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 Richmans' Trade and Taxes Blog



Conservatives Want to Eliminate the Ex-Im Bank Which Creates Jobs While Costing the Taxpayer Nothing
Raymond Richman, 8/31/2014

Conservatives oppose renewal by the Congress of the Ex-Im Bank whose guaranteed loans have facilitated exports and created and preserved American jobs while costing the government and taxpayers nothing at all. At the same time, conservatives are silent about the World Bank world socialist bank which the U.S. created and financed at a cost of hundreds of billions of dollars and continues to do so to this day. This is ideology being promoted at the expense of U.S. taxpayers and U.S. workers. There are plenty of government programs that ought to be cut. Why should the one selected be one that costs taxpayers nothing and does create jobs. 

The Heritage Foundation is a conservative think tank promoting a stronger economy and reduced government, traditional family values, and a strong America in the international arena. More often than not, its analyses and recommendations are sound in each of these areas. But one can quarrel with its opposition to Congressional renewal of the charter of the U.S. Export-Import Bank, an independent government agency whose loans to importers of US. goods, loans made usually by U.S. commercial banks, are guaranteed by the government. There can be no doubt of our need to close the U.S. trade gap which has caused extensive dis-employment in the U.S., more than four million jobs over the past two decades in our estimate. Does the Heritage Foundation have a case in opposing the Ex-Im Bank?

The government does not, other than giving its guarantee, subsidize the loans the Ex-Im Bank guarantees. It does not in fact cost the government a dime, something really rare for any government enterprise. The Ex-Im Bank’s default rate is less than one-quarter of one percent and is covered many times over by its successful loans. Diane Katz, a Heritage Foundation Research Fellow writes, “Taxpayers are ultimately on the hook for the $140 billion in loans and other credit that is currently outstanding.” Yes, but it has not cost the government anything, which she does not mention.  ...

 

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Conservative Opposition to the Ex-Im Bank is Misguided; They Should Consider Opposing the World Bank
Raymond Richman, 8/31/2014

The Heritage Foundation is a conservative think tank promoting a stronger economy and reduced government, traditional family values, and a strong America in the international arena. More often than not, its analyses and recommendations are sound in each of these areas. But one can quarrel with its opposition to Congress renewal of the charter of the U.S. Export-Import Bank, an independent government agency whose loans to exporters of US. goods are guaranteed by the government. There can be no doubt of our need to close the U.S. trade gap which has caused extensive dis-employment in the U.S., more than four million jobs over the past two decaades in our estimate. So does the Heritage Foundation have a case in opposing the Ex-Im Bank?

The government does not, other than giving its guarantee, subsidize the loans the Ex-Im Bank guarantees. It does not in fact cost the government a dime. The Ex-Im Bank’s default rate is less than one-quarter of one percent, covered amply by its successful loans. Diane Katz, a Heritage Foundation Research Fellow writes, “Taxpayers are ultimately on the hook for the $140 billion in loans and other credit that is currently outstanding.” Yes, but it has not cost the government anything, which she does not mention.  

Heritage Foundation’s objection is that the Ex-Im bank is in competition with commercial banks and other lenders who do not enjoy the government’s guarantee of foreign investments that are sometimes risky. The Heritage Foundation’s objection is that the Ex-Im Bank unfairly competes with the private banks because of its ability to make loans at a lower interest rates than commercial banks on  risky loans. True. But instead of recommending an end to the Ex-Im Bank, it could recommend guaranteeing the loans of commercial banks in some way. Stimulating exports is a worthwhile objective, especially when it involves no government expenditure at all. ...

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Inversions Are Not a Problem; the Real Problem Is Outsourcing
Raymond Richman, 8/28/2014

Burger King’s purchase of Canada’s Tim Hortons chain of coffee houses is called an inversion, a term used to describe a company’s moving its headquarters abroad to avoid paying U.S. taxes on the income of a foreign company it purchased. Tim Hortons has a number of locations in the U.S. as well (600) and it pays U.S. and state corporate income taxes on its U.S. operations. Burger King’s inversion does not reduce U.S. revenues from Burger King’s and Tim Hortons' operations in the U.S. at all. All the Burger Kings and Tim Hortons in the U.S. will continue to pay U.S. and state corporate income taxes. The fuss about inversions is a smokescreen that conceal the problem, U.S. manufacturing companies moving abroad and outsourcing their production. Now that is a real problem for the U.S. economy.

An inversion is not to be confused with outsourcing which does affect revenue, causes massive unemployment here at home, and worsens our balance of trade. Inversions do no. Nearly all the leading American corporations engage in outsourcing, including Apple, Nike, Honeywell, Caterpillar, Hewlett-Packard, Motorola, IBM, NCR, Lev-Strauss, and many, many others. They add insult to injury by importing the products they produce overseas to compete with product made here. By contrast, inversions like Burger King-Tim Hortons do not change the place of production or cause unemployment at all or worsen the trade imbalance.

The U.S. Congress and the Obama Administration in their arrogance want to tax Tim Hortons (now Burger King’s) Canadian operations at 35 percent, the U.S. corporate income tax rate. (In addition, the states have rates ranging from zero to Pennsylvania’s 9.99 percent.) The Canadian general corporate income tax rate is 28 percent and on manufacturing and processing corporations, it is 15 percent currently. Canada’s principal provinces levy corporate income taxes of 10 to 12 percent.  Canada reduced its corporate income tax rates from 38 percent to enable Canadian companies to compete with such countries as Ireland which has a 15 percent corporate income tax rate.

All that Burger King wants is to avoid paying more in taxes on the combined company than the two pay at present. The administration wants to increase those taxes as a result of the merger. Most countries have a territorial basis for income taxation and do not tax the foreign income of its companies; we do. All countries are entitled to tax the income earned within its boundaries. But the exercise of an extra-territorial right to tax does appear on the face of it arbitrary and unjustified.  ...

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Tax Inversions and "Factoryless Manufacturers"
Jesse Richman, 8/28/2014

Likely without intending to, Greg Mankiw's recent piece advocating corporate tax reform in the NYT makes the critical argument against the creation of a 'factoryless goods manufacturer' category in our national accounting. Mankiw writes:

A main feature of the modern multinational corporation is that it is, truly, multinational. It has employees, customers and shareholders around the world. Its place of legal domicile is almost irrelevant. A good tax system would focus more on the economic fundamentals and less on the legal determination of a company’s headquarters.

If indeed the multinational corporation is in essence multi-stated or perhaps beyond any corporate state-affiliation, then it makes truly no sense at all to count some of the profits that corporation earns from its overseas activities as American manufacturing. Such corporations are, in Mankiw's logic not American. And the manufacturing clearly doesn't happen in America.

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Burger King Inversion Has No Effect on U.S. Revenues, But the Corporate Income Tax Should Be Abolished Regardless
Raymond Richman, 8/27/2014

The purchase of Tim Hortons, a Canadian restaurant chain, by Burger King, an American restaurant chain, is making news as a so-called inversion, a term used to describe a company’s moving its headquarters abroad to avoid paying U.S. taxes on its foreign income. The Canadian effective corporate income tax rate on manufacturing and processing corporations is 15 percent currently but the provinces levy an additional 10 to 16 percent rate. The top U.S. rate is 35 percent and the states levy corporate income taxes ranging up to 9.9 percent in Pennsylvania and 8.84 percent in California. Burger King does not stand to save anything by moving to Canada but it will avoid an increased tax liability to the U.S. when it buys Tim Hortons by moving its headquarters. At present, the U.S. gets no revenues from Tim Hortons

President Obama and the Secretary of Treasury Lew have called inversions unpatriotic. You be the judge. Inversions cost no revenues. Compare that with out-sourcing abroad which not only affects revenue but c auses massive unemployment here at home and increases our trade deficit. Why the fuss about inversions and none about out-sourcing. And nearly all the leading American corporations do it, including Apple, GM, and other administration favorites. But out-sourcing is another story.

All that Burger King, and Pfizer and others appear to want is to avoid paying an increase in the taxes on the combined company than the two pay at present. The administration wants to increase those taxes, a desire to tax American businesses on their incomes regardless of where it is earned. Hypocritically, Congress and successive administrations have granted an exception for individuals (who vote!) who do not have to pay personal income tax on what they earn abroad as long as they are out of the country for eleven months per year. Thanks to the eleven months provision practically none of the employees of cruise ships patronized by Amearicans mostly are Americans! ...

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Trade (deficit) with China Caused Economic Stagnation (NBER paper)
Jesse Richman, 8/27/2014

An NBER working paper "Import Competition and the Great U.S. Employment Sag of the 2000s" by Daron Acemoglu, David Autor, David Dorn, Gordon H. Hanson, and Brendan Price provides additional economic analysis supporting the claim made by us and others that increasing trade (deficits) with China had substantial negative effects on unemployment. Their 'central' estimates are that 2 to 2.4 million net jobs were lost in the American economy as a result of the "swift rise in import competititon from China" and the attendant costs for U.S. manufacturing and other employment....

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Inversion Deals -- Corporate Income Tax Flight Continues
Jesse Richman, 8/26/2014

The United States has noncompetitive corporate income tax rates which create powerful incentives for US companies, aided by hedge funds and Wall Street banks, to flee the country.  A recent story in Forbes highlights the developing trend, and some of the key players in the effort to get Burger King a Canadian passport. 

The U.S. corporate income tax rate is politically hard to touch because people like the idea of taxing big money corporations at high rates.  But it is economically unsustainable, and needs to be significantly replaced by a VAT or some other tax that is less readily avoided. The move of even Burger King to abandon its U.S. corporate citizenship suggests just how important it is to break this political stalemate and reform the tax code. 

U.S. corporate tax rates are quite high compared with the rest of the world.  Canada's tax rate is 15 percent versus the U.S. rate of 35 percent, hence the attraction of a move north for Burger King.  

High corporate tax rates exacerbate the U.S. trade deficit in multiple ways.  For instance: 

1. They make it hard for truly U.S. corporations to compete internationally.  U.S. producers are at a disadvantage relative to foreign concerns paying less tax, and their products are correspondingly either less profitable or less price-competitive...  

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State of Play, 2014
Jesse Richman, 8/25/2014

 "Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity." -- Yeats, 1919

We are at the dawn of a new and much more dangerous period of world history. The last vestiges of the post-cold-war dominance the United States enjoyed are fading. A multi-polar world is emerging in which several great powers compete for influence, and the old assumptions that had guided our thinking and complacency are fading away.

...

As the world become more multi-polar, there is increased potential for conflict among enemies that may win the US new allies. The rise of the Islamic State is a case in point, arguably. Tied with this is the potential for more burden sharing with allies.

There are enormous, but currently being missed, opportunities to tip the policy balance in Washington towards policies that would better serve the long term economic and political interests of the United States. For instance we have the capacity (if not yet the will) to balance trade and reform the tax code.

Finally, the democratic system offers the opportunity to replace shortsighted and ideologically blinded leaders with leaders who are more effective -- who recognize the challenges and opportunities of the current moment, and craft effective responses.

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CPA Balanced Trade Petition
Jesse Richman, 8/22/2014

Would you sign on now and help get there?

Currently, the U.S. has the worst trade performance in our national history… and in the history of the world.

But trade negotiators spend their time futilely playing WHACK-A-MOLE with foreign trade cheating.

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The End of the Chinese NEP
Jesse Richman, 8/19/2014

Gordon Chang has an intriguing analysis of China's building attacks on multinationals up today on the Trade Reform website. The entire analysis is worth reading.  Chang writes:

The frontal attack on foreign business brings to mind the xenophobia of Mao’s era, and that may be no coincidence. Chinese President Xi Jinping has been conducting a series of Maoist-inspired campaigns since he became China’s leader in November 2012. The use of Cultural Revolution-style methods against multinationals suggests that Xi’s Maoist rhetoric is already affecting Chinese governance.

Xi is now taking the country backward in another important respect. China prospered when it opened up its economy after the bloodshed and chaos of the Maoist years. Xi talks positive change but has, on important matters, sponsored regressive economic moves. Whether or not Xi has abandoned Deng Xiaoping’s transformational policies, he is on balance moving China’s economy backwards.

My interpretation is that this reflects the continuation of important strands of China's communist policy -- that China's New Economic Plan coming to an end. In the 1920s the Soviet Union opened (briefly) to western firms in order to acquire technology and capability. William F. Jasper (2006) writes that Lenin stated the strategy behind this opening as follows:

The Capitalists of the world and their governments, in pursuit of conquest of the Soviet market, will close their eyes to the indicated higher reality and thus will turn into deaf mute blind men. They will extend credits, which will strengthen for us the Communist Party in their countries, and giving us the materials and technology we lack, they will restore our military industry, indispensable for our future victorious attacks on our suppliers. In other words, they will labor for the preparation of their own suicide.

In Trading Away Our Future (2008, p 78-81), my coauthors and I suggested that China's opening to foreign firms might have similar characteristics...

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What the U.S. Needs to Do to Grow the Economy
Raymond Richman, 8/18/2014

Economics professor George Schultz, former Secretary of theTreasury, State, Labor, and Director of Management and Budget, in the Wall Street Journal (8/ 9/14), in an opinion piece entitled “How to get America Moving Again”, made the following recommendations: 1) reform the personal income tax system of deductions and lower the marginal rates as proposed in the 1986 Tax Act which passed the Senate 97-3, 2) lower the corporate income tax rates to be competitive with the rest of the world, 3) simplify and reform the multitude of business regulations and design them to work better, 4) establish rule-based rules for federal reserve policy for stable monetary growth, 5) get control of government spending, especially entitlement spending, and 6) replace Obamacare by neighborhood health clinics, health savings accounts, and protection against catastrophic illnesses. George Schultz not only speaks for himself but his views may be taken as the predominant view of the economics profession. As such, they are very disappointing. They would do very little to stimulate the economy and reduce unemployment. 

Since these same suggestions are repeated so often, let’s consider them, why they are inadequate, and what would speed the recovery and growth. Before doing so, we should note that the belief that the economy is slowly recovering is widely touted by government spokesmen and the media. It seemed to be borne out by the 2nd quarter Gross Domestic Product increase to 4.0 percent which followed a 2.9 percent decline in the first quarter. A continuing recovery is also indicated by the reduction in recent weeks of the number of claims for unemployment insurance. The trouble with the second quarter’s increase in GDP is that private inventories of goods increased, usually undesirable and unplanned, added 1.66 percentage points to the second-quarter rate of growth. So the 4.0% growth rate was more like 2.34 percent. Private businesses increased inventories $93.4 billion in the second quarter, following increases of $35.2 billion in the first quarter and $81.8 billion in the fourth quarter of 2013. An undesired increase in inventories is a drag on the economy.

The recent reduction of the weekly claims for unemployment insurance from over 300,000 per week to less than 300,000 per week, while positive, has to be balanced by the sharp increase in part-time jobs and an increase in the number of persons no longer looking for jobs. As Mortimer Zuckerman, editor of the US News and World Report, pointed out in the Wall Street Journal, 7/13/14, we have 374,000 fewer jobs than we had in November, 2007 and most of the jobs created since then have been part-time. ...

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It's Time to Enact a CLOSED LOOP Trade Balancing Scheme
Frank Kirkland, 8/13/2014

For those of us who believe the annual ~$0.5B US trade deficit is an unacceptable and unsustainable drain on the American economy and a significant contributor to the demise of the middle class, and who subscribe to BALANCED trade as the solution, there is a fundamental, binary choice in policy going forward. One path is to continue the current piecemeal approach of advocacy for currency manipulation remedies, alternative national tax structures to combat foreign value-added taxes, improved trade agreement terms, targeted protectionist measures, appeals to the WTO or old fashioned jawboning. The second is to adopt a CLOSED LOOP trade balancing regime, one that autonomously effects balanced trade over time.  Only the later can succeed.

In point of fact, international currency markets and market forces have been assumed to be the loop closure mechanism that brought trade into balance. But in the last few decades mercantilist nations have used currency manipulation and myriad other mechanisms to subvert this result. Known proposals for an explicit closed loop strategy to restore balanced trade include Warren Buffet’s 2003 Import Certificate marketplace, Joseph Hitselberger’s 2011 Proportional Tariff, and the Richmans’ Scaled Tariff (documented in their 2014 book, Balanced Trade). This author has also attempted to promulgate a closed loop solution (termed Free, Fair, and Balanced Trade) based on driving bilateral trade ratios to unity since the early 1990s. Each of these inherently closes the trade gap over time. Despite their obvious attraction, none of these have gained significant traction.

Why will current piecemeal approaches fail and only a closed loop regime succeed? A closed loop system:...

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Victory in a War of Definitions
Jesse Richman, 8/11/2014

In June I posted an analysis of the proposed rules changes that would have allowed many companies that physically manufacture nothing in the United States to classify the goods they purchase from factories in other countries as American made. http://www.idealtaxes.com/post3776.shtml. Fortunately, the efforts of the Coalition for a Prosperous America and many other organizations resulted in an extraordinarily large number of comments (more than 26,000) objecting to the rules change. And the objections were heard. According to Michael Stumo for the CPA:

A notice in the Federal Register, published today, makes it official. The Office of Management and Budget (OMB) cited the large number of comments received, as well as statistical uncertainty, in withdrawing the proposal.

This is only one piece of a broader battle over goods classifications as a variety of related rules changes are already in place....

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The Outlook for the U.S. Economy is Continued Slow Recovery
Raymond Richman, 8/10/2014

That the economy may be recovering appears to have been borne out by the widely touted increase in second quarter Gross Domestic Product of 4.0 percent after a 2.9 percent decline in the first quarter and the reduction in the number of claims for unemployment insurance. The trouble with the second quarter’s increase is that private inventories of goods increased, the change in real private inventories added 1.66 percentage points to the second-quarter change. So the 4.0 growth rate includes a presumably undesired growth in inventories and perhaps the figure that should have been touted was 2.34 percent. Private businesses increased inventories $93.4 billion in the second quarter, following increases of $35.2 billion in the first quarter and $81.8 billion in the fourth quarter of 2013. An undesired increase in inventories is a drag on the economy. The trouble with the reduction of claims for unemployment insurance while positive has to be balanced by the sharp increase in part-time jobs and the increase in the number of persons no longer looking for jobs.

The growth that is occurring cannot be attributed to the government’s monetary and fiscal policies. On the monetary side, the stimulating effect has been primarily in raising asset prices. Corporate shareholders and real estate owners have benefitted. The unemployment rate alleged to be 6.2 percent is more than triple that if you count the millions of workers who lost their jobs and are no longer looking for jobs and if you count the millions of workers who are working part-time but want full-time jobs.

So what do the economic data tell us? That the performance of the economy is nothing to be proud of. So what should we do about it?  ...

 

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    Wikipedia:

  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]