Saturday, November 5, 2011

deregulation, tax reform, capital gains cuts, and corporate tax cuts

For those of you just joining American Politics, the title describes the "conservative" "solution" to the economy (not just our current economic problems, but all economic problems at all times).  Now, I have varying feelings about the items in this list.  I basically think that capital gains should be treated as regular income, which couldn't be farther from the conservative position.  By way of contrast, I think that certain kinds of tax reform (mostly in terms of loophole removal) would be awesome for both corporations and people, and I think that the government could do a lot of good by removing regulations created to protect incumbent businesses from entrepreneurial competition.  But! I think it is crystal clear that none of these things are solutions to the current economic crisis.  In case you disagree with me, I did a little research and made some charts.

About regulation:

This note by Dr. Jan Eberly at the US Treasury pretty much demolishes the idea that regulatory uncertainty has anything whatsoever to do with our current non-recovery.  I don't have a lot to add to it, so I'll just pull out the most telling points.

  • Corporate profits are as high (as a share of the economy) as they were pre-recession, and the most regulated industries are among the most profitable
  • Investment in software and equipment has grown at 5 times the rate of growth in the rest of the economy.  Why invest so much if future regulation looks so dismal?
  • Lenders don't see much risk difference between more and less regulated industries (as seen in bond market yields -- the interest rates the market demands)

  • The U.S. markets are highly correlated to the German markets, though Germany has a starkly different regulatory environment.  This means that the bad things in the US are tightly linked to the bad things in Germany (and I don't think our regulations trend very well with Germany's)

Basically, hiring is a reaction to increases in demand for goods and services now, or anticipated increases in demand for goods and services in the very near future.  You need more people to sell more of your stuff, but you don't need them if you aren't selling a lot of stuff no matter how profitably you're selling it.  This shouldn't be very surprising.

About personal income taxes:

I already did a whole big post about this.  Basically, there is zero historical evidence that lowering the top marginal tax rate does good things for economic growth.  Also, taxes are lower now than they have been in decades.

About corporate tax cuts:

Corporate taxes haven't really changed recently, and since they already have record profits, it's not clear why giving them even more money would raise hiring.  If they were hurting for cash, I could see it.  That said, our corporate tax code clearly needs to be reformed.  We have some of the highest marginal rates in the developed world, but we get basically no taxes from a significant set of very large and profitable companies, and our loophole intensive tax code leads to average corporate rates similar to the rest of the world. The graph is from some old post in my reader feed.

You might be reading this and thinking that it should all be a wash... the averages are the same and some people do a lot better than average.  The important thing to note is that the complexity of the corporate tax code heavily favors large companies that have been around a long time.  It takes time and money to construct legal tax evasion.  Why would we favor large incumbents over small startups?  Probably because they can afford more lobbyists.

About capital gains taxes:

Basically, these are taxes on money made by buying low and selling high, and they are set lower than regular income taxes to make rich people richer encourage business investment.  The idea is that businesses (especially startups) need money from investors to fund themselves, and people wont want to acquire equity in companies unless they can sell it later for more.  First of all, I think there's something horribly wrong with the idea that the best reason to hold equity in a company is so you can sell it later for more money.  This encourages investment in popular firms, not sound ones.  Dividends make much better incentives for stock holders because they tie the fortunes of the owners to the fortunes of the company... you know, like you might want to.  Secondly, I don't understand how these investments differ in any way from the investments of time and money that people make in preparing for and acting on wage-labor money making propositions.  Why should this form of income get special treatment?

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