• Condemned by many people including President Obama, corporate inversions might not be the problem. Instead we should reconsider the corporate tax.

    Corporate Tax Dilemmas

    Aug 25 • Behavioral Economics, Businesses, Economic Debates, Economic History, Economic Thinkers, Government, Regulation • 88 Views

    In a 1934 Appeals Court decision, Judge Learned Hand said,  “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes.”

    But still, the Judge concluded that the defendant in the case had illegally tried to dodge taxes by creating a new corporation that would diminish her tax bill. Agreeing, Supreme Court Justice Sutherland commented that the defendant’s strategy violated the intent of the statute.

    So where are we going with this? To corporate taxes…

    Corporate Inversions and the Corporate Income Tax

    Because corporate inversions let businesses lower their exposure to U.S. tax rates through foreign mergers and acquisitions, the device has been condemned. However, as Judge Learned Hand indicated, sidestepping taxes is not necessarily bad.

    So let’s say the corporate inversion might even be okay. Still though, it cuts corporate tax revenue and that takes us where we need to go. Instead of inversions, the problem could be corporate taxes.

    • Corporations tell us that the tax is complex and “counterproductive.”
    • The left-wing point of view emphasizes the loopholes that need to be plugged.
    • On the right, the cry is to eliminate the corporate tax.
    • Meanwhile, economists say the corporate tax is inefficient.
    • And everyone recognizes that corporations are no longer the domestic entities they used to be. As multinationals with multiple homes, their tax regulations are antiquated.

    The Bottom Line and Everyone’s Corporate Tax Rates

    Here is an OECD (Organization for Economic Cooperation and Development) list. There are other columns in the original table and a list of footnotes qualifying all of the numbers. While the data below display actual rates, it is quite evident from the footnotes that one number tells a very small part of the story. For starters, learning more would include loopholes, tax credits and “subcentral’ tax rates within a country.

    The numbers tell a very small part of the corporate tax story.

    Our bottom line: In a Brookings Institution article about corporate inversions and the corporate income tax, David Wessel expressed the perfect bottom line. “Either we are going to tax income at the corporate level in ways that make the U.S. a place where companies want to have headquarters, invest and create jobs. Or we should give up and find a better way to raise revenue on the owners of capital. If we don’t, we’ll be watching other made-in-America companies join the expatriate parade and the corporate income tax and the revenue it produces will wither away.”

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  • Everyday Economics — Sunday Chart of the Week

    Do You Prefer McDonald’s or Starbucks?

    Aug 24 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Economic Humor, Education, Gender Issues, Households, Labor, Lifestyle • 148 Views

    Our Sunday Chart

    Responding to a 2009 Pew Research Center survey, 2260 adults indicated whether they would, “prefer to live in a place with more McDonald’s or more Starbucks.”

    As you can see below, 43% said McDonald’s, 35% said Starbucks and 22% had no preference. According to the study, a key variable is your political inclination. Liberals tend to favor Starbucks over McDonald’s.

    More specifically, if you are female, politically liberal, 18-29 years old, earn more than $75,000 a year, a college graduate, or religiously unaffiliated, you probably prefer Starbucks. On the other hand, a McDonald’s loyalist tends to be male, to earn less than $30,000, to have a high school degree but not college, and/or to be Protestant or Catholic.

    Starbucks and McDonald's are in markets with monopolistic competition.

    From: Pew Research

     

    The Bottom Line and Economists’ Preferences

    The Pew survey reminded me of research about economics majors that was in the news. Discussing the connection between education and civic behavior, a New York Fed Staff Report concluded that students who majored in economics tended to be Republicans. Taking a huge analytic leap, does that means that economists prefer McDonald’s?

    Our bottom line: Taking another leap to some basic economics, we can say that monopolistic competition shapes the behavior of McDonald’s and Starbucks. The characteristics of monopolistic competition include many sellers with a similar product, sellers creating an individual, unique identity, and sellers having some control over price. The competitive behavior of beauty salons, supermarkets, and clothing manufacturers is also shaped by a monopolistically competitive market structure.

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  • This week's everyday economics included opportunity cost, GDP, and externalities.

    Weekly Roundup: From Waist Size Checks to the Russian Embargo

    Aug 23 • Businesses, Demand, Supply, and Markets, Economic History, Government, Thinking Economically • 95 Views

    Our Econlife Roundup for the Week:

     

    Everyday economicsSunday Chart of the Weekl8.17.14 Some insight about the economic health of the EU28…more

     

    With universal healthcare, improved health could come at the expense of free choice.8.18.14 The reason that the Japanese government measures waistlines…more

     

    A family invests in land, labor and capital to "produce" children.8.19.14 What costs the most when you raise a child…more

     

    Everyday economics: U.S. law does not mandate that wages and salaries be paid for vacations and holidays.8.20.14 Deciding whether to take your vacation days…more

     

    everyday economics tax credit incentives8.21.14 The tax incentives that bring movie producers to your state…more

     

    Whether looking at the price of food in Russia or at exports to Russia, supply and demand can explain price changes from the Russian embargo.8.22.14 How the Russian embargo affects Ikea and other businesses…more

     

    Economic Ideas Roundup:

    • Entitlements
    • Supply and demand
    • Tax credits
    • Opportunity cost
    • Economic growth
    • Land, labor and capital
    • Wages and salaries

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  • Whether looking at the price of food in Russia or at exports to Russia, supply and demand can explain price changes from the Russian embargo.

    Impact of the Russian Trade Embargo on Ikea’s Swedish Meatballs

    Aug 22 • Businesses, Demand, Supply, and Markets, Developing Economies, International Trade and Finance, Regulation, Thinking Economically • 230 Views

    At the Moscow Zoo, the sea lions eat Norwegian shellfish, giraffes nibble on Polish apples, orangutans prefer Dutch bell peppers and the cranes consume Latvian herring. According to a zoo spokeswomen, “They don’t like Russian food.”

    But the animals might have to become less picky. With the Russian embargo on U.S. and European food, substitutions like shellfish from Iceland will be pricey.

    The Global Impact

    Around the world, businesses are feeling the impact of the Russian embargo. At a small cheese store in Moscow, while roquefort, camembert and brie sales have tripled, 30 miles outside of Paris, 100,000 pounds of brie that had been destined for Russia have no place to go. Similarly, bulk cheese purveyors in Germany and the Netherlands who sell edam expect to feel the hit from the embargo as do specialty cheese makers in France and Italy.

    You can see who is affected by the embargo.

    Places where supply and demand are affected by the Russian embargo.

     

    On the other hand, there are some smiles in Switzerland among makers of mozzarella, edam and gouda because of the surge in Russian demand. However, because the embargo could end in a year or less and changing supply chains takes time, they are worried about expanding their capacity.

    Elsewhere also, the response has varied. At the buffets in their Russian stores, Ikea has said that it will stop selling Norwegian salmon and Scandinavian cheese but not Swedish meatballs because they do not come from Sweden. Meanwhile, Chile and China hope to replace some of Russia’s salmon supply and Brazil is welcoming Russian demand for its meat. Even fishing quotas have been affected with Scottish mackerel skippers asking to “bank” this year’s quotas so they can use them next year when the Russian market could return.

    As for the United States, poultry and pistachios are at the top of the list. In 2013, the Russians were the second largest market for our poultry exports and are the seventh largest importer of our pistachios.

    Supply and demand in the U.S. from the Russia embargo.

    From: the Washington Post

     

    The Bottom Line: Supply and Demand

    Hypothetical supply and demand curves perfectly illustrate the impact of the Russian embargo.

    Here, we have an increase in demand for cheese from Switzerland because of the embargo. Note though that the supply curve is somewhat vertical because the quantity supplied is inelastic. As a result, quantity barely changes but price rises.

    Supply and demand for Switzerland cheese

     

    Supply and demand can also display a spike in chicken thigh prices.

    Supply and demand show why chicken thigh prices increased.

    Our bottom line: Everywhere, the impact of an embargo is classic supply and demand.

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  • The state tax incentives that attract TV and film makers need more cost and benefit analysis.

    When is a Tax Credit Like a Groupon Coupon?

    Aug 21 • Businesses, Demand, Supply, and Markets, Economic History, Government, Labor, Macroeconomic Measurement, Media, Thinking Economically • 133 Views

    New York City lost the $79 million that Law & Order generated annually because NBC cancelled the show. Just feeding the actors for 14 years meant $1.5 million to David’s Gourmet Catering and Craft Service. One person on the show’s design staff said, “We spent an enormous amount of money in Saks Fifth Avenue and Barneys, dressing the lawyers.”

    The show hired actors, camera operators and costume designers. They needed hair and make-up stylists and local carpenters. People stayed in hotels, they ate at restaurants, they drank at bars. They purchased duct tape and boom microphones. Broadway actors could supplement their incomes with a one-day acting role. The NYC Commissioner of the Mayor’s Office of Film, Theater and Broadcasting said Law & Order was responsible for 4,000 jobs and maybe $1 billion in spending during its 20-year tenure.

    States are willing to fight for the millions in revenue they can get from TV and film production. Their ammunition includes tax credits and rebates.

    When Hawaii wanted to be sure that The Descendants filmed there, they offered a tax credit of approximately 20% for in-state expenditures on items like travel, equipment and wages—even George Clooney’s salary. New York State gives tax credits equal to 30% of production costs.

    Some states even let businesses transfer unused tax credits. Just like there is a market in Groupon coupons that buyers cannot use, so too can tax credits be sold. There are actually middlemen called “tax credit brokers” who, for a fee, match sellers and buyers of tax credits.

    And here is where we need to flip our perspective from the attractiveness of tax incentives to their cost. According to 2012 Pew Research, most states inadequately balance the cost and benefit of the tax incentives they offer for economic development.

    Using cost and benefit to asses state tax incentives

    Our bottom line: While tax incentives can create jobs and promote economic growth, states need to be more aware of their costs and benefits.

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