Poll Results: Anti Counterfeiting Trade Agreement

The poll is now closed.

Had you heard of the Anti Counterfeiting Trade Agreement (ACTA) before today?

Yes: 1
No: 9

No surprise here; the agreement is not well known. But as I argued in the related post, this treaty, if it withstands constitutional challenge, will increase the cost of medications in many countries by taking away the ability of government health agencies to negotiate with drug companies for lower prices.

Tax Havens Cost the Middle Class Untold Billions

As I argued yesterday, when taxes are reduced for one group, government must raise taxes on someone else, run bigger deficits, or cut programs. Tax havens, jurisdictions with strong secrecy provisions and low or zero tax rates, are one way that rich individuals and corporations reduce their tax payments, both legally and illegally. A recent book by Ronen Palan, Richard Murphy, and Christian Chavagneux summarizes the latest work on tax havens and contends that they form a central part of the global economy. Tax Havens: How Globalization Really Works presents data that 30% of multinational corporations' foreign direct investment passes through tax havens like Bermuda, Ireland, or Luxembourg, overwhelmingly for tax purposes. Tax havens, then, are far more central to the global economy than we generally suppose.

How much does this cost average taxpayers? In a separate report, Murphy calculated that wealthy individuals have roughly $11.5 trillion in tax havens, which at a 7.5% rate of return would generate $860 billion in income each year. If, on average, these people faced a 30% marginal tax, that would come to $255 billion annually that the rich avoid in taxes. Needless to say, this is a best guess, since the value of these assets is not disclosed publicly. See his report for more details on how he generated those figures.

That's just individuals. The situation with corporations is murkier still. While corporations set up subsidiaries in tax havens for the obvious purpose of reducing their tax, Palan et al. say there is no solid estimate of the overall cost of these activities. The Government Accountability Office reported in 2008 that of the largest 100 U.S. companies, 86 had subsidiaries abroad, and 83 of these had subsidiaries in tax havens. Bank of America had 115 subsidiaries in tax havens, including 59 in the Cayman Islands. Citigroup had a whopping 427 tax haven subsidiaries, including 91 in Luxembourg and 90 in the Cayman Islands. Goldman Sachs only had 29, 15 in the Cayman Islands.

I mention the Cayman Islands because President Obama has long been a critic of tax havens, saying during the 2008 campaign of Ugland House in the Cayman Islands, "Either this is the largest building in the world or the largest tax scam in the world. And I think the American people know which it is." Palan et al. report that the Caymans are the sixth largest financial center in the world, with $1.9 trillion in assets in December 2007. However, since taking office, the President has not succeeded in passing a version of the Stop Tax Haven Abuse Act, which in its original form he co-sponsored with Carl Levin, Norm Coleman, Ken Salazar and Sheldon Whitehouse.

Tax havens could not exist without the financial services industry, which provides the tax lawyers, accountants, and other professionals who make it possible for the rich and corporations to reduce their taxes. Collectively, they and their clients are the 1%. Occupy Wall Street has highlighted the abuses benefiting them, and tax havens are most definitely part of their pattern of abuse. Tax havens have proved amazingly resilient, however, and it will take sustained political pressure to shut them down.

How to Read a Republican Tax Proposal

We've been hearing about Herman Cain's 9-9-9 Plan for a few weeks and now Governor Rick Perry has released his tax proposal, supposedly a 20% flat tax. We will undoubtedly hear more as the Presidential campaign kicks into higher gear. As a public service, I am providing a simple way to understand the impact of these tax plans.

Step 1: Assume revenue neutrality.

Don't laugh; Cain's “9-9-9 Scoring Report” claims to be revenue neutral and Perry says he will keep federal revenue at 18% of gross domestic product. 

Step 2: Look at what income is no longer taxed.

For example, the 9-9-9 Plan “features zero tax on capital gains and repatriated profits,” eliminates the estate tax, and cuts the corporate income tax from 35% to 9%, while Rick Perry's tax plan eliminates taxes on capital gains, dividends, Social Security, estates, repatriated profits, and cuts the corporate income tax from 35% to 20%.

Step 3: Determine how much of that income you have.

If you're not rich, you've got very little of it, except Social Security in the Perry plan. If you're not retired, you'll get virtually no reductions under either plan.

Step 4: Ask what taxes have to be raised to get to revenue neutrality.

Step 5: Look in the mirror to see who pays them.

Comments: As I argued in Competing for Capital, if you cut one group's tax burden, one of three things has to happen to offset the reduction: someone else's tax burden increases, government runs higher deficits, or programs must be cut. If you maintain revenue neutrality, the first of these options is the only one possible, as flat tax pioneers Robert Hall and Alvin Rabushka admitted as far back as 1983: “It is an obvious mathematical law that lower taxes on the successful will have to be made up by higher taxes on average people” (h/t James Carville, We're Right, They're Wrong).

But in fact, Perry's proposal clearly is not revenue neutral. How could it be, when people have the option of filing under the current tax system or his new system? People who would pay more under the new plan would pay under the old plan and people who would save money under the new plan would pay under the new plan: this necessarily means less revenue. Rich people would save quite a bit of money, as Seth Hanlon at Think Progress has shown. Using published tax returns of famous people and the tax form on the Perry website, he shows that Warren Buffett's tax rate would fall from 11% to 0.2%, former Vice-President Cheney's rate would drop from 19.1% to 6.4%, President Obama would get a $60,000 tax cut, and Governor Perry's rate would fall from 18.6% to 15.8%.

Similarly, Cain's 9-9-9 Plan would raise far less than current taxes do, even as it increases taxes on the middle class and the poor. Michael Linden at Think Progress estimates that it would only bring in 14% of gross domestic product, well below the current low revenue that's giving us a $1 trillion deficit. In addition, many analysts think his corporate income tax is actually a value-added tax in disguise (h/t Michael Linden).

 The bottom line is that if we cut taxes for the wealthy and corporations, it will impact the budget elsewhere, in some combination of tax increases on the middle class, program cuts, and deficit increases. Regardless of the spin surrounding these and other tax plans that may come down the pike, if a proposal reduces some taxes but doesn't reduce your taxes, you will lose out via these three methods of compensating for the lost revenue.

Great catch by Yglesias on U.S. intellectual property bullying

In the middle of a fairy tale about how trade deals are a vehicle for overcoming special interest opposition to foreign competition, Matt Yglesias hits on what he sees as the exception, but is actually the rule:

But over the past 10-15 years, I think we’ve gotten saddled with a pretty fallen and perverse version of it. The trade deal was supposed to be a political vehicle for overcoming special interest politics, but it’s really just become another venue for interest group politics. Read, for example, this account of U.S. efforts to use trade agreements to coerce foreign governments into paying higher prices for pharmaceutical products.

Matt was in high school when the Uruguay Round trade agreement was signed in 1994, so it's understandable why he's overlooking how the U.S. pharmaceutical, entertainment, publishing, and software industries created the so-called Agreement on Trade-Related Aspects of Intellectual Property. Still, he really should read Susan Sell's Private Power, Public Law to see how industry placed such draconian laws into the TRIPS agreement that even free-trade icon Jagdish Bhagwati harshly criticized it in In Defense of Globalization as a terrible deal for developing countries. Agreeing to TRIPS, as noted by Sell, was what developing countries had to give up to get industrialized countries to end their hypocritical quotas on textile exports from developing countries, the Multi Fiber Agreement.

The new example in Matt's link of bullying by intellectual property industries concerns the Trans Pacific Partnership, which would ban government health services from negotiating prices with pharmaceutical companies. This follows on the Anti Counterfeiting Trade Agreement, which requires countries to institute criminal penalties for all kinds of counterfeiting, while nowhere mentioning "fair use." The U.S. Trade Representative is claiming the executive branch can enter into without Congressional action, something disputed by Senator Ron Wyden. NAFTA and the Uruguay Round agreement (which created the World Trade Organization) were both passed as legislation in the U.S., as opposed to being considered treaties requiring a 2/3 vote in the Senate. ACTA has not been considered by Congress at all, even though it is obviously an international agreement.

TRIPS lengthened patent terms around the world, including in the U.S. (from 17 to 20 years), something Congress had repeatedly voted down when considered on a stand-alone basis. But in the all-or-nothing "fast track" procedure used for the Uruguay Round legislation, Congress had no choice but to accept it if it wanted the other parts of the agreement. With the ACTA and now TPP negotiations, the pharmaceutical and other industries are trying to make it impossible to undo their gains from TRIPS.

Forbes 400 has collected plenty of subsidies

Dirt Diggers Digest has a good post up about how various members of the Forbes 400 have received plenty of government subsidies. Echoing Elizabeth Warren, Phil Mattera writes:

Accumulating a great fortune requires, among other things, a legal system oriented to property rights, a tax system biased in favor of investment income, and government spending on infrastructure ranging from interstate highways to the internet.

 He gives numerous examples of how the 1% have received subsidies on top of these general government provisions. Bill Gates' Microsoft received $32 million in Texas for a data center in Bexar County. Warren Buffett's General Re, an insurance company owned by Berkshire Hathaway, got $28.5 million in various subsidies simply to relocate from one place in Stamford, CT, to another, creating no new jobs. Michael Dell's self-named firm got $242 million (nominal value) from North Carolina for a computer manufacturing facility which closed less than five years later.

As I show in my report for the Global Subsidies Initiative, "Investment Incentives: Growing Use, Uncertain Benefits, Uneven Controls" (free download), Dell received millions more in the U.S. and Canada for call centers, most if not all of which are now closed. The company received millions more in Europe, including a controversial 54.5 million euro subsidy to relocate its computer manufacturing from Ireland to Poland in 2009. (Subsidized relocations are a rarity in the European Union, and I was shocked that the European Commission approved this; when I spoke to them in Brussels in January on my book Investment Incentives and the Global Competition for Capital, most of the Q&A was about my criticism of their decision.)

Mattera gives many more examples, even though he only gets down to #18 of the 400. His basic point is on the money: the richest Americans have exploited government subsidies both here and abroad to grow their fortunes, and the 99% are right to be upset about it. As I've emphasized before, we could more than pay for all government layoffs at the local and state level if we could find a way to end these giveaways.

The Selling of Trade Agreements from NAFTA to Today

With last week's passage of three trade agreements (Colombia, Panama, and South Korea), and spurred by Suzy Khimm's article on the Korea trade deal, I was reminded of the storm of numbers proponents of NAFTA threw out there in the run-up to its approval.

Gary Hufbauer and Jeffrey Schott, described by the New York Times (2/22/93; no link but available on Lexis-Nexis) as "the two most influential academic experts on the North American Free Trade Agreement," wrote a book entitled NAFTA: An Assessment in 1992, with a second edition in 1993 (all references below are to this edition). They predicted that the U.S. would gain 170,000 jobs by 1995.

This work struck me as flawed for a number of reasons. In the first place, it was odd that two economists would write about the winners and losers from NAFTA without making any reference to the economic theory on the subject, such as the Stolper-Samuelson Theorem (see below). Second, the authors did computer simulations of the effect of the agreement that said in their long-run scenario (Table 2.1, p. 16) that we would gain low-skill jobs and lose high-skill jobs, pretty much the opposite of what you would expect based on economic theory. I questioned what assumptions would be necessary to get that result. Finally, the book assumed that the U.S. would have a merchandise trade surplus with Mexico, "$7 billion to $9 billion annually through the 1990s, and perhaps $9 billion to $12 billion annually in the following decade" (p. 15) They held this view even though the authors showed on on page 4 that the Mexican peso was overvalued. If the value of the peso were to fall, Mexican goods would become cheaper in the U.S., while American products would be more expensive in Mexico, completely upending the likelihood of a U.S. trade surplus. As we know, the peso fell sharply in the December 1994 "tequila crisis," and the U.S. has had a trade deficit with Mexico ever since. See the table for details.

U.S. Goods Trade Balance with Mexico ($billions)

Year                                  Amount

1985                                    -5.5
1986                                    -4.9
1987                                    -5.7
1988                                    -2.6
1989                                    -2.2
1990                                    -1.9
1991                                    +2.1
1992                                    +5.4
1993                                    +1.7
1994                                    +1.3
1995                                   -15.8
1996                                   -17.5
1997                                   -14.5
1998                                   -15.9
1999                                   -22.8
2000                                   -24.6
2001                                   -30.0
2002                                   -37.1
2003                                   -40.6
2004                                   -45.2
2005                                   -49.9
2006                                   -64.5
2007                                   -74.8
2008                                   -64.7
2009                                   -47.8
2010                                   -66.4
Jan-Aug 2011                     -44.8

Source: Census Bureau

So much for that prediction. According to the then-fashionable claim that $1 billion in net trade surpluses created 19,600 jobs, the fact that the trade deficit worsened from $1.9 billion in 1990 to $74.8 billion in 2007 ($72.9 billion deterioration) implies a loss of 1.4 million jobs at its worst point. This number should be taken with a grain of salt, but it is in one sense what we expect. Still, it's only about 1% of the labor force, though we could certainly use the jobs now. But the effect on labor may have been worse, because the expanded option for companies to relocate to Mexico made it possible for them to threaten their workers with job loss and thereby hold down their wages. Kate Bronfenbrenner of Cornell's Institute for Labor Relations found that shutdowns became much more frequent after NAFTA (15% vs. 5% in the late 1980s) during labor organizing and contract campaigns.

At the same time, a contradictory prediction also failed to hold up. Wolfgang Stolper and Paul Samuelson argued that the expansion of trade was good for a country's abundant factors of production (they are land, labor, and capital) because of added markets abroad, but bad for scarce factors of production because of competition from abroad. Here, "bad" means reduction in real (inflation-adjusted) income. The U.S., which is not densely populated by world standards, is thus labor scarce but abundant in land and capital. My expectation was that NAFTA would therefore lead to lower real income for labor. In fact, however, weekly earnings for nonsupervisory workers in the private sector, which fell from a peak of $341.83 (constant 1982-84 dollars) in 1972 to a low of $266.46 in 1992, have risen ever since, despite the NAFTA and WTO agreements, hitting $284.79 in 2000 and $297.31 in 2010, according to the Economic Report of the President 2011, Table B-47. Of course, we are still $44.52 1982-84 dollars below the peak, or about $95.25 per week in 2010 dollars.

While obviously we see plenty of economic misery today, I'm curious why the trend on this measure, which Bill Clinton brilliantly politicized with "It's the Economy, Stupid," has reversed course, and how it relates to other measures of labor income. Perhaps there is a better measure of wages out there, or perhaps inflation is currently underestimated (there was a huge campaign in the mid-1990s claiming it was overestimated; maybe the Bureau of Labor Statistics paid too much attention to critics), which would overstate real income. Let me know what you think in the comments.

As for the three new trade deals, they are being sold with squishy job projections, just like NAFTA was. While Khimm's interviewees are probably right that the deals' effect on labor will be small, I still think we should go with the Stolper-Samuelson expectation that the effect will be negative.

Occupy Wall Street points in the right direction

The Occupy Wall Street movement has gotten plenty of press and I've sometimes wondered what I can add to the conversation. But I've decided that it is worth echoing that they are pointing in the right direction regarding how we got into the economic mess we're in. To hear many conservatives tell it, the 2008 financial crisis was caused by the Community Reinvestment Act (CRA), Fannie Mae, Freddie Mac, and ACORN. There is a huge analytical problem with this narrative, though: the financial crisis was a change in outcome, and these supposed wrongdoers had all been around for decades. If the cause doesn't change, it can't be the cause of a changed outcome. We have to look somewhere else for what changed.

The CRA was passed in 1977. Fannie Mae was founded in 1938. Freddie Mac was founded in 1970. The ACORN Housing Corporation, now known as Affordable Housing Centers of America, was founded in 1986. Their existence cannot be what caused a financial crisis 22 years after the last of them (and 70 years after the first of them) was founded. Something had to change.

What changed, of course, was bank regulation and securitization. Laws keeping banks from taking on excessive risk, like the Glass-Steagall Act, were targeted by financial firms and eventually repealed. During the housing boom, private loan originators chopped up mortgages into mortgage-backed securities (MBS), and these mortgages had much greater delinquency and default rates than the ones Fannie and Freddie issued. (F&F did buy some of these securities, but they were not the main player even in that role.) As David Min shows (h/t Paul Krugman), even the riskiest of F&F loans had "serious delinquency" rates in the 2nd quarter of 2010 of under 10.5%, whereas subprime mortgages had a serious delinquency rate over 28%. Private actors got the rules changed in their favor, and dramatically increased their risk-taking to earn huge personal incomes, and the taxpayer bailed them out when it all went bust.

This brings us back to Occupy Wall Street. In the group's "Declaration of the Occupation of New York City," we see that OWS identifies the problem as corporations running government and subverting democracy. As Robert Creamer points out, for OWS politicians are only the problem insofar as corporations (especially on Wall Street) control them. The repeal of bank regulation came about through a decades-long campaign based on political contributions and influence by Wall Street firms. This process is what the Occupy Wall Street manifesto highlights. Occupy Wall Street puts the spotlight on private sector power and greed and demands a change. OWS's manifesto also points out the efforts of corporations to take away employee rights and to use outsourcing to reduce pay and benefits. In a future post, I will discuss the decline of real income in much more detail. It has led to a greater need for two-income families, and then an increase in family debt, in order to maintain a standard of living that was possible on one middle-class income in the 1970s.

I'll close for now with some words from one of my favorite books, Charles Lindblom's Politics and Markets (1977). They could easily have been in the Occupy Wall Street manifesto: "The large corporation fits oddly into democratic theory and vision. Indeed, it does not fit."