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Monday, December 29, 2014

Travel break

I'm on the road for a few days, so no new posts for just a bit. Like Middle Class Political Economist on Facebook for links to important articles elsewhere.

Wednesday, December 17, 2014

Eleven Richest Americans Have All Received Government Subsidies

A new report by Good Jobs First shows how the very wealthy in America have benefited from government subsidies as one element in building their fortunes. According to the study, the 11 richest Americans, and 23 of the 25 richest, all have significant ownership in companies that have received at least $1 million in investment incentives.

The study compares the most recent Forbes 400 ranking of wealthiest Americans with the Good Jobs First Subsidy Tracker database. Not only do Bill Gates, Warren Buffett, Larry Ellison, the Koch Brothers, the Waltons, Michael Bloomberg, and Mark Zuckerberg own companies that have received millions or even billions in taxpayer funds, 99 of the 258 companies connected with the Forbes 400 have such subsidies.

As I argued theoretically in Competing for Capital, the new report points out that subsidies for investment increase inequality as average taxpayers subsidize wealthy corporate owners. Location incentives directly put money into their pockets, which then has to be offset by higher taxes on others, reduced government services, or higher levels of government debt. Moreover, as the study notes, despite the huge amount of these subsidies given in the name of economic development, there has not been enough payback to raise real wages even back to their 1970s peak. In other words, if economic development has created so many new jobs, why haven't wages risen?

Of course, subsidies don't account for the biggest part of inequality. Read Thomas Piketty for the big picture on the subject. But the new report shows that large numbers of America's wealthiest (or not so wealthy, like Mitt Romney) have benefited handily from government subsidies.

Cross-posted at Angry Bear.

Monday, December 1, 2014

Basics: The German Euro is Undervalued

I keep telling people that the German euro is undervalued, but some folks seem not to believe me. (See the comments section from this post last year for an example.) But this is a really big deal. The dominant narrative about the eurozone crisis is that fiscally irresponsible countries like Greece were bringing the once-proud currency to its knees, and weakening the European project to boot. Meanwhile, the virtuous Germans keep on cranking out trade surpluses and have to bail out Greece, Ireland, Portugal, and Spain. And it's pretty clear that the Germans believe this version of events.

Never mind that Spain and Ireland, for two, had budget surpluses prior to the crisis, or that Spain's economy is five times as large as Greece's. What's going on in Greece is supposedly the true explanation for the eurozone's problems.

Let me challenge that narrative that with a simple thought experiment. Instead of one euro, let us reason as if each of the 18 eurozone members had its "own" "euro." Let's begin by thinking about what creates the value of the current 18-country euro. We might include interest rates, inflation rates, growth rates, and trade balance, among other things, and of course expectations for all these variables. What we need to remember is that the value of today's euro represents the averaged effect of all these variables in all 18 countries, rather than reflecting the economic conditions of any one of them.

So the euro is currently worth about $1.25. It used to be higher; what is dragging it down? The simple answer is that conditions in Greece, Spain, Ireland, Portugal, and at time Italy have pulled its value down. As has often been noted, if Greece pulled out of the euro it would then devalue the drachma, becoming internationally competitive again without the need for the brutal austerity that has pushed its unemployment rate over 25%. The same is true for the other peripheral countries. By looking at what would happen to the drachma/punt/peseta/escudo, we can see that, for these countries, the euro is overvalued. Another way to say it is that the "Greek euro," for example is overvalued.

So why isn't the value of the euro lower than $1.25? The answer, of course, is that Germany, the Netherlands, Austria, Luxembourg, and so forth, are performing well and pushing the value of the euro upwards. These countries, by contrast, would see their currency values rise if the euro were suddenly abolished. For Germany, for instance, the euro is undervalued; an equivalent DM would rise in value.

U.S. officials constantly rail about the undervalued Chinese yuan and the huge bilateral trade deficit it creates for this country. But officials could (and to some extent do) say the same thing about Germany, which now has a larger trade surplus than the vastly larger Chinese economy. In fact, last year Morgan Stanley estimated that a stand-alone German euro would be worth $1.53, compared to the actual euro exchange rate then of $1.33.

With an undervalued currency, Germany gets a much larger trade surplus than it would have had otherwise, magnifying trade deficits in the United States and elsewhere. At the same time, it gets to pretend that this surplus is simply due to German thrift and virtue, rather than currency misalignment. It then points to its virtue as justification for doing nothing to increase domestic consumption, wages, or inflation, and for demanding austerity from the countries to which Paul Krugman rightly says Germany is exporting deflation.

Let me leave you with Krugman's chart. You can see at a glance that Germany has throttled nominal wage growth and has inflation far below the European Central Bank's announced target of just under 2%. When you combine its low inflation with an undervalued exchange rate (remember, low inflation should tend to raise the currency's value), you come to realize that Germany is a huge part of the world economy's problems today.


Credit OECD and IMF
Source: Paul Krugman

Cross-posted at Angry Bear.

Monday, November 24, 2014

November Tax-Cast Highlights Lux-Leak, Kenya, Ukraine

So much tax justice news this month that the usually 20 minute podcast runs just shy of 30 minutes. The International Consortium of Investigative Journalists publishes a treasure trove of leaked data from Luxembourg, putting pressure not only on the country but its former Premier, now President of the European Commission, Jean-Claude Juncker. Kenya is abolishing many of its tax subsidies; meanwhile the Ukraine has become the first country to mandate a listing of the beneficial owners of all companies operating within the company. Hear about it here:

www.taxjustice.net/taxcast

Monday, November 17, 2014

Tax haven benefits are not investment incentives

Tim Worstall at Forbes takes issue with my last post, claiming that we actually don't know that U.S. state and local governments give more in location incentives than EU Member States do. He then says that while it is true that EU states give less in cash grants and other kinds of subsidies defined as "state aid" in EU law, these same states give more than the U.S. in other types of tax benefits. His argument then moves quickly through Ireland's 12.5% corporate income tax (though he gives no examples) to Amazon's European sales all being channeled through Luxembourg subsidiaries. Worstall claims that the tax advantages created by this financial gimmickry comprise a location incentive just like providing Tesla $1.3 billion to build a factory in Nevada is.

I've been researching U.S. and EU incentives for 20 years, and I certainly don't expect Worstall to have read everything I've written on the subject, including two books. So this makes as good a time as any to clarify the terms I use and the analysis I've made.

My default term for my object of study is "investment incentives," as in the title of my last book. But you can't say that phrase multiple times on every page of the book, so I use a specific set of synonyms when I write: Investment incentive = location incentive = investment subsidy = location subsidy = development incentive and sometimes, as in the headline of the last post, simply "incentive," though I also use that term in its more generic sense. Note that the term Worstall uses in his headline, "tax incentive," is not a synonym, because investment incentives and subsidies more generally can take forms other than tax breaks, i.e. cash grants, low-interest loans, free infrastructure, etc.

What, then, is an investment incentive? I define it as a subsidy ( = "state aid" in the EU context) to affect the location of an investment. To get this kind of subsidy from a government, it is necessary to make an investment. An investment incentive can be contrasted with an operating subsidy ("operating aid" in the EU), which is a subsidy for ongoing operations and is, critically, not contingent on making an investment. The distinction between investment incentives and operating subsidies is crucial to what follows.

So an investment incentive requires a subsidy and an investment. Let's now consider Worstall's examples on these criteria. As some readers may know, Ireland for many years had a 10% corporate income tax rate on profits from manufacturing, a rate explicitly provided for in Ireland's EU accession negotiations, and which the European Commission long accepted as being part of the country's general macroeconomic framework rather than a subsidy (see my book Competing for Capital, pp. 94-95, for an extended discussion). Contra Worstall, I am certainly well aware that Ireland's tax policy is a method of competing for investment; in 2000, I called it "a clear and unregulated element in the country's competition for investment" (p. 95; italics in original).

 Despite that, when the Commission ruled in July 1998 that manufacturing was specific enough for the tax rate to be considered a state aid, it ruled that it constituted an operating aid. A manufacturing company was entitled to the 10% tax rate forever, whether it made new investment or not, or even if it disinvested, as Intel has done from Ireland. Since there was no link between the subsidy and investment, it did not constitute an investment incentive. In the end, Ireland and the Commission agreed that a 12.5% tax rate that applied to all corporations would not be considered state aid. Now we no longer have a subsidy, but tax competition. (This of course doesn't talk about the boutique deals that the EU is now investigating as possible state aid.)

One ironic takeaway is that despite the intentions and nearly unanimous views of Irish policy-makers (many of whom I have interviewed over the years), the evidence doesn't actually suggest that the country's low-tax policy contributed to its growth. For the policy's first 30 years, 1958-87, Ireland grew, but no more rapidly than the rest of the EU. For almost the entire period, it had no tax on foreign multinational corporations. The famed Celtic Tiger came together when the tax rate MNCs faced was 10 percentage points higher, 10%.

What about Amazon and Luxembourg? Amazon has real operations in Luxembourg, employing about 1000 people overall. But the turbocharged financial benefits Amazon receives come not from normal operations using the lower VAT (again, tax competition, not an investment incentive), but from its use of tax haven subsidiaries. As the linked article points out, where Amazon makes its money in Luxembourg is from Amazon Europe Holding Technologies SCS, a partnership with no employees or office, which had completely tax-free profits of €156.7 million in 2013, according to the Wall Street Journal article linked above.

Moreover, according to the huge dump of leaked documents from the International Consortium of Investigative Journalists, in 2009 Amazon Europe Holding Technologies SCS paid Amazon Technologies Inc. (located in the tax haven of Nevada) €105 million in order to license Amazon's intellectual property. By some miracle, this no-employee company managed to re-license the IP to Amazon EU for €519 million. Given Worstall's claim in July that transfers of technology to a tax haven subsidiary have to be made at "full market value," how does he explain the way that "no one," if you will, raised the value of this IP by €414 million, which just coincidentally was untaxed in Luxembourg? Could it be that Amazon Europe Holding Technologies SCS didn't actually pay "full market value"?

Worstall also makes the odd claim: "And we do regard different corporation tax rates within the US dependent upon location as being location based incentives and we don’t regard them as such in the EU." Aside from wondering who his "we" is, I know I'm not part of it: My estimates of U.S. state and local subsidies and investment incentives most definitely do not count differences in corporate income tax rates among states as a "location incentive." My posts on Tesla take no account of the fact that Nevada has no corporate income tax, while its home state of California levies 8.84%. Yes, it's tax competition, as in Ireland, but if you were to call it a subsidy, it would be an operating subsidy, not an investment subsidy. I also don't include the federal government's many subsidies in these numbers. (Note: Writing this prompted me to go back and look at the data ICA Incentives provided me last year, wherein I found that it did include some federal subsidies. I removed them from the totals from the ASDEQ paper I cited in my last post, leaving U.S. state and local investment incentives 3 1/2 times, not 5 1/2 times, as large as EU investment incentives. See corrected post here.)

Worstall, then, is trying to mix apples and oranges. For a tax provision to be a subsidy, it needs to be a derogation from a country's normal tax rules. Yet Amazon tells us it is "subject to the same tax laws as other companies operating" in Luxembourg. Of course, Amazon may be stretching the truth here. But if Worstall thinks that creating arcane tax haven arrangements (as in his examples of Apple, Google, Facebook and Microsoft sales flowing through Ireland for tax purposes) is the same thing as, you know, actually building things, I'm here to tell him he is mistaken. Using the same term, "location incentive," to try to cover two completely different types of economic activity, is certain to detract from our understanding of the policy issues, not increase it.

Cross-posted at Angry Bear.

Thursday, November 13, 2014

UPDATED AND CORRECTED: Further proof that the U.S. uses incentives more than the EU

As if any more proof were needed, I recently came across yet more evidence that U.S. state and local governments give far more in location incentives than EU Member States do. A paper given this spring at the annual meeting of the Association des Économistes Québécois (Association of Quebecois Economists) includes a summary of project-by-project subsidy reporting by the consulting firm ICA Incentives.

ICA Incentives, which has on several occasions provided me data on $100+ million incentives in Europe and the United States, reports on the announcements of large investment projects. Thus, the data summarized in the paper will omit the thousands of smaller projects in the United States that are subsidized by state and local governments. My guess (I have not seen the underlying data) is that the coverage of EU projects is more complete, since EU rules require pre-notification of subsidies to the European Commission and the Commission posts all state aid decisions on its website.

From page 10 of the paper, the total of incentive packages in 2011 through 2013 inclusive, is as follows [UPDATE: I discovered in a database previously supplied by ICA Incentives a number of federal loan guarantees and loans in 2011 and 2012, which I eliminate below]:

United State: $37.2 23.5 billion [subtracting $13.7 billion in federal loans & loan guarantees]
European Union: $6.6 billion
Canada: $2.2 billion
South America: $8.4 billion (more than the EU, which has a GDP over 3 times as large)
Asia: $1 billion (I would guess this is an underestimate)

We can see that the United States gave more than 5 3 1/2 times as much as the European Union did over the three years analyzed. Given that these economies are approximately the same size, that is a gigantic disparity, and it shows, as I have argued on numerous occasions, that the EU state aid controls work to reduce location incentives. The result for South America also suggests this.

Moreover, the consequences of giving such large state and local incentives are enormous. As I have reported before, the value of state and local subsidies ($70 billion per year) substantially exceeds the cost of the state and local government jobs that were cut in the wake of the Great Recession. This is a huge opportunity cost for these governments as well as representing efficiency and equity losses as a result of the subsidies. With this additional evidence, the need for incentive reform is stronger than ever.

Cross-posted at Angry Bear.

Tuesday, November 4, 2014

Time to comment on the GASB standards!

As I reported last month, the Government Accounting Standards Board (GASB) has proposed new rules that would require state and local governments to disclose subsidies in their financial reports. The proposal is now open for public comment from now until January 15, 2015.

Good Jobs First, which has long advocated for this change in accounting rules, has produced a detailed analysis and critique of the proposal. While any improvement in transparency is welcome, for governments' Comprehensive Annual Financial Reports (CAFRs, as they are called) to provide useful information to citizens and investors alike, they need to truly be comprehensive. The problem, as Good Jobs First points out, is that the way GASB has defined "tax abatements" (its rather odd choice for the broad category of economic development tax incentives -- odd because tax abatements per se make up only a subset of such incentives) leaves open the possibility that major categories of subsidies could be omitted altogether.

As Good Jobs First points out, GASB's specification that a "tax abatement" includes a government forgoing tax revenue means that tax increment financing (TIF) may not fall under the definition. The reason, as I have analyzed for the Sierra Club, is that a TIF recipient is legally deemed to have paid its property taxes in full, even though it individually benefits from the diversion of the incremental taxes. If someone has "paid" all her/his taxes, then how does one say that government has foregone the tax due? GASB has to make clear that it won't be blinded by the legalese here, but will instead be guided by what actually happens. One possibility would be to use phrasing seen in the WTO Agreement on Subsidies and Countervailing Measures, that the government promises to abate taxes "in law or in fact." Using this phrase has the advantage that the Agreement has been adopted verbatim into U.S. law, that being the way that the United States "signed" the Uruguay Round agreements, rather than ratify them as a treaty.

Tax increment financing is a high value subsidy in the United States. TIF in California was generating $8 billion per year in tax increment by 2010. Even in Missouri, local governments adopt TIFs worth hundreds of millions of dollars every year. It would be very problematic if GASB allowed its revised Generally Accepted Accounting Principles (GAAP) to ignore tax increment financing.

Other types of potentially excluded subsidies identified by Good Jobs First include diversion of employees' withheld income taxes (because the source for the subsidy is not the company's own taxes) and and sales tax diversions, such as Missouri's Transportation Development Districts (again because the source of the subsidy is not the company's own taxes). The latter total hundreds of millions of dollars in Missouri annually. Furthermore, Good Jobs First flags highly ambiguous provisions which could lead to excluding performance-based subsidies (because the subsidy occurs after the investment or hiring, not before) and Payments in Lieu of Taxes or PILOTs (which in some state identify actual payments made by a recipient, but in Tennessee and perhaps others is simply the phrase used to describe property tax abatements).

I would suggest further that GASB require governments to cross-reference cash subsidies paid to companies in the "tax abatement" notes so the notes reflect all subsidies given to companies in one place. Cash subsidies already appear in CAFRs because they are on-budget, but grouping them with the more numerous off-budget tax-based subsidies will simplify research by bond analysts, academics, or anyone else, putting total subsidies in one convenient place within the CAFR.

In addition, Good Jobs First notes other deficiencies on the issue of transparency. There is no requirement for company-specific disclosure, which is especially important for large incentive packages but is best when universal. Furthermore, there is no requirement for governments to disclose their future commitments under multi-year tax agreements. This should be at least as troubling to bond analysts as it is to advocates for good subsidy policy, if not more so. It is impossible to tell the true fiscal position of a state or local government if it is allowed to hide large future liabilities.

Good Jobs First gives detailed instructions for commenting: The easiest way is to email your comments to Director of Research and Technical Activities, Project No. 19-20E, at director@gasb.org. What are you waiting for? It's time to comment!

Cross-posted at Angry Bear.

Tuesday, October 28, 2014

How to deal with the growing incentives competition

This article was originally published in the Columbia FDI Perspectives series of the Columbia Center for Sustainable Investment, #131, September 29. I have left it largely unchanged, except for adding a link and a comment, and correcting a grammatical error.



As I discussed in an earlier Perspective,[1] the use of investment incentives is pervasive and growing. The most recent example [this was completed prior to the Tesla auction] of a big bidding war was when Boeing threatened to move production of its 777-X aircraft out of Washington state, prompting some 20 states to offer incentive packages to the company (including $1.7 billion from Missouri). In the end, Washington gave Boeing a package of tax incentives worth a record-breaking $8.7 billion over the 2025 – 2040 period to stay, and the unions made substantial concessions regarding pensions.

What can be done to control such auctions, which are often international in scope? The most robust control method, regional in scope, is embodied in the European Union (EU) Guidelines on Regional Aid. These rules guarantee transparency, set variable limits (in terms of “aid intensity,” which equals subsidy/investment) for aid levels based on each region’s per capita income, and reduce the value of aid to large investment projects over €50 million. They require projects to stay at least five years and mandate the use of clawbacks for firms that fail to meet their commitments in investment contracts. Moreover, the guidelines provide demerits for firms in a dominant position in their industry, although they do not mandate a particular reduction in aid.

The other international control measure comes under the World Trade Organization (WTO) Agreement on Subsidies and Countervailing Measures. While these rules are more tailored to production subsidies than to investment incentives, the latter certainly come under the purview of the Agreement as well, as illustrated by the EU’s successful complaint against subsidies for Boeing in the states of Washington, Illinois and Kansas.

However, this case also illustrates the limits of WTO subsidy control. The EU has already filed a compliance complaint,[2] and there is little likelihood the United States (US) will comply anytime soon (the US Trade Representative’s office claims that the US has complied, but as long as the state and local tax credits continue in Washington state, that is not correct). Indeed, as mentioned, Washington state has approved a new round of subsidies for Boeing that is likely to initiate a new WTO dispute. 

While the WTO rules require frequent notification of subsidies, there is no penalty for failure to notify, with the result that subsidy notifications are of very uneven quality. Federal states outside the EU frequently make poor quality notifications regarding subnational subsidies. Finally, the TRIMs and GATS agreements regulate performance requirements, but not investment incentives.

What, then, can be done against incentives competition? First, there must be continuing efforts to improve the transparency of location subsidies. This is necessary for jurisdictions to make effective investment promotion policy (especially in a region such as the European Union and the United States, where there are many competing governments) as well as for international policy discussion.

Second, the EU’s example shows that incorporating subsidies rules into regional agreements can be a fruitful way to bring bidding wars under control. For many products, such as automobile assembly and steel, corporate location decisions still focus on a single region, meaning that such rules would be geographically comprehensive enough for a variety of industries. Consequently, major stakeholders—including the Columbia Center on Sustainable Investment, the International Institute for Sustainable Development, the United Nations Conference on Trade and Development, the World Association of Investment Promotion Agencies, the International Monetary Fund, the World Bank, and the Organisation for Economic Co-operation and Development—should unite in promoting location subsidy guidelines within regional trade areas. There are no doubt numerous other non-governmental organizations that would endorse such a move.

Third, WTO notifications should be strengthened. Incomplete notifications should be flagged and countries involved should be pressured to give cost estimates for subsidies at all levels of government. Still, it is difficult to envision that sanctions for non-compliance will be introduced.

Fourth, no-raiding zones could be a first step for countries to negotiate controls over investment subsidies. A no-raiding agreement simply commits a state to not give a subsidy to relocate an existing facility from another state; it would not apply to new investments. Their track record is mixed—several agreements among US states failed quickly, but Australia (2003-2011) and Canada (1994-present) have been more successful.[3] Despite these mixed results, it is easier to demonstrate to policymakers the futility of relocation subsidies, since they create no new jobs, than it is to do for incentives for new investment, which could make this a more feasible first step.

Though national and subnational jurisdictions have incentives to offer location subsidies, these proposed measures would help keep their value to more reasonable levels with a lower likelihood of distorting competition and international investment flows.



[1] Kenneth P. Thomas, “Investment incentives and the global competition for capital,” Columbia FDI Perspectives, No. 54, December 30, 2011.
[2] Emelie Rutherford, “EU wants $12 billion in U.S. sanctions over Boeing subsidy spat,” Defense Daily, September 27, 2012.
[3] Kenneth P. Thomas,  “Regulating investment attraction: Canada’s Code of Conduct on Incentives in a comparative context,” 37 Canadian Public Policy, 3 (2011), pp. 343-357; Kenneth P. Thomas, “EU control of state aid to mobile investment in comparative perspective,” 34 Journal of European Integration 6 (2012), pp. 567-584.



 From: Kenneth P. Thomas, "How to deal with the growing incentives competition," Columbia FDI Perspectives, No. 131, September 29, 2014. Reprinted with permission from the Columbia Center on Sustainable Investment (ccsi.columbia.edu).
 
Cross-posted at Angry Bear.

Sunday, October 26, 2014

October Tax-Cast Highlights Corporate Subsidies

This month's Tax-Cast from the Tax Justice Network highlights several issues covered here recently. There is an interview with Greg LeRoy of Good Jobs First on corporate subsidies in general and on the proposed changes by the Government Accounting Standards Board that would require state and local governments to disclose the incentives they give. In addition, John Christensen of TJN discusses the case of Irish state aid to Apple.

You can hear the entire podcast here:

https://www.youtube.com/watch?v=84gaikIMwiA&feature=youtu.be

Friday, October 17, 2014

U.S. Median Wealth Up from 27th to 25th

Today Credit Suisse released its Global Wealth Databook 2014 to go along with the Global Wealth Report issued Monday. Global wealth hit another new record of $263 trillion as of mid-2014, up 8.3% from mid-2013 (Report, p. 3). Rich people are doing well, but how about the middle class? One measure of this is median wealth per adult, the exact midpoint of the wealth distribution.

In the United States, mean wealth per adult reached $347,845, and median wealth per adult hit $53,352 (Databook, Table 2-4). This represents an increase in median wealth of 18.8% over 2013, enough to move the U.S. up two places to 25th in the world.

Before we congratulate ourselves too much, we need to remember that $53,352 is not all that much money, especially for retirement (don't forget that figure includes home equity). With 49% of Americans in the private sector having no retirement plan at all, and only 20% having a defined-benefit pension, a retirement crisis is looming for younger baby boomers and all later middle-class retirees. Meanwhile, if Republicans take control of the Senate in this year's elections, we are likely to hear increasing demands for cuts to Social Security, when what we actually need is to raise Social Security benefits.

The relatively low median wealth also points to persistent inequality in the United States. While only 25th in median wealth per adult, the U.S. ranks 5th in mean wealth per adult. With a ratio between mean and median wealth per adult of 6.5:1, this is higher than any of the other top 25 countries. Number one Australia has a ratio of less than 2:1. Without further ado, here is the list of all countries with median wealth per adult above $50,000.

Cross-posted at Angry Bear.



Median wealth per adult, mid-2014


1. Australia                  225,337
2. Belgium                   172,947
3. Iceland                    164,193
4. Luxembourg            156,267
5. Italy                         142,296
6. France                     140,638
7. United Kingdom     130,590
8. Japan                       112,998
9. Singapore                109.250
10. Switzerland           106,887
11. Canada                    98,756
12. Netherlands             93,116
13. Finland                    88,130
14. Norway                   86,953
15. New Zealand          82,610
16. Ireland                     79,346
17. Spain                       66,752
18. Taiwan                    65,375
19. Austria                    63,741
20. Sweden                   63,376
21. Malta                       63,271
22. Qatar                       56,969
23. Germany                 54,090
24. Greece                     53,375
25. United States          53,352
26. Israel                       51,346
27. Slovenia                  50,329

Source: Credit Suisse Global Wealth Databook 2014, Table 2-4

Monday, October 13, 2014

Is Piketty wrong on British and Swedish wealth?

Embarrassingly, I missed this reply by Tim Worstsall to my post "Understanding Piketty, part 1." My apologies to Mr. Worstall and my readers; despite his writing it August 14, I just discovered it the other day when I was mindlessly looking at site traffic data from Alexa.

In his post Worstall takes issue with Piketty's claim (which I endorsed) that if Financial Times author Chris Giles was correct about the level of British wealth concentration (the top 10% controlling 44% of UK wealth), then British wealth inequality in 2010 was lower than that of Sweden and, indeed, lower than even the lowest share ever held by the top 10% of wealth owners in Sweden (about 53%) which, he said, "does not look very plausible."

Worstall's point was that, surprisingly enough, if we measure wealth inequality by the Gini index, Sweden in 2000 had greater inequality than did the U.K, 0.742 to 0.697 (higher is more unequal). His ultimate source (according to the Wikipedia article he cites) was work by the creators of the Credit Suisse Global Wealth Report, a research effort which Piketty praises as "innovative" in capital21c, p. 623 n. 8.

Let's first note that even if that were true, it does not get Giles off the hook. Giles, whose error was to tack survey-based UK wealth data for 1990-2010 on to earlier tax-based wealth data (thereby biasing it severely downward; see also Howard Reed in The Guardian), does not dispute that the proper measure for inequality is the wealth share of the top 1% and top 10% of wealth owners. Giles makes no appeal to alternate measures to save himself. Thus, on their agreed measure of wealth inequality, Giles fails to make a dent in Piketty's data.

However, Worstall's point is an interesting one on its own merits to Piketty's attempted reductio ad absurdum. While in part 1, I pointed out that income inequality measured by the Gini index is lower in Sweden than in the United Kingdom, the further fact that wealth inequality is always higher than income inequality within each country does not mean, as I blithely assumed, that the country with lower income inequality will necessarily have lower wealth inequality as well.

The question then becomes which is the more meaningful measure of wealth inequality. The U.K. has higher top 1% and top 10% shares but, evidently, a lower Gini coefficient. As I noted in part 3, Piketty deliberately avoids using the Gini index. As Piketty's sometime-collaborator Facundo Alvaredo writes, "The most commonly used measure of inequality, the Gini coefficient, is more sensitive to transfers at the center of the distribution than at the tails." This is not a problem for the top shares measures; they have a much more intuitive meaning than the dimensionless Gini index. One might well argue that there is more political significance for the top 1% of wealth owners to increase their share from 20% to 30% than there is for owners at the 85th percentile to gain a corresponding amount of wealth from those below them. But to make that argument doesn't prove it's true.

Alvaredo also elaborates on a way to adjust the Gini index for variations at the top of the distribution, which he attributes to Atkinson. As Alvaredo shows in his paper, it is possible for the unadjusted Gini index to be falling even as the adjusted Gini index is rising. I took a stab at adjusting the figures given by Worstall by taking the top 1% share of Sweden in 2000 as 20% and the U.K.'s as 30%. That gives adjusted Gini indices of (.742*(1-0.2)) + 0.2 = 0.7936 for Sweden and (0.697*(1-0.3)) + 0.3 = 0.7879 for the UK. These are much closer, but the U.K. is still slightly more equal if I have gotten this right. In any event, while Swedish income inequality remains robustly lower using either top shares or Gini index, wealth inequality for Sweden is only lower using income shares, but still not Gini.

There remains an obvious question for Worstall: What is the trend of U.K. wealth inequality using the Gini index? If it increased, then Piketty's finding of an increase using wealth shares will be robustly backed up with this measure Worstall is preferring. Gini may give Worstall a desirable result for a comparison, but still unpleasantly show that Britain is more unequal in wealth than in 1980. That's the actual question Piketty and Giles were disputing. However, I have yet to find a such a 1980 Gini index for wealth; as Piketty notes in capital21c, the drawback of the Credit Suisse research is that it does not go back in time very far. Perhaps a reader knows where a series of Gini indices for wealth (unlike income, which is easy to find) can be found.

So the answer to the question in the title is that we don't actually know. Likely, however, it doesn't matter as far as trends in inequality since 1980 are concerned. It's definitely worth thinking about what it might mean that the two wealth inequality measures diverge for ranking Britain and Sweden in 2000, even if we eventually conclude that one measure is definitely better than the other.

And it's not like Piketty is unaware of a potential for greater wealth inequality in Sweden. In June, he lectured in Helsinki, arguing against a recent trend in the Nordic countries to abolish estate (inheritance) taxes. Sweden abolished its inheritance tax in 2005. Not only does this shift the tax burden to those with lesser wealth, as he argued in Helsinki, but it follows from the argument of the book that it takes away the possibility of generating the most reliable form of data on wealth inequality itself.

Cross-posted at Angry Bear.

Wednesday, October 8, 2014

New Government Accounting Standards to Require Subsidy Disclosure

In a move with potentially enormous implications, Good Jobs First reports that the Government Accounting Standards Board (GASB) will soon issue new draft rules for Generally Accepted Accounting Principles (GAAP) for governments. Don't fall asleep; this could be awesome!

As regular readers know, one of the things bedeviling subsidy debates is the lack of transparency in what governments actually give to businesses, and on whether incentive recipients actually deliver on their promised jobs and investment. We have just seen how Boeing is moving 2000 jobs out of Washington state despite receiving huge subsidies  there. And since the stakes nationally are $70 billion a year, by my estimates, better transparency is a must if we are to have any kind of democratic debate and accountability.

As Good Jobs First reports, the GASB proposal would require governments to publish detailed information on "tax abatements" (an oddly narrow term it applies to the wider concept of tax incentives; but what about cash grants or free infrastructure?) in order to comply with Generally Accepted Accounting Principles. State and local governments will have no choice but to comply with whatever is adopted, as it is impossible to issue bonds or carry out other basic financial operations unless they meet GAAP standards. This is why Good Jobs First has long campaigned for a change by GASB. The centrality of GAAP means that we have to pay attention to the draft rules and comment on them in the three-month comment period starting in November.

It turns out that taxpayers aren't the only people who want to know about tax incentives. Bond analysts want to know about present and committed tax subsidies to help them assess whether bond issuers can really pay them back. Good Jobs First cited the example of Memphis, where tax breaks consume about one-seventh of potential property tax revenue.

What we have now is a complete patchwork where some states (and proportionately fewer cities) have good disclosure and others don't. This requires the constant monitoring and central aggregating of subsidy costs that Good Jobs First does so well (250,000 subsidies and counting). It also necessitates the construction of estimates, like mine, of the overall costs of investment incentives and other subsidies to business. In a good world (not even a perfect one), these data would already be available in easy-to-analyze forms. Really strong GASB rules would get us a long way to reaching that point.

I'll let you know when the comment period starts.

Cross-posted at Angry Bear.