Jensen on the costly politics of tax competition

Nate Jensen recently published an op-ed of note, asking "Why Are Your State Tax Dollars Subsidizing Corporations?" Nate has studied tax and corporate decision making for some time, and recently published "Incentives to Pander: How Politicians Use Corporate Welfare for Political Gain", which is on my reading list. This is, of course, a favourite topic of mine. A few excerpts from the op-ed:

Politicians are using public policies, from renaming a city to offering billions of dollars in grants, infrastructure improvements and tax abatements, to take credit for companies’ location decisions. ...

In all likelihood, incentives are overpaying firms, leading to lost resources that could be used for other purposes. If the incentives don’t pay for themselves, they must be paid for by either higher taxes or decreases on government spending. Local school districts are vocal opponents of incentives; they see their tax base being given away in the name of economic development. 

But in fact it is most likely the quality of the work force that will be the deciding factor for Amazon, not the billions in incentives. Proponents of incentives often claim that these subsidies pay for themselves, and voters often support these efforts, believing the promises of good jobs. But this is possible only if governments perfectly target the companies that require incentives and pay just enough, and not a penny more, to sway a company’s decision.

...Political pandering is behind this explosion. But there is also some of what Brink Lindsey of the Niskanen Center and the political scientist Steven Teles call the “captured economy.” In between these politicians and corporations are economic incentive consultants, tax professionals and lobbyists all providing ways for businesses to maximize their take, and getting a percentage of these incentives in return.

There is a role for government in economic development. State and local governments can help businesses without access to finance survive and expand, provide worker training that is valuable to residents and companies, and invest in traditional education from pre-K to college. There are certainly worthy investments that can be made. But $7 million for Carrier, $3 billion for Foxconn and billions for Amazon is just using the public coffers for political theater.  

Highly recommended reading in full for anyone interested in tax competition.

In global tax governance, institutions matter.

José Antonio Ocampo posted a plea for institutional reform in tax policymaking today,  in which he decries the jealous guarding of tax policy exclusivity by OECD countries, especially the US and the UK. At the recent Financing for Development conference, developing countries called for a greater role for the UN in global tax governance but the OECD countries balked. Ocampo writes:

The OECD, whose members are essentially the world’s 34 richest countries, certainly has the capacity to set international standards on taxation. Yet the domination of a select group of countries over tax norms has meant that, in reality, the global governance architecture for taxation has not kept pace with globalization. 

The Monterrey Consensus reached in 2002 included a call to enhance “the voice and participation of developing countries in international economic decision-making and norms-setting.” But although the OECD invites some developing countries to participate in its discussions to establish norms, it offers them no decision-making power. The OECD is thus a weak surrogate for a globally representative intergovernmental forum.

I understand that it is costly and complicated to develop institutions that allow for meaningful participation by all people affected by transnational tax policy norms.  But the international tax system is a resource allocation machine that has significant impacts on people's life chances across all populations. I fail to see what principles of justice support a world in which a small and privileged group of people make decisions of both process and substance that directly impact, and yet purposefully and systemically exclude, the majority of the world's population. The substance of norms, rules, and standards may matter in global tax governance, but ultimately institutions matter even more.

Proposed Legislation will Shine More Light on Lobbying, Self-Dealing in Congress

Last week, US Congressman Mike Quigley (D-IL) introduced the Transparency in Government Act of 2014, a bill "to amend the Ethics in Government Act of 1978, the Rules of the House of Representatives, the Lobbying Disclosure Act of 1995, and the Federal Funding Accountability and Transparency Act of 2006 to improve access to information in the legislative and executive branches of the Government, and for other purposes." I am always worried about those other purposes, because funny things tend to get slipped into law this way, but the bill is interesting.

Government Executive Oversight calls it "a grab-bag transparency bill" that would "use technology to boost public oversight of program spending, standardize agency reporting on use of the Freedom of Information Act, shed greater light on lobbying and add new requirements for judges to disclose financial investments," as ell as "toughen online disclosure requirements for lawmakers’ personal finances, office expenses, gift reports and foreign travel." All that sounds like it is worth doing.

I especially like the idea of putting completed FOIA requests online, but would like to see the law go even further: if it's FOIAble it ought to be automatically disclosed and available to the public, not have to wait for individuals to file applications. I realize that this presents administrative costs but FOIA is a constructed barrier that unnecessarily imposes costs on individuals to release information that is of public benefit. If a government is producing thousands of pages of ultimately public documents I don't see why the individual must be forced to compel publicity in the vast majority of cases; the opposite should be true.

The other main part of the bill is its attempt to make public officials more honest about their backroom dealings, including politicking and rule changing.

Finally it's about time for another attempt to stop Congress from inside trading after they "quietly" undid the 2012 Stop Trading on Congressional Knowledge (STOCK) Act which was meant to curb this behavior. Congress, it seems, was worried that transparency would expose members to identity theft. This is something that Congress worries about a lot when it comes to themselves but seems incapable of determining how to stop when it comes to those not in Congress.

It is nice to see at least one Congress person push for transparency and accountability in Congress, but given past experience there is unfortunately all too much room for doubt that any reforms will stick even if they pass. I always hope to be proven wrong in this skeptical view.

The Shutdown and a Tea Party Tax Paradigm Shift: Guest Post by Marco Garofalo

One of the many benefits of hosting a tax policy colloquium is that the students become deeply engaged in grappling with tax policy principles through contemporary scholarship, and they apply these ideas to the world in which they find themselves. After our recent presentations by Reuven Avi-Yonah on the shifting pressures of globalization on the tax base, by Clifton Fleming on the politics of tax expenditure analysis, and by Lyne LaTulippe on the topic of tax competition, in which she introduced us to work by the political scientist Mark Blyth, one of my students came back with the following analysis of tax politics in the US, and he agreed to share it here.

Government Shutdown and a Tea Party-Induced Tax Policy Paradigm Shift in the United States

A paradigm shift in tax policy may be unfolding in the United States, as the Tea Party positions itself differently than either the Democrats or the Republicans when it comes to important aspects of tax policy processes and practices.  In a recent article, "Paradigms and Paradox: The Politics of Economic Ideas in Two Moments of Crisis," Mark Blyth investigated why we did not see a paradigm shift in economic policy after the financial crisis of 2008. He argues that paradigm shifts are usually:

1. triggered by failures in the current paradigm; 
2. accompanied by a new paradigm that is waiting in the wings to replace the current one; and 
3. driven by a change in who can speak authoritatively on the subject.

He concluded that “it is politics, not economics, and it is authority, not facts, that matter for both paradigm maintenance and change.” Consequently, he argues that we did not see a paradigm shift after the financial crisis for a few reasons. First, even though there was a failure of the current paradigm, there was no challenger waiting to replace it. To illustrate his point, Blyth suggests that it was inconceivable that the Washington Consensus would be replaced by the Beijing Consensus, “so complete was its initial victory.” Second, the sudden policy failure did not result in a change of who speaks authoritatively on the subject, as protagonists did not change (individuals in the US Treasury, the ECB, and the IMF all retained their authority) and thus their solutions did not either. Blyth calls this ‘disciplinary incentive’; in other words, “too many careers and institutions are at stake!” Thus the financial crisis did not spur a paradigm shift.

But consider the Tea Party and its crusade. Since 2009, the Tea Party has been an unavoidable presence in US politics. While the Tea Party story has many permutations, causes, and manifestations, only the current government shutdown is important for the purposes of the current discussion. The current shutdown is not about Republicans versus Democrats; it is about the Tea Party versus Republicans. The Patient Protection and Affordable Care Act passed in Congress, was upheld by the Supreme Court of the United States, and its funding was not seriously contested by the Republican Party. This is an artificial crisis, a main architect of which appears to be Jim DeMint, former US Senator and current President of the Heritage Foundation.  If non-Tea Party GOP members do not want to play along, the implicit threat, according to Joshua Green of Bloomberg Businessweek, is that the Tea Party will turn on them, such as by launching “attack ads calling [Republican Senator Mitch] McConnell a ‘turncoat’ who ‘surrendered to Barack Obama’ in the healthcare fight."  So far, the Tea Party is pulling off this political coup: the government is shut down and positions are becoming entrenched.

Now consider this political impasse as a paradigm shift. First, we have a failure in the current paradigm (even though it is artificial). Joshua Green argues that “What’s causing the malfunction is a battle within the GOP.”  Second, we have a paradigm waiting in the wings to replace the current one. In fact, the Tea Party is not so much waiting to replace the Republicans as forcing that to happen. Third, the loci of authority in the Republican Party are shifting, either to Tea Party members or to the remaining GOP members who agree to change their tune. Hence we may see a paradigm shift, in which the Tea Party becomes the dominant faction in the Republican Party, resulting in a recalibration of the Democrat-Republican relationship.

Such a paradigm shift would have serious implications for tax policy. At least two would arise immediately, in the areas of tax expenditure analysis and tax consultations. First, tax expenditure analysis may begin to play a greater role. While the Republicans and Democrats function largely by dressing government spending as tax credits and deductions, the Tea Party is having none of that. The prime example would be the current crisis. The current government shutdown is itself a tax issue: the Patient Protection and Affordable Care Act, SCOTUS cogently reminds us, is a piece of tax policy. If the Tea Party does become the dominant Republican faction, then tax expenditure analysis may take center stage as a tool to sniff out government spending in all of its forms.

Second, the structure and content of tax consultations could change. Professor LaTulippe argues that international tax policy is beholden to a discourse of competitiveness (draft forthcoming). While part of the competitiveness discourse is about low rates, which the Tea Party presumably likes, part of the discourse is about tax expenditures, which the Tea Party would not like. Currently, tax consultations perpetuate this discourse by giving short time frames for the private sector to contribute to proposed tax reforms, with the result that a certain class of participants (accountants and lawyers) is greatly advantaged in giving feedback and achieving client-favored tax policy results. With the Tea Party paradigm, that policy loop could be disrupted, as this recent article suggests.

A paradigm shift in US politics is not certain. Any number of things could happen, including the Republican Party standing up to and beating the Tea Party. If that were to happen, then tax policy commentators should be concerned about the issues described above. Maybe once the dust settles we will meet the new boss, same as the old boss. But the current government shutdown (and impending sovereign debt default deadline) exhibits signs of a paradigm shift.  Something fundamental does seem to be changing on the small government side of political discourse. As such, we should stay tuned to the implications for tax policy.

What the banks’ three-year war on Dodd-Frank looks like

A fascinating account from the Sunlight Foundation of the gutting of a regulatory initiative by the kind of methodical persistence that can only be sustained by special interest groups with much to be gained from weak regulation:

In the three years since President Barack Obama signed the Dodd–Frank Wall Street Reform and Consumer Protection Act, federal regulators charged with implementing it have opened their doors to the biggest banks over and over again – 14 times as frequently as they have to representatives of consumer and pro-financial reform groups, a new Sunlight Foundation analysis finds. 

By most accounts, the banks’ besiege-the-regulators strategy has yielded rich rewards in sapping, slowing, and stymieing regulations intended to prevent another massive financial crisis. The emerging consensus is that Dodd-Frank implementation is limping, while the big banks are poised to return to being the most profitable industry in the U.S.

The website feature an interactive showing the number of meetings by sector over the three years; you can mouse over the dots to see their identities. Is it any surprise that the Giant Vampire Squid is at the top with a whopping 222 meetings, followed closely by JP Morgan with 207? Each of these giants independently dwarfs the entire "pro-reform" group, that tiny cluster of dots on the other end of the graph.

Here's a chart depicting meetings by sector over time:

From the discussion:

In the 152 weeks our data cover, we find 59 weeks in which regulators met with financial sector representatives at least once every single day (Monday through Friday), and 47 weeks in which they met with financial sector representatives at least four times. 

... By contrast, active pro-reform groups appeared in only 153 meetings logs – only about one meeting for every 14 regulators held with financial institutions and associations. Moreover, 24.2 percent of pro-reform group meetings took place on a single issue: the Consumer Financial Protection Bureau. 

...Law and lobbying firms, largely working in service of financial institutions, appeared in 707 meetings. Other, non-financial corporate interests, largely energy and agricultural companies, participated in 381 meetings. These companies are major purchasers of derivative contracts, which they use to hedge against price risk.

Imagine you're a regulator. 3,000 meetings with finance industry lobbyists, lawyers, and other corporate interests over three years, each one doing their best to explain why you should undermine the law as written in some tiny way. Would you not want to tear your hair out? Quit in despair? Or just give in to the soothing balm of lobbyist favor? What could possibly be left of the law after this barrage? Meanwhile the anti-regulation crowd has worked very diligently to kill Dodd-Frank's provisions in other ways, such as the lawsuit against the corporate tax transparency provisions sponsored by the American Petroleum Institute.

Sunlight catalogues the delays and dismantling of Dodd Frank that has been accomplished by all this lobbying and litigating and concludes:

...Collectively, the data offer a powerful testament to the oldest and still perhaps most effective technique in the lobbyist’s playbook: sheer persistence. As the Dodd-Frank law passes its third anniversary, lagging on deadlines, and increasingly defanged, the meetings log data offer a compelling reason why: the banks have overwhelmed the regulators. 

Lobbying pays, and it pays whether it is done before, during, or after legislation has been passed. This represents a major governance crisis with no redress anywhere to be found.

Lobbying pays: the skewed impact of the fiscal cliff deal, in one striking chart

From Citizens for Tax Justice:

In 2013, the richest one percent of Americans will receive 18 percent of the tax cuts while ...[t]he bottom three-fifths ... will receive 18 percent of the tax cuts. In other words, the richest one percent of Americans will receive the same share of the tax cuts as the poorest 60 percent of Americans:

 

Note that it is hard to give tax breaks to the poorest, since they aren't much in the tax net to begin with. But what explains the middle? CTJ notes that the deal made permanent 85% of the Bush income tax cuts and 95% of the estate tax cuts, which we already know were skewed toward the wealthy and have presided over the largest widening of the income gap in US history since the gilded age. That is destroying the middle--there aren't so many people in that category any more.  And the ones still in the category have much less to work with:

Why did the fiscal cliff turn into welfare for the 1%? We know the answer, it's always the same. Incidentally Matt Stoller wrote a follow up piece arguing that if we understand how lobbying corrupts policymaking in the US, we can work against it.  But I am not optimistic.

Lobbying is policy in the US. That is how governance works. There are good aspects and bad aspects to the ability of the public to influence lawmakers in a democracy; the issue is what happens to democracy when you have to pay enormous sums to play. It seems that one thing that happens for sure is that elected officials become "utterly unresponsive to the policy preferences of millions of low-income citizens.” Major social imbalance is the result when, as Nancy Folbre says:

Our most affluent citizens now have less to gain from cooperation with the rest of us than they once had. They can effectively threaten to opt out and invest elsewhere. They can also invest vast resources in lobbying and electioneering.

I am still puzzled as to how on earth the NY Times managed to get their headline so wrong. Yves Smith calls it a big lie, and I would have to concur.

AIG PR Blitz “Thanks” Taxpayers For Bailouts

Something went horribly wrong in AIG's public relations department:

what is the message here from AIG?
“I needed money so I stole your car, robbed a liquor store, and now I am giving you your car back and I left a portion of the liquor store loot…”

And I'm proud of that. Thank you, America!

The PR dept didn't completely fail though: they were smart enough to disable the comments section:

At some point, government has got to be accountable.

Here in Quebec, we have perhaps the highest tax burden in North America, and it appears we are using a lot of that money to line the pockets of all too many of our elected leaders.  Tax and development experts have long argued that if you could only get the masses paying taxes, they will demand their governments be accountable to them for how those taxes are used (this has been the argument for salient taxes like the VAT, which everyone feels the pain of daily).  This shameful abuse of taxpayers ought to get people into the streets banging pots.

One fraudulent voter, and 3 things as likely to occur as that

a 3-mile-wide meteorite hitting the earth.   finding an orange lobster.  And one vote actually impacting the outcome of an election.  These three things have about the same percentage chance of happening as a person fraudulently voting in Florida.

This is because among the 10 million voters on Florida's rolls, a months-long search for a virtual tidal wave of fraudulent voters by Republican leaders in the state has turned up but one: a Canadian citizen who pretended to have U.S. citizenship so he could own a gun and vote.  Perhaps not in that order.  The Globe and Mail has the story here.  The man pled guilty and faces a sentence of up to five years and deportation back to Canada; most of the remaining 179,999 persons identified as potentially fraudulent voters were cleared:

Under pressure from the [Florida] governor, the state’s electoral officials had initially flagged more than 180,000 names (many of them Hispanic-sounding) for checking. All but 2,600 of those initially flagged – some of whom turned out to be not only citizens, but military veterans with service in Afghanistan and Iraq – were quickly determined to be bonafide citizens and restored to the voter rolls. 

After further investigation, only one name – Mr. Sever’s – was sent to law-enforcement authorities last spring. Six other “suspect” cases, in a state with more than 10 million names on the voters’ list, are still being investigated.

All that effort to catch one in ten million: curbing voter fraud is a costly lottery.  From Slate:

Here’s the paradox of the new voter ID crackdown, of the 38 states that have debated or passed legislation that puts more demands on voters. The new laws—and in Florida, new executive campaigns—ask voters to show driver’s licenses at the polls, or prove their eligibility with birth certificates, or prove that they’ve never had a felony, or prove that they are citizens of the United States.

Doing that involves navigating your state’s bureaucracies. Those bureaucracies have been shrunk or frozen by years of belt-tightening. They rely on data from other cost-cutting organs of the state. Imagine giving some endomorphic amateur athlete a low-calorie diet and limited access to a gym. He’s training for a mile-long fun run, so there’s no pressure. All of a sudden, you panic about the threat of Sprinting Fraud or something, and you inform the runner of his new task: Run a timed 3.5-mile circuit, tomorrow.

The calorie restriction imagery is apt.  Starve-the-beast led to the strangling of administrators; now those same administrators are meant to spend what little resources they have left to chase after a problem that statistically doesn't even exist, in the meantime cutting off some 2.2 million eligible voters.  A strategy in which the taxpayers, the administrators, and democracy lose should not be a winning strategy.  Yet as we well know, non-voting by certain constituencies will help certain politicians claim victory.

The private sector really is doing ok, or, why workers collaborate in their own self-destruction

If by private sector you mean US corporations, which are making more profit than ever:

From Business Insider.  But not if by private sector you mean wage earners.  As we know median wages have plunged in the US; this article shows that in addition wages as a percentage of GDP are at an all-time low:

The author comments that "[o]ne reason companies are so profitable is that they're paying employees less than they ever have as a share of GDP. And that, in turn, is one reason the economy is so weak: Those "wages" are other companies' revenue."


The juxtaposition thus paints a zero-sum picture: that as wages fall, corporate profits rise.  We've seen other charts that show corporations and managers claiming most or all productivity gains over the last several decades at least.

Richard Murphy responds: "the reason why we have a crisis is that the wealthiest and companies got too rich whilst most got left behind so the wealthiest and companies lent the rest of us their excess wealth through debt arrangements which people could not repay."

Now consider Yves Smith's post today in response to sociologist Claude Fischer, who asks "Why Don't Americans Take Vacations?" and answers with rugged individualism and something about the American way.  Nonsense, says Yves, the right answer is, because of a systemic and steady diet of anti-labor propaganda.  Yves points us to a related article of interest by Mark Ames from 2006, "We're not going on a summer holiday," which says:

vacation time has been slowly disappearing for American workers ever since the Reagan Revolution, which ushered in a violent shift in corporate culture away from the paternalistic post-New Deal model towards the current stock-price-is-God model. According to Harvard economist Juliet Schor, in the 30 years before Reagan's presidency American workers were getting more and more vacation time; however, in the 1980s, that trend suddenly reversed. By the time Reagan left office, Americans got three and a half fewer days off per year, on average.

Ames says at the same time corporate managers have vastly increased their leisure time and pursuits.  A glance at the FT's How to Spend It can certainly confirm the market for vacation by the ultra-rich.  For Ames the most amazing aspect is that

the designated victims in this drama - America's workers - are such willing collaborators in their own existential demise.

...according to a New York Times article, British workers get more than 50% more paid holiday per year than Americans, while the French and Italians get almost twice what the Americans get. The average American's response is neither admiration nor envy, but rather a kind of sick pride in their own wretchedness, combined with righteous contempt for their European worker counterparts, whom most Americans see as morally degenerate precisely because they have more leisure time, more job security, health benefits and other advantages. 

We have seen a related version of this in the public outrage ginned up over the "generous" health and pension packages of public sector employees that has allowed conservative governors to eviscerate worker's benefits and their rights in the process--c.f. Wisconsin.   A constant stream of propaganda tells us that public sector workers must be stripped of their many unearned and undeserved benefits.  There is no equally powerful alternative stream of propaganda demanding better health and pension benefits for all workers.   There is no alternative stream painting a picture of life as an American worker when wages stabilise to global median levels.  The result seems to perfectly illustrate Ames' willing collaboration in self-destruction.

Why don't politicians support public institutions?

Catherine Rampell talks about the vicious cycle that occurs when budget cuts lead to understaffing and inefficiency, which leads to declined trust government institutions, which leads to further cuts. Writing  in response to Tyler Cowan's post on the loss of trust in government, she argues that trying to cut government jobs or government spending will erode public trust further, using the Post Office as a case in point:

Because it is still waiting for Congressional approval to make many of these changes, the Postal Service is cutting costs by reducing staff levels and hours at existing facilities. Reducing costs in the way that’s most politically expedient rather than most efficient and economically sensible means that service will most likely get worse, customers will lose confidence in the agency, market share will fall further and the agency will be forced to make more drastic and possibly inefficient cuts.

Rampell could have looked to the IRS for a similar and I think very troublesome example of this problem.  It seems so perverse to me that politicians can decry and claim to crack down on tax evasion,  while using the next breath to argue that IRS funding should be cut in the name of efficiency in governance.  Tax compliance is a big project and it requires expertise and resources.  Cut those and I think you should expect compliance to fall accordingly.  Less compliance leads to less revenues being collected leads to even more pressure on the budget.   That's a very vicious cycle and moreover it is the fundamental source of all the budget pressure for all the other institutions of government.  But why do politicians let this happen?  Isn't it in their interest to have strong institutions creating virtuous cycles?


From Cowan's post:

 State and local governments are controlled by politicians and, indirectly, by voters. And for better or worse, those voters have lost faith in the social returns of these jobs and our ability to afford them. The voters have responded by looking to cut expenses, and they’ve chosen state and local government employment as a target.

From this we may well extrapolate to the conclusion that politicians undermine government because even though stronger government would be better for politicians as a whole, each individual politician's re-election hinges on satisfying a public that has lost trust in government.

Cowan says all would be well if we could just wait for prices to rise again:

The slow cure for this problem is to allow asset prices, along with perceived wealth and trust, to return to or exceed the previous levels over time. Americans would then spend and invest more money, bolstering both aggregate demand and supply, and in both the private and public sectors. But the process would be cumbersome, partly because trust is more easily destroyed than restored.  

This sounds sort of ridiculous to me as a strategy.  Probably because I am not an economist but I do read children's books and I have heard this story before.

Cowan goes on to talk about the various fixes available to governments, but concludes that basic trust in government needs to be restored before any big policies can be implemented.  I think it's certainly true that lack of trust in government is spurring NGO interest in transparency in tax matters, c.f. the EITI and CBCR movements, UK Uncut's suit against HMRC, Oxfam's suit against the SEC, etc.  I don't see rising prices doing much for the core concerns there.

Why do we subsidize oil & gas?

Easy: because politicians can't get re-elected when fuel prices seem high.