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Saturday, December 17, 2011

Democrats' Continued Caves Threaten Middle Class

Via Mark Thoma, David Graham points out that Senate Democrats are caving in on an issue that looked won a week ago, the millionaire's tax.
 [Democrats] were calling for a tax cut, after all, and they had Republicans tying themselves in knots explaining why the party of Reagan and Tea didn't want lower taxes. All the Democrats wanted in exchange for extending the reduction was a small increase in how much the wealthy paid -- a position that was widely popular among voters.
And then Senate Democrats caved, without a peep from the President, despite his "big speech" in Kansas last week on economic inequality.

So what did Democrats get from the apparent deal to avert a government shutdown? A measly two months' extension of unemployment benefits and the payroll tax cut with the extraneous inclusion of language to force a decision within 60 days on the Keystone XL pipeline. No millionaire's tax. And it's not like tax cuts are the most effective form of economic stimulus anyway -- and this one takes money from Social Security.

Let's get a little historical perspective here. Political scientist Sven Steinmo, in his book Taxation and Democracy (1996), wrote that polls had long showed that Americans thought a major problem with the tax system was that the wealthy didn't pay enough tax. Yet the political system then, and in the 15 years since, has been delivering "tax reform" that has done exactly the opposite, reducing taxes on the rich. One has to question exactly how democratic a political system is that cannot deliver a reform favored by a large majority for at least 30 years.

So, here we stood on the verge of getting at least a little movement in the direction favored by a big majority, and Senate Democrats pull the rug out from under us again. As the Occupy movement has pointed out, something is very rotten in the state of American democracy.

As I wrote earlier, we face lots of hostage-taking opportunities in the future, especially if we are getting shutdown-averting deals that only last two months. If the Democrats keep caving in at this rate, they could give away most of the welfare state by election day.

Friday, December 16, 2011

Good story at Atlantic Cities on Job Piracy

Julie Irwin Zimmerman has a story at Atlantic Cities on job piracy, "The Folly or Corporate Relocation Incentives." She tells the story of Sears and other job blackmailers in Illinois in detail and quotes me on the failure of previous no-raiding agreements by states in the past. She points out that there are multiple reasons for opposing these subsidies, an equity argument that attracts liberals and an efficiency argument that brings conservatives and libertarians to the issue of investment subsidies.

Zimmerman does a great job; go read it.

FYI, when she quotes me as saying the cost of location incentives is almost $50 billion a year, that's correct. My other frequently quoted estimate of $70 billion annually includes all subsidies to business, including those which do not require an investment to receive them. Many sales tax subsidies don't require an investment, for example.

Thursday, December 15, 2011

Whatever Happened to John Kasich?

Back in the 1990s, there was a Republican Congressman from Ohio named John Kasich who was a scourge on corporate subsidies. He even ran a "Stop Corporate Welfare Coalition" and had a joint news conference with Ralph Nader, Grover Norquist, and others to oppose it on January 29, 1997. "We've reformed welfare for those who don't have money or powerful Washington lobbyists," he said there. "Now it's time we did the same for those corporate welfare programs that aid the rich and powerful." (Newark Star-Ledger, Jan. 29, 1997, no link).

Interestingly, a guy with a similar name was elected governor of Ohio last year. But this Kasich indulges in the worst kind of subsidy abuse, offering incentives to companies to move existing facilities. Governor Kasich is offering Sears $400 million to move its headquarters, with 6100 jobs, from the Chicago suburbs to Columbus. At a time when the state is engaging in substantial budget cuts including, according to the linked story, funds for local governments and school districts, it's hard to justify $400 million subsidies that create zero net jobs for the country. Moreover, by dangling these subsidies in front of Sears, Kasich (and others like him in other states) is enabling the company to extort retention subsidies out of Illinois, just like it did in 1989 when it left the Sears Tower for Hoffman Estates.

Yet this Kasich has no shame. After poaching 500 jobs from Kentucky in September, he told Sean Hannity, "I was accused in the front page of the Cincinnati Enquirer by people in Kentucky of wanting to steal all their jobs. And guess what? They're right."

The John Kasich I remember would have seen that since the states can't help themselves (two voluntary no-raiding agreements between states have collapsed in the past), there is a need for federal action. Only the federal government can pass laws to prevent subsidies from being given for relocations, or tax them so heavily a company would have no incentive to accept such inducements. If he were still in Congress, maybe he could even be persuaded to author a bill like that.

I wonder whatever happened to that guy.

Sunday, December 11, 2011

Cost of Tax Evasion Estimated at Over $3 Trillion Annually

The Tax Justice Network late last month published a new report that deserves much wider notice than it has received so far. Authored by Richard Murphy, it uses recent estimates by the World Bank on the size of the underground or shadow economy covering 98% of world gross domestic product to calculate the amount of tax lost as a result. The totals are simply staggering.

The report finds that over $3.1 trillion annually is lost to tax evasion worldwide. The calculation is quite simple, though necessarily imprecise. It takes the average size of the underground economy as given in the World Bank paper (1999-2006 average) and multiplies it by each country's GDP (mostly 2010) to determine the size of the shadow economy. This figure was then multiplied by the country's average tax burden (tax/GDP; 2010 or most recent available) as reported by the Heritage Foundation's 2011 Index of Economic Freedom.

Here are the top 10 countries in terms of gross dollars lost to tax evasion. The U.S. is number 1, by virtue of having the largest economy by far, even though it has relatively low tax rates and the second-smallest underground economy by percentage of GDP.

Country             GDP ($t)          Shadow Economy/GDP        Tax/GDP              Evasion ($b)

US                     14.6                          8.6%                           26.9%                   337.3
Brazil                    2.1                       39.0%                           34.4%                   280.1
Italy                      2.1                       27.0%                           43.1%                   238.7
Russia                  1.5                       43.8%                            34.1%                   221.0
Germany              3.3                       16.0%                            40.6%                   215.0
France                 2.6                       15.0%                            44.6%                   171.2
Japan                   5.5                       11.0%                            28.3%                   171.1
China                   5.9                       12.7%                            18.0%                   134.4
UK                      2.2                       12.5%                            38.9%                   109.2
Spain                   1.4                       22.5%                            33.9%                   107.4

As an example of the scale of tax evasion, the study ranks countries by tax evasion relative to a country's health care expenditures. Bolivia was the worst off, with tax evasion equal to 419% of health care spending; Russia was second at 311%. Overall, 67 countries saw tax evasion exceed health care spending, and for 119 countries total, it was 50% or greater.

The consequences of tax evasion are enormous. When we consider the European debt crisis or funding stress on social programs worldwide, it is clear that these figures mean the difference between solvency and insolvency for many countries. As a result, countries need a policy response equal to the task.