"Technology Causes Inequality" Refuted

I'm getting to this a little late due to extensive travel (in South Africa now), but David Cay Johnston has a nice writeup of a recent paper on inequality based on the World Top Incomes Database. The paper, by Facundo Alvaredo et al., is important because it largely refutes the idea that technological change is the big reason for diverging incomes between skilled and unskilled workers. As Johnston writes:

That [sharply different levels of increased inequality] is significant because it means that new technologies and the ability of top talent to work on a global scale cannot explain the diverging fortunes of the top 1 percent and those below, since the Japanese have access to the same technologies and global markets as Americans. The answer must lie elsewhere. The authors point to government policy.

As the paper shows, the income share of the top 1% in the U.S. declined from a high of around 24% just before the Great Depression to a low of about 9% in the late 1970s. Since then, it has soared all the way back to about 23% just before the Great Recession, but falling back to 20% in 2010. Other English-speaking countries have had similar "U shaped" patterns, as the authors describe them (i.e., reaching Great Depression levels again), but the share of the 1% is much less in other countries. For example, in Australia, even though the 1% share is close to what it was in the 1920s, it is still only 10% of total income, compared to 20% in the U.S. This difference is part of the reason that median wealth is so much higher in Australia.

The paper gives examples of other countries where the 1% share is permanently below its 1920s level, such as Germany, Japan, France, and Sweden. In all four cases, that share is only about 10%. As Johnston emphasizes, these countries are all essentially equal to the U.S. technologically (remember back in the 1980s when so many people thought Japan was poised to eclipse the U.S. in technology?), so their substantially lower levels of inequality stand in direct contradiction to frequent economists' claims that technology is the problem (Richard Freeman has a balanced analysis).

It is also important to point out, as Johnston does, that lower tax rates on the 1% have an impact on this. One suggestion the paper makes is that lower tax rates give CEOs and other top managers more incentive to bargain for higher income, so the effect even shows up in pre-tax income. Obviously, lower tax rates make post-tax income even more unequally distributed.

A New, Progressive Tax That Even Republicans Like

No, there are no typos in the headline. A new tax is sweeping the states, having already passed in both Democratic (Washington) and Republican (Virginia) controlled legislatures, and is on the fast track in states like New Jersey (Democratic legislature, Republican governor) and North Carolina (Republican legislature and governor).

I know, I know, Republicans are the party of "no new taxes" and the Norquist pledge. So I've got to be pulling your leg. But no: Washington and Virginia have both passed new fees on electric and hybrid vehicles because they pay less in gasoline taxes since they obviously use little or no gasoline. New Jersey (see link above) is considering a tax on every mile an owner drives (talk about government intrusion and paperwork!), regardless of whether the car is gas or electric, to make sure that electric car owners pay their fair share for road  upkeep. North Carolina plans a fee of $100/year on electric vehicles and $50/year on hybrids.

If you have seen the story on North Carolina's "Moral Monday" protests, you know that the Republican legislature is passing laws to restrict voting rights and to cut [insert almost any program here, not to mention taxes] as fast as is humanly possible So I have little doubt that North Carolina will have this law approved by the end of the legislative session.

I'm just not sure Republicans have thought through all the implications of these taxes. Most significantly, they are progressive in nature, as they would only be paid by people rich enough to afford high-priced cars like the Tesla and the Chevy Volt. And Republicans like their taxes as regressive as possible, as state after state has reduced personal and corporate income taxes while raising the sales tax

Better not tell them. Their heads might explode.

Andrew Cuomo Reinvents the Enterprise Zone. Why?

Via @WNYPlanner, we learn that New York Governor Andrew Cuomo has proposed "Tax-Free New York," a plan that would let any business opening on State University of New York (SUNY) campuses outside New York City, some private colleges upstate, some areas adjacent to SUNY campuses, and an additional 20 "strategically located state properties" be entirely tax-free. According to the proposal:

Tax-Free NY will entice companies to bring their ventures to Upstate New York by offering new businesses the opportunity to operate completely tax-free – including no income tax for employees, no sales, property or business tax – while also partnering with the world-class higher education institutions in the SUNY system.

 In effect, we are looking at a new incarnation of the enterprise zone, though thankfully without regulatory incentives to go with the fiscal incentives. Unfortunately, enterprise zones don't work very well, so the lack of regulatory exemptions is cold comfort.

Another strike against this program is that it explicitly allows companies to use it if they relocate from other states. Of course, relocation from within the state is prohibited:

Protecting Against Fraud: Tax-Free NY will include a series of provisions to protect against fraud. Businesses will have to submit certification to ESD [Empire State Development], and falsifying certifications will be a crime. The initiative will include strict provisions to guard against "shirtchanging," or when a company reincorporates under a new name and claims its existing employees are now new jobs. The initiative will also include measures to prevent self-dealing and conflicts of interest. In cases of fraud, the state will be empowered to claw-back benefits granted to the business.

 Proving once again, as Good Jobs First reported in "The Job Creation Shell Game," that states already know how to write anti-piracy language. They just don't apply it to themselves.

Finally, as Citizens for Tax Justice points out, this program would exacerbate the state's fiscal problems: "With the state budget office projecting (PDF) shortfalls ranging up to $3 billion per year in the coming years, removing entire companies from the tax rolls is hardly fiscally responsible."

Hopefully the state legislature will reject this poorly thought-out proposal.

First-Ever Report on Local Subsidy Transparency Released

Today, Good Jobs First released the first-ever report (report, press release) on local subsidy transparency in the United States, "Show Us the Local Subsidies." This is a welcome development, even if the bottom line is that the glass is nowhere near half full yet.

The report analyzes 64 incentive programs in the country's 25 largest cities and 25 largest counties. Of these, only 1/3 (21) report the name of the subsidy recipient online. Of these, a mere 10 list the amount of the subsidy initially awarded, and only six the actual number of dollars ultimately disbursed.

Memphis/Shelby County, New York City, and Austin each had a program that earned a perfect score for their online disclosure, and Chicago was not far behind. But 20 cities and counties, out of the 36 that had locally-controlled subsidy programs, did not report at all.

Why is local transparency so important? The reason is simple: there are thousands of local governments giving subsidies, so it is difficult to obtain information on them all. Without information, there is no way to hold firms to any commitments they might make in return for the subsidies, nor any way to hold governments accountable for giving the subsidies. From the standpoint of a researcher, it means it is virtually impossible to make a particularly reliable estimate of how much they all add up to.

In fact, since local subsidy reporting is so bad, when I made my estimates of state and local subsidies in Competing for Capital and Investment Incentives and the Global Competition for Capital, I could not find a better approach than to simply assume that they were about equal to state subsidies, as several experts suggested to me. While one would think that most cities give less than states (though Kansas City has given several $100+ million tax increment financing subsidies), the fact that there are so many more cities than states offsets this consideration. In fact, in Missouri local subsidies exceed state subsidies, and they did so in California until the state abolished TIF last year. So this assumption is not as outlandish as it seems at first glance. The resulting estimate is that there is $25-35 billion in local subsidies annually, enough to hire every laid-off local worker in the country.

That's why a serious push for local level transparency is so welcome. When Greg LeRoy and Good Jobs First began promoting state disclosure in the late 1990s, the number of states with company-specific reporting was in the single digits. As the new report notes, even in 2007, only 23 states had reached some level of transparency. This year, we are up to 46 states and the District of Columbia. Good Jobs First is promising a new state transparency report card later this year.

Thus, while the glass is very far from half-full on local transparency, the fact that there is enough to report on, and that more is surely on the way, is very good news indeed.

"Libertarian" Koch Brothers Have Taken Tens of Millions in Subsidies UPDATED

The Cato Institute, originally the Charles Koch Foundation, is one of the most influential libertarian think tanks in the country. With both Charles and David Koch on its board of directors, Cato has produced numerous studies on the evils of corporate subsidies (which it calls "corporate welfare"), dating back at least to the 1990s. Supposedly, Charles Koch himself (via Wikipedia) is opposed to "corporate welfare," and plans to oppose it this year.

I guess I'll believe it when I see it. As previously discussed in Dirt Diggers Digest, Koch Industries has received many subsidies over the years, and I doubt this leopard will change its spots. In fact, the full tally of giveaways they have received extends far beyond the article linked above.

The calculation below relies on Good Jobs First's Subsidy Tracker database and the New York Times subsidy award database (not the program database). While 98% of the entries in the Times database come from Good Jobs First, reporter Louise Story took the first big step toward aggregating by standardizing company names. However, this still does not connect parent and subsidiary companies, so I carried out this step for the Kochs by using the Wikipedia entry for Koch Industries. With a quarter of a million entries and counting in Subsidy Tracker, I cannot imagine how long this would take if I had to do it for every company.

Here are the subsidies I was able to identify for Koch companies.

Flagship Koch Industries has taken over $16.5 million in subsidies from 11 different awards, none of which are sales tax breaks (which generally are not subsidies).

Subsidiary Georgia Pacific has received 72 subsidies worth over $43.9 million (none of these were sales tax breaks).

Subsidiary Flint Hills Resources LP has received subsidies from Iowa, Kansas, Texas, and Michigan, according to the Good Jobs First Subsidy Tracker; the New York Times subsidy database, which omits Michigan but includes one more Iowa subsidy, puts the value of the Iowa and Kansas subsidies alone at just over $12.5 million (again, none of which were sales tax breaks).

Subsidiary INVISTA has received $217,504 in training grants from South Carolina, according to Subsidy Tracker. Several other subsidies appear to be connected to this subsidiary, but none have available subsidy amounts. Again, none were sales tax breaks.

To summarize:

Koch Industries: $16.5 million
Georgia Pacific: $43.9 million
Flint Hills: $12.5 million
INVISTA: $0.2 million

Total subsidies to the Koch brothers:$73.1 million

Remember, this is the minimum value of the Koch brothers' subsidies. Some of the entries had no dollar figures available, and there is always the possibility that some incentives were missed entirely or that the awards above were only a part of a subsidy package, not the entire value. In particular, local subsidies are not well covered in either database; the same is true for my national estimates. The  data just isn't widely available.

Meanwhile, Koch Industries is going to be the largest investor in the Big River Steel project in Osceola, Arkansas, which is expected to cost the state $132 million in incentives.

Like I said, when it comes to the Kochs fighting subsidies, I'll believe it when I see it.

UPDATE: Yasha Levine tweeted me to let me know about two stories he did at Exiled Online in 2010 and 2011. While I focus above on state and local subsidies, Levine's stories focus on federal and foreign subsidies received by Koch companies. The biggest takeaway is that the federal subsidies, especially the ethanol subsidy, dwarf what the Kochs have received at the state and local level, with the ethanol subsidy alone worth perhaps $1 billion a year. The mind boggles.

Check out Levine's stories for the gory details. Thanks, Yasha!

Cross-posted at Angry Bear.

Mississippi Sets a Record for Unreported Subsidies

As I have written before, when states announce a major new investment, it is far more likely that the announced subsidy is an underestimate than an overestimate. A new Good Jobs First study commissioned by the United Auto Workers unearths a new example of this, which I believe is the largest underestimate ever: Nissan in Mississippi.

When Nissan announced in 2000 that it had chosen Madison County, Mississippi, just north of Jackson, as the site for a new assembly facility, it was reported that the project had received $295 million in subsidies (at a present value of $289.7 million, as I calculated in Investment Incentives and the Global Competition for Capital). The project also was given the power of eminent domain, and while one family succeeded in avoiding condemnation, it no doubt weighed on voters when they overwhelmingly passed an eminent domain reform initiative in 2011.

It turns out, as Good Jobs First reports, that the announcements left a few things out. While the $295 million package was passed by the state legislature in a one-day session (North Carolina does this sort of thing, too), the project was also receiving incentives from Madison County, and the city of Canton agreed not to annex the plant for 30 years. In addition, it was eligible for huge subsidies under existing Mississippi programs, including Jobs Tax Credits, reductions in its business franchise tax, personal property and sales tax exemptions, as well as Advantage Jobs, which lets employers keep up to 90% of workers' state tax withholdings. This is a type of subsidy of which Good Jobs First is highly critical, as is David Cay Johnston.

Just how much was left out? $867 million, as follows:

Jobs tax credits: $400 million over 20 years
Franchise tax reduction: $72 million over 20 years
Advantage Jobs: $160 million over 20 years
County infrastructure: $25 million
County property tax abatement: $210 million over 30 years

Not only that, but Nissan received a further $68 million for an expansion in 2002, plus about $13 million in miscellaneous subsidies more recently. Finally, Good Jobs First estimates that the state had to spend about $90 million to finance the bonds for the infrastructure at the beginning of the project.

The report notes that employment is around 4500. Counting all the subsidies, but omitting the $90 million for financing, that comes to about a nominal value of $276,000 per job, more than the usual assembly plant project. In addition, about 20% of the jobs there are held by temporary workers, making the value of the project less than if all workers were directly employed by Nissan.

No doubt some of this information was available before. But the fact that it's taken over 12 years to get a full accounting of the costs of the project--and that the subsidy for the initial phase was almost three times the amount advertised--provides a stark warning about how difficult it is to have adequate oversight and accountability for even projects that receive a great deal of press coverage.

Four Easy Fixes for Corporate Taxation

Everyone "knows" that the corporate income tax is a mess. Ask any company. They pay too much in corporate income tax, face rates higher than in any other OECD country, and are just following the law when they use tax havens to keep profits eternally deferred from taxation and to perform general sleight-of-hand.

Don't believe a word of it. While some economists believe we shouldn't tax corporations at all, the corporate income tax (CIT) is a necessary backstop to the personal income tax (PIT). With no CIT or a rate lower than the PIT, individuals have an incentive to incorporate their economic activities so they aren't taxed on them, or are taxed less. Needless to say, this is something an average wage or salary worker would not have the ability to do. This is another area where we have one tax law for the 1%, and different rules for the rest of us.

So what should we do? The answers are simple, which is not to say that achieving them will be simple. Corporate interests hold a lot of political sway right now, and overcoming them will be anything but easy.

1. End the usefulness of tax havens for secrecy by instituting "publish what you pay." Currently, companies can hide all sorts of transactions because they are only required to publish "consolidated" accounts of their global operations. Thus, Starbucks reports losses on its British tax statements while telling investors how profitable it is in Britain.  Apple can get away with leaving its subsidiaries in Luxembourg, the Netherlands, and the British Virgin Islands off its annual report because it classifies them as not "significant." By forcing companies to un-consolidate their reports, we would know where their employees were, where their their sales (both source and destination of products and services) were, where they declared their profits and paid their taxes, etc. Part of the beauty of "publish what you pay" is that it doesn't require the cooperation of the tax havens to obtain the information.

2. End the usefulness of tax havens for avoidance by enacting unitary taxation. Upheld by the U.S. Supreme Court in 1983, unitary taxation treats multinational corporations the same way many states already tax the income of multistate corporations: considering all of a company's subsidiaries as a single entity, and using a formula to determine what portion of its global profits are taxable in your jurisdiction. The most common factors to put in the formula are sales, employment, and assets. Like "publish what you pay," this has the advantage of not requiring the cooperation of the tax havens, which have largely shown themselves to be minimally cooperative at best with global efforts to combat tax evasion and tax avoidance.

A big roadblock is the Organization for Economic Cooperation and Development (OECD), which promotes allegedly "arm's length" transfer prices that companies long ago learned to run rings around. Via the Tax Justice Network, Bloomberg reports that this allows U.S. and European companies to save over $100 billion a year on their taxes. As an indication of how uncertain lost tax estimates are, note on the one hand that this is significantly less than the $189 billion TJN estimates is lost to illegal tax evasion, but at the same time Bloomberg reports that the European Union says it loses EUR 1 trillion ($1.3 trillion) annually to tax avoidance and evasion, far in excess of these other two estimates. We're talking big money here. The OECD has begun a project called Base Erosion and Profit Shifting (BEPS), but there is widespread doubt about how much progress will come out of this. Bloomberg notes a major revolving door where OECD tax officials leave to work for tax avoidance consultants, and documents how many OECD conferences on tax are underwritten by the very enablers of tax avoidance in the accounting and legal professions. Unitary taxation would make the BEPS project unnecessary, but the OECD has long opposed unitary taxation.

3. In the United States, end the deferral of taxes until profits are repatriated. In other words, require companies to pay tax in the year the money is earned, rather than when it comes back home years later, if ever. Tax deferred is tax reduced, at the very least. To show just how difficult this will be politically, Robert Gilpin of Princeton University recommended this in his book U.S. Power and the Multinational Corporation--all the way back in 1975. (By the way, this book was quite influential on my thinking in graduate school and ever since.) Even now, U.S. multinationals are trying to get a "repatriation holiday" that would allow them to bring back $1 trillion in profits at a nominal tax rate, even though the 2004 repatriation holiday was a dud in terms of investment and job creation.

4. Don't cut the corporate income tax rate. There is a big difference between the headline rate of 35%, which is indeed tops in the OECD, and the effective rate of 12.1%, one of the lowest in the OECD. In fact, there is a significant economics literature showing that large countries can charge higher taxes than smaller ones do without suffering for it, just like the federal government can charge a much higher CIT than state governments can. There is no need for the U.S. to content itself with revenue neutral combinations of rate cuts and base broadening when government will actually put the money to work, something companies have avoided doing ever since the beginning of the recession which, need I remind you, began over five years ago.

While the road to truly fixing corporate income tax will not be easy, we seem to have reached a promising juncture in the battle with government initiatives like the Foreign Accounts Tax Compliance Act (FATCA) and the massive International Consortium of Investigative Journalists (ICIJ) tax  haven investigations. Last week (via markthshark at Daily Kos), the U.S., British, and Australian tax agencies reported that they had received an even larger data leak than ICIJ had, and that one was gigantic. We certainly can't count our chickens yet; instead, we need to redouble our efforts to force governments to stamp out tax abuse by corporations and the wealthy.

Cross-posted at Angry Bear.