (that is also true of low-income
households, since they seldom pay income taxes under the status quo).<o:p></o:p></div>
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<a href="http://3.bp.blogspot.com/-ywzHe0VVWKE/VhVzuPyxXEI/AAAAAAAAMHE/-VHc9zk_rZg/s1600/FT%2B10%2B7%2B5.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="123" src="http://3.bp.blogspot.com/-ywzHe0VVWKE/VhVzuPyxXEI/AAAAAAAAMHE/-VHc9zk_rZg/s320/FT%2B10%2B7%2B5.png" width="320" /></a></div>
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This is both useful and reliable information. Perhaps the
most important point made by the OTIM is that the benefits produced by this tax
change are due entirely to the increase in the standard deduction. It also
tells us that paying for such a tax cut by gross-receipts tax would not wipe
out its gains altogether. Nevertheless, it’s also clear that the net effect
would be fairly small. <o:p></o:p></div>
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Moreover, there are policy relevant tax facts that the OTIM
doesn’t address. In this case, no estimate is made for the increased
administrative cost associated with collecting a new tax. Chances are that the
incremental cost would not exceed increased collections, but that is by no
means certain (and, in any case, this increase depends on the persistence of a
sluggish economy). Furthermore, the model is silent about the dead-weight
efficiency costs (compliance and misallocation of resources) a gross-receipts
tax would impose upon the economy. Based on <a href="http://www.washingtonpolicy.org/blog/post/senate-work-session-focuses-wpc-bo-reform-proposal">Washington’s
dissatisfaction with its gross-receipts ta</a>x, it is not unreasonable to
assume that these are <a href="https://www.washingtonpolicy.org/sites/default/files/Single%20business%20tax.pdf">significant</a>,
if not necessarily substantial. <o:p></o:p></div>
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Finally, the OTIM is a computational dynamic model, not a
stochastic one. It doesn’t tell us what the effect of tax changes will be with
respect to the volatility of the economy (in this case almost certainly
trivial) or on the volatility of revenues. One thing we know for certain is
that revenue volatility is driven primarily by the progressivity of the tax
system. This change would make the tax system more progressive, ergo it should
increase revenue volatility. That’s not necessarily a bad thing, of course, but
it has implications for expenditure smoothing via saving or borrowing that should
be addressed prior to a move in this direction.<o:p></o:p></div>
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Patrick Emersonhttp://www.blogger.com/profile/17242234148546323374noreply@blogger.com0