Global Corporate Tax Revenues Are a Total Laffer

The Economist points us to a rather telling chart about the amount of revenue (as a percentage of total GDP) that major industrialized nations collect from corporate taxes:

The story accompanying the chart makes two very important points.  First, they talk about the impact of global tax competition on corporate tax rates, and what happens in a modern, globalized economy if a typical nation tries to tax its way to revenue abundance:

Two countries stand out from the top of the table – Australia and Norway. Both have the benefit of natural resources and can thus get tax revenue from “captive” companies. Other countries have to compete to attract manufacturing and service companies; their take from the corporate sector thus hovers between 2-4% of GDP. America is at the bottom of the range, although its tax take from this area is not as exceptional as for consumption. (An important caveat is that total tax revenue in the US is around 10 percentage points below the OECD average, so one would expect it to lag behind in individual categories.) Some will cite this table as an argument for taxing profits more heavily, by closing loopholes and eliminating tax breaks. The counter-argument is that companies have three options: to pass on the taxes in the form of higher prices; to offset the effect on their margins by employing fewer workers, or paying existing workers lower wages; or by moving to a more tax-friendly domicile.

In short, if a nation raises corporate taxes on "non-captive" manufacturing and service industries, the victimized companies will eventually just leave (and take their jobs and revenues with them).  And I'd be remiss to not mention the embarrassing little fact that the United States has the highest statutory (and effective) tax rate in the industrialized world:

It is simply unfathomable that this chart has nothing to do with the first chart, wouldn't you agree?  But hey:  We're number 1!  We're number... oh, wait.

Second, and on a very related point, the Economist highlights the extreme fallacy that global tax competition starves national budgets of sweet, sweet tax revenue:

Note, by the way, that there is a big difference between tax rates and tax take. The French complain about unfair tax competition from the Irish (the latter have a 12.5% rate) but the Irish actually get a higher proportion of their GDP in tax revenue than the French. And note also that there may not be scope to raise huge amounts from this area, unless you are as lucky as the Norwegians. Even if America were to move to the OECD average, that would only boost the tax take by around 1% of GDP, when the deficit is in double digits.

So much for the pervasive argument from those on the left that America's insane budget problems can be solved by just taxing evil corporations (and rich people), eh?  But here I'm a little confused: despite the great data showing that (i) global tax competition can have dire revenue consequences for countries with itchy taxing fingers; and (ii) lower corporate tax jurisdictions often raise higher amounts of total revenue, not once does the Economist mention the Laffer curve, which posits that higher taxes can (i) reduce work effort, (ii) cause other inefficient distortions, and (iii) reduce the size of the tax base (thus often reducing total tax revenues).  A generic representation of the Laffer curve is as follows:

Higher taxes can cause individual taxpayers to slack off or figure out ways to report less taxable income.  But most people don't make life decisions based only on tax rates, and only the wealthiest folks can up and leave a high-tax jurisdiction (at the national level, that is - New Jersey and Maryland, among others, are losing millionaires by the yacht-load).  Thus, the "tax elasticity" in the individual case is less severe.  Corporations, on the other hand, are far more rational (i.e., driven by the bottom line) and mobile, and they therefore can, and often do, vote with their feet.  The Economist's data make these facts abundantly clear (as do myriad studies on corporate taxes in a modern globalized economy).

I'll leave it to others to question why the Economist didn't bring up the Laffer curve when the evidence so strongly points to it.  Instead, I just have one, more pointed closing question:  Why on earth does the United States have such ridiculously high corporate tax rates?  Is it because we just have too many darn jobs and too much economic growth?  Or is our economy just too darn competitive?

Or is awful ideology standing in the way of obvious and much needed tax reform?

I think the answer there is as obvious as the charts above.

Mankiw: You Don't "Win the Future"

Greg Mankiw has a great op-ed in tomorrow's NYT about the wrongheadedness of trying to "win the future," as President Obama challenged us to do in his State of the Union Address.  Mankiw hits on several of the fundamental issues that I've discussed here, including the President's continued - and misguided - adherence to what I call "adversary economics."  I highly recommend the whole thing.  Here's a sample:

[C]alling on Americans to “win the future” misleads us about the nature of the policy choices ahead. Achieving economic prosperity is not like winning a game, and guiding an economy is not like managing a sports team.

To see why, let’s start with a basic economic transaction. You have a driveway covered in snow and would be willing to pay $40 to have it shoveled. The boy next door can do it in two hours, or he can spend that time playing on his Xbox, an activity he values at $20. The solution is obvious: You offer him $30 to shovel your drive, and he happily agrees.

The key here is that everyone gains from trade. By buying something for $30 that you value at $40, you get $10 of what economists call “consumer surplus.” Similarly, your young neighbor gets $10 of “producer surplus,” because he earns $30 of income by incurring only $20 of cost. Unlike a sports contest, which by necessity has a winner and a loser, a voluntary economic transaction between consenting consumers and producers typically benefits both parties.

This example is not as special as it might seem. The gains from trade would be much the same if your neighbor were manufacturing a good — knitting you a scarf, for example — rather than performing a service. And it would be much the same if, instead of living next door, he was several thousand miles away, say, in Shanghai.

Listening to the president, you might think that competition from China and other rapidly growing nations was one of the larger threats facing the United States. But the essence of economic exchange belies that description. Other nations are best viewed not as our competitors but as our trading partners. Partners are to be welcomed, not feared. As a general matter, their prosperity does not come at our expense....

The president is right that we should encourage a greater number of highly educated foreigners to migrate here. Because skilled workers pay more in taxes than they receive in government benefits, increasing their supply would reduce the fiscal burden on the rest of us. But if these foreign students decide to return home, as many do, we shouldn’t worry that they are competing against us.

Instead, we should view higher education in the United States as one of our most successful export industries. The United States has 5 percent of the world’s population but most of the best universities. Is it any wonder that students from many nations flock here to learn? And as they do so, they create opportunities for Americans — from the professors who teach the classes to the grounds crews who maintain the campuses.

When the foreign students head home, they take the human capital acquired here to become productive members of their own communities. They spread up-to-date knowledge, so it can foster prosperity everywhere. Some of this knowledge is technological. Some of it concerns business, legal and medical practices. And some is even more fundamental, such as the values of democracy and individual liberty. Nothing could be better for the United States than these thousands of American-trained ambassadors who have seen at first hand the benefits of a free and open society.

Good stuff.

Politicians' Misguided Reliance on Conventional Trade Statistics, part 47

One of this blog's many non-monkey-related themes has been the realization that 21st century global supply chains have rendered conventional trade statistics like the trade balance wholly unreliable indicators of the efficacy of current trade policy.  Economist Mark Perry points us to yet further proof of this fact from a fascinating article in yesterday's WSJ about a new study on the origins of the iPhone and its impact on the US-China trade deficit.  The WSJ story also hits on the political implications of this important research (emphasis mine):

One widely touted solution for current U.S. economic woes is for America to come up with more of the high-tech gadgets that the rest of the world craves.

Yet two academic researchers estimate that Apple Inc.'s iPhone—one of the best-selling U.S. technology products—actually added $1.9 billion to the U.S. trade deficit with China last year.

How is this possible? The researchers say traditional ways of measuring global trade produce the number but fail to reflect the complexities of global commerce where the design, manufacturing and assembly of products often involve several countries.

"A distorted picture" is the result, they say, one that exaggerates trade imbalances between nations.

Trade statistics in both countries consider the iPhone a Chinese export to the U.S., even though it is entirely designed and owned by a U.S. company, and is made largely of parts produced in several Asian and European countries. China's contribution is the last step—assembling and shipping the phones.

So the entire $178.96 estimated wholesale cost of the shipped phone is credited to China, even though the value of the work performed by the Chinese workers at Hon Hai Precision Industry Co. accounts for just 3.6%, or $6.50, of the total, the researchers calculated in a report published this month....

The result is that according to official statistics, "even high-tech products invented by U.S. companies will not increase U.S. exports," write Yuqing Xing and Neal Detert, two researchers at the Asian Development Bank Institute, a think tank in Tokyo, in their report.

This isn't a problem with high-tech products, but with how exports and imports are measured, they say.

The research adds to a growing debate about traditional trade statistics that could have real-world consequences. Conventional trade figures are the basis for political battles waging in Washington and Brussels over what to do about China's currency policies and its allegedly unfair trading practices....

 

Breaking down imports and exports in terms of the value-added from different countries can lead to some controversial conclusions. Some U.S. lawmakers, for instance, argue China needs to let its currency rise significantly against the U.S. dollar in order to reduce the trade gap between the two nations. 

The value-added approach, in fact, shows that sales of the iPhone are adding to the U.S. economy—rather than subtracting from it, as the traditional approach would imply.

Based on U.S. sales of 11.3 million iPhones in 2009, the researchers estimate Chinese iPhone exports at $2.02 billion. After deducting $121.5 million in Chinese imports for parts produced by U.S. firms such as chip maker Broadcom Corp., they arrive at the figure of the $1.9 billion Chinese trade surplus—and U.S. trade deficit—in iPhones.

If China was credited with producing only its portion of the value of an iPhone, its exports to the U.S. for the same amount of iPhones would be a U.S. trade surplus of $48.1 million, after accounting for the parts U.S. firms contribute....

The latest results are broadly similar to analyses made by the Personal Computing Industry Center at the University of California, Irvine, of the trade and manufacture of another Apple product, the iPod. That research also found that Chinese labor accounted for only a few dollars of the iPod's value, even though trade statistics credited China with producing its full value....

Awesome.  The new study is available here, and it adds to a growing number of studies which show, as I've chronicled extensively over the last two years, that globalization - in particular global supply chains, multinational specialization, cross-border investment and realtime logistics - has rendered old school trade stats increasingly worthless for everything except raw materials/foodstuffs and the most basic industrial goods.  This latest work is especially cool because it shows that the United States derives almost twice as much as China from the actual manufacturing of the iPhone - a little tidbit that should quell some (misguided) criticisms of an earlier iPhone study which showed that, of the iPhone's $600 retail price, the United States derived $360 "only" from services (design, engineering, marketing) and profit, as opposed to manufacturing. (China got only $6.54 for assembly.)

Unfortunately, as the WSJ article mentions, many American politicians and so-called "experts" still rely on these obsolete data, in particular bilateral trade balances, to justify their trade policy demands, whether it be for Chinese currency appreciation or solving global "imbalances" or any other policy prescription that could have massive ramifications for the global economy and, in many cases, create serious new conflicts with some of our largest trading partners.  For example, on the same day that the WSJ published this story, Sen. Ron Wyden (D-OR) released a new "report" breathlessly complaining about evil Chinese "green" protectionism and demanding that the Obama administration take action to "combat" China's policies.  And Wyden's only proof of foul play?  Yep, the US-China trade deficit in green goods:

“It has become clear to me that China’s aggressive and targeted industrial policies are giving its producers and exporters of green goods an unfair leg up on the competition, so much so that our green good trade deficit with China grew even while our overall trade deficit in these products shrank,” Wyden said, Chair of the Senate Finance Committee’s Subcommittee in International Trade. “Even in a good year, American workers and producers in Europe and Japan are falling prey to what appear to be unfair practices employed by China. A unified approach is needed to combat these challenges and I urge Ambassador Kirk and Secretary Locke to make clear to China that the U.S. places a high premium on a fair market for green goods.”

The report shows that the U.S. trade deficit with China in green goods grew by almost 60 percent, to $954 million in 2010, even as the U.S. green goods trade deficit with other countries shrank. The report also shows that the U.S. exported more green goods in 2010 than at any time in the previous five years. Despite this growth, U.S. exporters continue to lose market share to the Chinese in the biggest and fastest growing markets.

So to recap: on the same day that the nation's most-read newspaper published a big story about how global supply chains have (i) completely ruined conventional statistics on trade in high-tech goods and (ii) seriously undermined policies based on said data, Sen. Wyden released a new report advocating a fight with America's second-biggest trading partner based solely on the very trade stats that the WSJ article has just debunked.

You simply cannot make this stuff up.  And it's just further proof that in the 21st century, using the trade deficit to plan US trade policy makes about as much sense as using astrology to plan your retirement.  It might've been what they did in the old'n days, and it might've even worked for a few people, but it sure as heck ain't the best way to ensure a reasonable return on your investment.

All humor aside, this little coincidence also raises a very serious point.  Since the original 2007 UC-Irvine study on the iPod and global supply chains, there have been many scholarly analyses revealing the obsolescence of conventional trade statistics like the US-China trade balance.  Cato's Dan Ikenson has written several very good policy papers on this issue (including one we co-authored back in 2009); smart, widely-read bloggers like Mark Perry (and, to a much lesser extent, your humble correspondent) have repeatedly highlighted this important work; and newspapers like the WSJ and NYT have reported on the issue several times over the last few years.  So, while the ADB's new iPhone study is certainly interesting and worth noting, it's not like it's really groundbreaking stuff.  These issues have been widely-known, even in the mainstream press, for several years now.

Yet politicians like Sen. Wyden (and trust me, he's not alone) still rely on the trade deficit as some sort of accurate barometer for US and global trade policy.  Indeed, the statistic is often the only basis for their calls for greater protectionism or more aggressive unilateral/multilateral trade "enforcement" actions - things that would dramatically alter, if not implode, the global economy.  At some point, mustn't we ask whether our duly-elected representatives are acting not out of somewhat-humorous ignorance, but instead out of willful and pernicious blindness to the realities of globalization and the dangerous implications of their mind-numbingly absurd plans?  I mean, at some point, don't we have to stop giving Wyden and his cohorts the benefit of the doubt and start demanding that they immediately cease and desist with the silly, dangerous trade deficit demagoguery? 

Seems like a no-brainer to me.

Sunday Quick Hits

Lots going on over the last week, and I'm traveling today, so let's just get right to it:

• Economist Ray Fair explains in detail why he believes that RMB appreciation will be a net negative for the US economy.

• Ever wonder why so many politicians campaign with impunity against free trade in Democrat primaries?  Well, this fun new survey suggests that they're just playing to their target audience. (Snicker snicker.)

• Chinese officials assert that American legislation (or administrative action) to attack China's currency policies through US anti-subsidy laws would violate WTO rules.  As I've already noted, they are probably right.

• In one quick little blog post, Paul Krugman finally admits that (a) he doesn't understand global trade rules; and (b) he just doesn't care about them.  Krugman disregarding the rule of law?  Shocking, I know!  Of course, he could've read this helpful blog entry and saved himself the embarrassment.

• The Bush Institute's Jim Glassman hosts an interesting video debate on "Doubling Exports - Rhetoric or Reeality?" between Cato's Dan Ikenson and Public Citizen's Lori Wallach.

• Speaking of Ikenson, he provides the "Charts of the Week" - maybe even the month - which clearly and concisely demonstrate just how critical import competition is for American families and businesses.

• And then Ikenson's colleague Dan Griswold unpacks the most recent US trade data to explain how - assuming you're a sane, apolitical person (I know, I know) - the stats argue against attacking China's currency.

• More on ObamaCare and America's global competitiveness: here's a handy listing of all the US companies that have announced tax hits (and the amount of the hit) because of the new US healthcare law.  Ouch.

• The Peterson Institute's Gary Hufabauer and Theodore Moran explain how the recently-passed American Jobs and Closing Tax Loopholes Act will destroy American jobs and hobble US exports.  They show that the legislation's "tax measures would cost $14 billion over 10 years for the foreign operations of US-based multinational corporations."  Awful.

• And speaking of awful American fiscal policy, Art Laffer explains how the seemingly-inevitable tax increases in 2011 (when the Bush tax cuts expire) will crush any US economic recovery, while Mark Calabria shows that Obamanomics is already doing a number on the struggling US labor market.  Oh, goody.

• Finally, the Atlas Institute's Tom Palmer explains free trade in under 3 minutes in the following video.  A little basic for readers of this blog, but a nice thing to share with family/friends who don't obsess about this stuff like I do.

ObamaCare and America's Global Competitiveness

As part of my ongoing examination of the effects of American healthcare "reform" (aka ObamaCare) on the United States' global economic competitiveness comes this interesting news out of Raleigh, North Carolina:

Blue Cross and Blue Shield of North Carolina is testing a plan that would outsource some information technology work to India.

The state's largest health insurer is looking for ways to reduce costs as the recession has slowed membership growth and health reform looms. This week, Blue Cross started a "small pilot project" with Keane, a Boston-based information technology firm, to extract and analyze data from the insurer's massive electronic repository. Some of the work will likely be handled at a Keane facility in India, said Blue Cross spokesman Lew Borman.

"It does not affect any current jobs, but I can't speak to down the road," Borman said. "We're looking at a variety of ways to operate more efficiently and keep premiums affordable. It's about costs and cost savings for North Carolinians."...

Outsourcing or offshoring has been a trend in corporate America for years, but has come under fire from lawmakers and other critics as unemployment remains stubbornly high. When any company does it for the first time, there's the potential for a backlash from consumers and others, said Jim Johnson, a professor of strategy and entrepreneurship at UNC's Kenan-Flagler Business School....

[H]ealth reform is forcing many medical companies to find ways to cut costs, Johnson said. Reform will also bring a host of data-management challenges. Last year's federal stimulus bill included billions of dollars to entice physicians, hospitals and others to adopt electronic medical records, which can improve efficiency and reduce errors.

As some companies hire outside firms to handle that work, they have to look to global information technology providers with operations in cheaper countries. "The cost differential is just too wide," Johnson said....

What's most interesting about this news is that, unlike those billions in new tax costs that US companies were forced to incur (and report) after ObamaCare became law, the moves by BCBS are not in response to actual higher costs, but only the threat of such costs in the future.  Yet each demonstrates a clear pattern: ObamaCare is placing more artificial burdens on American companies and workers - already some of the most heavily burdened in the world.  These tax and regulatory burdens reduce America's global competitiveness and, where those costs outweigh the benefits of staying onshore (i.e., the "tipping point"), companies and/or jobs are forced offshore.

Of course, one of the biggest criticisms of the US healthcare "reform" legislation was that it would actually increase costs for health insurers and American businesses, so BCBS' response here is totally and utterly expected - it's what good businesses do to, you know, stay in business.  Nevertheless, you really must wonder how many other insurers and other companies are already researching and or/employing similar cost-saving measures in order to absorb ObamaCare's current or future burdens and remain operational. 

And it's all to the detriment of American companies, workers and the overall economy.