Tuesday, January 7, 2014

Advocating Elimination of the Corporate Income Tax, Economist Laurence Kotlikoff Illustrates All That is Wrong With an Academic Economist

An Economist Apparently Ignorant of What Drives Economic Growth and Investment

It is hard to fault the New York Times for presenting alternative views, but it is hard to praise them when they present views that so defy logic and common sense as to be a total waste of time and space.  This is the case with the opinion piece by Boston University Economist Laurence Kotlikoff, who argues that eliminating the corporate income tax would be a huge bonanza for the wealthy American workers.

I, like many economists, suspect that our corporate income tax is economically self-defeating — hurting workers, not capitalists, and collecting precious little revenue to boot.

So what is the basis of this conclusion?  Well there is the obligatory economic model, the black box of equations and computer programming that spits out conclusions that should never be questioned even if they are nonsensical, because, well, it’s a computer and mathematics.

I’ve developed such a model with three colleagues through the Tax Analysis Center, a nonpartisan research group. Our findings make a very strong, worker-based case for corporate tax reform.

In the model, eliminating the United States’ corporate income tax produces rapid and dramatic increases in American investment, output and real wages, making the tax cut self-financing to a significant extent. Somewhat smaller gains arise from revenue-neutral corporate tax base broadening, specifically cutting the corporate tax rate to 9 percent and eliminating all corporate tax loopholes. Both policies generate welfare gains for all generations in the United States, but particularly for young and future workers. Moreover, all Americans can benefit, though by less, if foreign countries also cut their corporate tax rates.

And to illustrate his point Mr. Kotlikoff makes this statement.

The rich, including Boeing’s stockholders, can take their companies and run — and not just from Washington State to, say, North Carolina. To avoid our federal corporate tax, they can, and often do, move their operations and jobs abroad. Apple’s tax return says it all: The company, according to one calculation, paid only 8.2 percent of its worldwide profits in United States corporate income taxes, thanks to piling up most of its profits and locating far too many of its operations overseas.

The implication of course is that Apple moved jobs overseas because of taxes.  But what really happened is that Apple moved income overseas through sophisticated tax accounting to lower its tax rate.  And its overseas operations are largely independent of U. S. tax laws, Apple manufactures overseas because of lower labor costs and lower regulations.  A real economist would know this, an academic economist is easily fooled.  But even most academic economists are not fooled by the doctrine of 'taxing rich people really hurts poor people'.  Mr. Kotlikoff is apparently the exception.

Economic growth is driven by public and private investment.  Private investment is driven by consumer demand.  If one really wants higher economic growth, higher income for consumers and greater government investment in education, training, infrastructure is the key.  Business taxes at current levels are a sideshow, a distraction, a way for politicians to secure huge campaign donations from corporations and wealthy individuals.

Okay New York Times, we appreciate your effort here, but can’t you find someone to support a position who actually knows what he or she is talking about.

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