tax policy

  • Source: "Getting the most out of business taxes"  

    No connectionThe standard GOP narrative involving corporate tax rates is that if you reduce the rate, you will increase business investment. The Economist divided the OECD countries into four quartiles based on their corporate tax rates, highest to lowest. They then looked at the relationship between the level of the corporate tax rate and bot business investment and corporate tax revenue - there is not much of a relationship. See chart. 
    Some features of corporate tax rates - first, differences in rates can cause some companies to shop around for the best rate But other factors determine company location besides tax rates (supply chains, transportation access etc.). Also, the highest corporate tax rates tend to be in resource-rich countries. Natural resource extraction creates captive companies. Why don't we just eliminate the corporate tax rate altogether and just tax shareholders directly? First, many shareholders like pension plans are tax exempt. Also, eliminating the corporate tax would give incentives to individuals to incorporate themselves.

     

  • Source - Economist, Nov 10, 2018: "A gamble gone wrong"     

    Haiti is a mess. Still recovering after a 2010 earthquake that killed 200,000 people, the President of Haiti is Jovenel Moise, head of the "Shaved Head" Party, who came to power with big promises of massive infrastructure projects and uninterrupted electricity. These promises cost money and Haiti has an incredibly narrow tax base - just 70,000 income tax returns were filed last year in a country of 11 million people. The $300 million a year Haiti was receiving in aid from Venezuela has also stopped due to the ongoing economic crisis there. Aid donations from abroad usually go to NGO's, not the Haitian government because of corruption concerns. All this means Haiti can only spend about 5% of its already low GDP on health, education and social safety net programs (compared to 15% for nearly-as-poor Honduras).  

    Moise sought to free up money by ending the fuel subsidies (about $350 million a year) his government pays out to keep gasoline cheap. As only the wealthiest Haitians can afford a car, these subsidies benefit the wealthy. 85% of the fuel subsidies benefit the wealthiest ten percent of Haitians. Yet, when they were cut (raising gas prices by about 40%) - riots erupted. And they were hard to stop. Haiti abolished its army in 1995 and UN peacekeepers left Haiti for good in October of 2017. The inability of the Haitian police to stop the fuel riots raises serious doubts about its ability to handle any future unrest. 

  • Article: "The red and the brown"  

    Tax reform hasn’t been accomplished in the US since 1986.Where once the passage of bills was smoothed by including federal money for pet projects in congressmen’s districts, tax breaks are now the preferred lubricant. The growth of the federal tax code, which has tripled in length in the past 30 years, is often cited as proof that the country is overtaxed. But its size reflects all those special tax breaks. For individuals, the exemptions turn a tax system whose headline rates are redistributive, by rich-world standards, into one which is not. The two most popular exemptions are the mortgage interest and charitable giving deductions, both of which will be difficult to change.

    The same is true of company taxation. The top marginal rate, of 39%, is an outlier by international standards (the OECD average is 25%). But between 2006 and 2012, two-thirds of companies paid no federal tax, according to a study by the Government Accountability Office (GAO). Large companies that were profitable paid a federal tax of 14% on their net income between 2008 and 2012, according to the GAO, a rate that rose to 22% once state and local taxes were included.

    Killing the special exemptions will be critical but will be the hardest to accomplish politically as those exemptions exist because of powerful, influential lobbyists. Over 230 House Republicans have signed a pledge not to vote for any tax rise, giving them cover to reject a bill that offends constituents or donors by killing a tax break.

    >Interesting comment: “Mitt Romney had one decent idea back in 2012, and that is to set a limit on either the amount of deductions or the percentage --- say a maximum of $50,000 deductions, or perhaps cap it at 10% of gross income. “

  • Source - Economist, Nov 10, 2018: "A misshapen economy"     

    Mexico's economy is surprisingly sluggish. Real GDP per person grew at an annual rate of 1.2% a year between 1995 and 2015 - one of the slowest rates in Latin America. Economist Santiago Levy (new book is Under-rewarded Efforts - The Elusive Quest for Prosperity in Mexico) believes the slow economic growth has to do with tax policies that create perverse incentives.

    From the article: "Mexico has a huge and disproportionate number of small businesses, and unusually wide variation in the productivity of its companies. The census under-counts small firms because it excludes those that lack fixed premises (such as taco stands) and those in villages of fewer than 2,500 people. Even so, more than 90% of the 4.1m firms in the 2013 census had at most five workers. And 90% of the total were “informal”, absorbing almost 33% of the capital stock and 40% of workers. Rather than “informality”, the key distinction Mr Levy makes is between firms that have salaried employees and those that do not. Four-fifths of the “informal” firms are in the second category: their staff are either self-employed or paid piece-rates or profit shares. These firms’ only legal obligation is to pay corporate tax, of just 2% of revenues if these are under 2m pesos ($105,000) a year. Firms with salaried workers, by contrast, must pay social insurance, deduct income tax and grapple with employment law (which doesn’t allow them to fire people if business drops). The census shows that firms with salaried workers are much more productive. So it is worrying that from 1998 to 2013 the weight of non-salaried firms in the economy grew. Mr Levy argues that public policies are to blame. In the name of social inclusion, in the period under study, Mexico introduced non-contributory pension and health benefits worth 1.3% of GDP, thereby helping non-salaried workers, while raising income taxes on salaried ones to the tune of 1.9% of GDP. 

    The solution? Levy thinks that Mexico needs to replace restrictions on firing with unemployment insurance and shift the tax burden away from payrolls, abolish tax perks for small firms and take contract enforcement more seriously. The prize would be faster growth, better social provision and better-paid jobs.