Beer Taxes!

Update: The Tax Foundation sent out a corrected map this morning (3/18)

This was prepared for St. Patrick's Day, no doubt (thus the green):

Fred Thompson: Minimum Wages and Childcare

Fred Thompson checks in with another take on minimum wages

Oregon’s leading economic blogger, Mark Thoma, recently called for an increase in the national minimum wage. I have no problem with the thrust of his proposal, but I do question some of his economic analysis.

Mark asks, “doesn’t an increase in the minimum wage reduce employment?” And, answers, “No.”

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 (Dube, Lester and Reich, 2010), although typically not much or for long (Congressional Budget Office, 2014). 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 do not measurably reduce total employment (Card and Krueger 1995; Neumark and Wascher, 2008; Dube, Lester, and Reich, 2010; Doucouliagos and Stanley, 2009; Lerner, 2014; Schmitt, 2015). 

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.”

Here Mark goes beyond the evidence: it appears that the main responses to moderate minimum-wage hikes are (usually small) price increases (Aaronson, 2001; Lemos, 2008; Aaronson, Agarwal, and French, 2011; Hirsch, Kaufman, and Zelenska, 2015), wage compression (Autor, Mannning, and Smith, 2016; Hirsch, Kaufman, and Zelenska, 2015, 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 (Howes, 2005). Lemos (2008) 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 (2011), who concluded that the adoption of a minimum wage significantly reduced profitability in the United Kingdom.

According to Schmitt (2015) 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, the effects of minimum wage changes are tiny. 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. 

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 (2015) or Sabia (2008)) or industries (usually quick-service restaurants, although Howes (2005) looks at home healthcare and Draca, Machin, and Van Reenen (2011) at residential care homes in the UK) to suss out the effects of minimum-wage hikes for individuals, workers or service recipients, and enterprises.

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.  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.

For example, in the bellwether industry my colleagues (Kawika Pierson, Jon Thompson, and Robert Walker) and have looked at here in Oregon, childcare, 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.

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.

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.

Fred Thompson: Tax Mavens Talk About Disappearing State Corporate-Income-Tax Revenues; Oregon Did Something About It

 Fred Thompson checks in with the second of his two-part post.  The first one appeared last week.

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.

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.

Economists don’t like turnover taxes. The Diamond-Mirrlees production-efficiency theorem 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, turnover taxes are hard to avoid and relatively cheap to enforce, much more so on both counts than state corporate-income taxes. Consequently, I found it fairly easy to support Measure 67’s alternative minimum turnover tax, as an effective complement to the corporate income tax, 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.

But there’s more: Oregonians pay high taxes, partly because we face fairly high tax rates, but a lot of the taxes that we pay are actually paid to other states (and to jurisdictions in other states). On a per-capita basis, Oregon is one of the nation’s leading net tax exporters. Consequently, Oregon’s per capita state and local tax collections 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. 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 and pay CITs in other states, even where those CIT rates are lower. Minimum alternative turnover taxes tend, thereby, to reduce tax exports.

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.

Nevertheless, there are a variety of proposals to increase or extend Oregon’s turnover tax. The group, A Better Oregon, is seeking to put an initiative on the ballot that would 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 25 times (2500 percent!).  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).  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 strengthen Oregon’s economy. Personally, I’d prefer it if experiments like this were performed in some other laboratory of democracy.

The Oregon Legislative Revenue Office recently assessed the consequences of adopting a comprehensive turnover tax (called a commercial activity tax or CAT) 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, relative to repeal of the corporate income tax, 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; relative to increasing the standard deduction or creating a homestead exemption, 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).

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 (as in the proposals assessed by the LRO, 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).

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, “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.”

......

Fred Thompson: Why Are State Corporate Income Taxes Disappearing?

Fred Thompson checks in with the first of a two-part post.  I'll post the second one next week.

They are.

https://plot.ly/~governing/692.embed

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.

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.

However, we know the nation’s 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, which is a lot of avoidance, if not evasion.

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.

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).  As a result, the owners (shareholders) of C corps tend to pay higher tax rates on their businesses’ profits than do the owners of other businesses. That is generally also true at the state level. It is almost certainly the case in Oregon.

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 federal corporate income tax vis á vis personal income tax receipts.

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. Instead, it has fallen nearly twice as fast. Or, perhaps, more clearly, 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. 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 Governing Magazine.

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 real 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 GM evidently excluded revenue from turnover taxes from its figure – see my next post).

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.

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.

However, as the Governing Magazine. 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.

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.

Blog

No, 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...


Update!  Okay, so now there is the Earth.  Upgrade complete.  Like a whole new site...

The Tricky Problem of Child Labor

On NPR this morning there was a report 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.

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.

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.

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.

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.

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.

Fred Thompson: Kickers Redux

Fred Thompson once again keeps the blog alive with another insightful piece.

Patrick Emerson and I have written about the Kicker and its folly 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.

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.

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.

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.

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., grow spending at a sustainable rate, 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).

It might be noted that other states have found the political cojones to repeal automatic triggers. According to Governing Magazine, 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.