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Sep 17 2012

Oil Company CEO: 2% Taxes is Too High

Here’s a perfect example why marginal tax rates should be mostly ignored and only effective tax rates matter. Harold Hamm, the CEO of Continental Resources and Romney’s chief energy adviser, testified in front of a Congressional committee to complain about his company’s astronomical tax rate:

These same tax provisions not only allowed us to survive the disastrous years of OPEC dominance and decades of sub-economic oil and gas prices here in America, but most importantly, they allowed us to try new things and fail, and try again and fail, until we finally succeeded in “breaking the code” to produce the vast resource plays (even the source rocks themselves) like the Bakken in Montana and North Dakota. Continental’s effective tax rate is 38%!

But as ThinkProgress notes, that isn’t even close:

But according to Citizens for Tax Justice, Continental paid an average 2.2 percent tax rate, or $40 million, over five years.

In fact, the highest federal tax rate paid by Continental in the last five years, during which they’ve made almost $2 billion in profits, was 3.2%. The lowest was .1%. And he thinks that’s too high.

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  1. 1
    Zinc Avenger (Sarcasm Tags 3.0 Compliant)

    So how do I register myself as an oil company, for tax purposes?

  2. 2
    Michael Heath

    While I advocate eradicating income and capital gains taxes on U.S. businesses, a rate below 3% probably either:
    a) a considered factor when making major business decisions (in high margin businesses) or
    b) doesn’t determine major business decisions in low margin sectors.

    I was pleasantly surprised to see Paul Volcker do an interview the other day (IIRC with the NYTs); where he advocated for a consumption-like tax.

  3. 3
    Zugswang

    I think we’ve learned that any time a company has to give money to something else, be it workers’ salaries, taxes, equipment safety regulations, it’s too high. What a mockery of justice that money that goes in has to go somewhere other than a company executive’s off-shore bank account.

  4. 4
    leftwingfox

    Personally, I’ve been advocating heavily for labor-pegged tariffs. It’s long past time corporations stopped profiting from making products in a $10/day economy and selling them at prices a $20/hour economy can afford.

  5. 5
    dsmccoy

    @1 – if you make a $2 billion profit, you’ll easily be able to hire someone to take care of the not paying taxes part.

  6. 6
    matty1

    @2 Aren’t consumption based taxes regressive? Even if we ignore arguments about fairness I’m not convinced decreasing the spending power of low income housesholds helps an economy grow but perhaps you can explain.

  7. 7
    Michael Heath

    leftwingfox writes:

    Personally, I’ve been advocating heavily for labor-pegged tariffs. It’s long past time corporations stopped profiting from making products in a $10/day economy and selling them at prices a $20/hour economy can afford.

    Corporations aren’t the only benefactors of a free market global economy. Consumers here also benefit as does economic growth in general. Our root cause problem isn’t competitive advantages in developing economies which beat our own; it is instead an increasing inability to exploit our current and projected competitive advantages.

    Liberal populism, similar to today’s brand of populist conservatism, proved long-ago it’s incapable of good governance. For the very reason today’s brand of conservatism is failing, because anti-intellectual populism is not capable of setting sound policy – lessons from history fused to what experts argue do far better. In fact many of our cities and my state of Michigan still suffer from this old type of liberal policies.

  8. 8
    Michael Heath

    matty1 writes:

    @2 Aren’t consumption based taxes regressive? Even if we ignore arguments about fairness I’m not convinced decreasing the spending power of low income housesholds helps an economy grow but perhaps you can explain.

    They don’t have to be regressive.

  9. 9
    Michael Heath

    matty1 writes:

    @2 Aren’t consumption based taxes regressive? Even if we ignore arguments about fairness I’m not convinced decreasing the spending power of low income housesholds helps an economy grow but perhaps you can explain.

    They don’t have to be regressive. It addition it’s the wrong first question to ask. Far more important is how this tax scheme differs from other schemes when it comes to optimizing economic growth, improving the labor market, and maximizing meidan discretionary income trends (the latter roughly indexes economic equality which in turn correlates to maximum economic growth).

    We need to stop worrying so much about how we screw the other side and instead first look towards what would work best.

  10. 10
    matty1

    Michael Heath,

    OK so can you write a thumbnail sketch of what your preferred tax system is and how it would maximise median discretionary income?

  11. 11
    Artor

    So his business failed, failed, failed, until it found the right formula for success. Which is apparently paying next to nothing in taxes. I’m going to go out on a limb here and guess that it also involves massive gov’t subsidies and contracts. I’d be a success too if I could get the gov’t to pay me billions and expect nothing back. We should all try that, right?

  12. 12
    Raging Bee

    Liberal populism, similar to today’s brand of populist conservatism, proved long-ago it’s incapable of good governance.

    Examples, please?

  13. 13
    Michael Heath

    I wrote:

    Liberal populism, similar to today’s brand of populist conservatism, proved long-ago it’s incapable of good governance.

    Raging Bee responds:

    Examples, please?

    In no particular order, the first is support of union rules for government employees who long resisted pay for performance and other measures which reconcile to the mission of the entity which employed them. This culture was attendant in the atrocious deals unions and businesses did in the 1950s through 1970s in the private sector, which has led to an unsustainable framework for both current business ventures and current retirees with the government picking up the tab on those failed pension plans. There are exceptions, in my state an exemplary outfit is the Dept. of Natural Resources who from my perspective takes a science first approach; but our teachers’ unions have long promoted mediocre results similar to what we see in many other states.

    The second is electing liberal populists at the local level who effectively burnt their tax receipts rather than prudently investing and expending those funds. These cities have long depended on state tax receipts, not to pull them up to sustainability, but where those funds have gone down the same rabbit hole for decades. I include these local officials inability to manage their responsibilities as well, including their dealing with government unions. This harm is now amplified by conservatives who’ve passed budget deficit laws at the state level which requires state and local governments to contract spending and investment at the very time the economy requires them to expand spending and investment (during a recession).

    A third instance is promoting laws and politicians which makes it more difficult for businesses to justify operations here in the states and thrive here relative to other places. For example, immigration laws which favor familial ties at the expense of college students and people with degrees and money. Another example is liberal populists continually demonstrate no clue or appreciation for the risks business people taken when they start or invest in business ventures. Instead they use the worst examples of business as strawman to justify conclusions about the attributes of all businesspeople. Where Mitt Romney’s not helping kill off this caricature; I find his record horrific beyond anything I ever even imagined let alone observed.

    I want to point out the current Democratic party began to abandon these defects by the 1980s, and arguably in the mid-1970s. Their leadership at the national level and at least in my state of Michigan, have also abandoned these defects, to their credit. They are not committed to a more technocratic form of government which relies on what experts advise rather than popular populist talking points. But we still see some remnants of these defective attributes amongst the more populist branch of the liberal party. To the Democrats credit, their populists been effectively marginalized into near-irrelevancy, unlike the Republican party whose populists are nearly its entire voting base.

  14. 14
    Ben P

    It’s important to remember that due to the slightly ridiculous nature of our corporate tax system, he’s not just making up the 38% number.

    There are two distinct sources for information on how much a company has paid in taxes, tax returns and SEC filings. The SEC filings use a completely different definition of taxes. The Citizens for tax justice link above pretends that Continental will apparently simply be able to ignore tax law and refuse to pay taxes either here, or in another country.

    The SEC Filings lay out a company’s performance for a given year. It generally include financial statements that will show how much a company paid in taxes in that given year.

    However, particularly with something like an oil company, consider that much of their profit comes from operations conducted abroad.

    If continental has an operation in Saudia Arabia, the money made by that operation can stay with the foreign subsidiary, and Continental doesn’t have to pay taxes on it until it brings that money back to the United States. However, depending on how it does this, it may be liable for Saudi Arabian taxes, which is a seperate point. The company’s federal income tax burden doesn’t reveal its total tax burden by a large margin.

    The CTJ article above just pooh-poohs the deferred taxes and pretends like they’ll never be paid. The fact is they have to be paid, or deferred until the profits are used up. The company can’t just ignore the rule. It has to account for those deferred taxes. If it retains and later spends that money, the money can be deducted, but then the money wasn’t profit that returned to the shareholders.

    So in reality, while saying they paid a 38% efffective tax rate is deceptive, it is no less, and quite possibly more deceptive to say that they only paid 2% in taxes.

  15. 15
    Ben P

    OK so can you write a thumbnail sketch of what your preferred tax system is and how it would maximise median discretionary income?

    Just curious, why is “maximizing median income” your apparent #1 goal for a tax system?

  16. 16
    Michael Heath

    matty1 writes:

    OK so can you write a thumbnail sketch of what your preferred tax system is and how it would maximise median discretionary income?

    I would start the repeal of all the Bush tax cuts, not just those for the richest among us. Because we need even more revenue to better grow the economy and eradicate debt, and even though I support a decrease in the military budget, I’d go with VAT/consumption tax on luxury goods; with policies in place that put punitive measures in place to insure tax avoidance on this tax is not practical.

    I would eradicate taxes on businesses and capital gains (though not dividends) and would especially seek tax policies which attracted capital not stashed in tax havens but also intellectual capital operating outside the U.S. I favor tax policies which attract capital and educated labor distinctly better than any other developed economy, conceding the cheap labor market to places like India. Our future is neither the late-1900s or 1950s labor markets, but instead one where people are not only well-educated, but continually learning and able to think.

    Some redefinition of what defines a capital gain is needed since hedge fund managers are not really creating gains for their account, but instead earning income from their efforts just like the rest of us working stiffs do; so they should be taxed equal to others. I would also significantly increase estate taxes and reduce the amount of avoidance tricks, especially given my proposing eradicating taxes on capital gains.

    I would eradicate the cap on income taxed for Social Security to increase benefits, not decrease them. I’d also make benefits means-tested (OMG! Socialism!). I’d also increase payroll withholding taxes on Medicare and work towards a single-payer healthcare model, starting with a public option. I would transfer the employer-contribution for both SS and Medicare to the employee since the employee already effectively pays it, but fails to appreciate how this cost impacts his wages.

    While I think we’d also be better off replacing income taxes with a complex, multi-variable VAT/consumption tax (variable based on the item category) with rebates for the poor. I would leverage the slow expansion of the luxury VAT/consumption tax I proposed above to ease into it and while monitoring its efficacy relative to some key metrics: GDP growth rate, underemployment rate, median discretionary income trends, other metrics which measure economic disparities).

    And while I reject protectionism which favors consumers, I’m far more biased towards tax policies which best exploit supply opportunities. Where we manage the demand side with cyclical-sensitive fiscal policies; currently we rely far too much on monetary policy.

    While Bruce Bartlett doesn’t exemplify my positions well, he’s probably the best popular writer of economics which provides a sufficient framework and presentation of arguments to work through my arguments and others. Mr. Barlett is one of the advocates for a VAT/consumption tax albeit a decade after I started. And like any credible intellectual, Mr. Bartlett has evolving arguments and is smart enough to argue his successfully implemented policy preferences in the past wouldn’t work now because conditions are different. He’s the architect of the Kemp-Roth tax cuts implemented in the early-1980s, which are now credited to Ronald Reagan along with being a seminal figure in H.W. Bush’s going back on his promise to not raise taxes but instead to raise them in spite of his ‘read my lips’ promise. Now Bartlett’s on the front lines now arguing effective tax rates are too low, which is why he promotes a VAT; however I promote far more spending than he does.

  17. 17
    Michael Heath

    CLARIFICATION: In my previous post I was asserting the Democrats are now more technocrat. A typo has me incoherently claiming they’re not technocratic friendly.

    Ben P writes:

    Just curious, why is “maximizing median income” your apparent #1 goal for a tax system?

    I’ve never claimed median income is #1, instead I include median discretionary income in a set of items which are #1. That set also includes optimal GDP growth trends and a healthier labor market.

    Why is this particular income trend metric in my set? We empirically understand that optimal long-term economic growth can’t be sustained with increasing income disparity. Median discretionary income focuses on after-tax income which is a better measure of how well off we are for a given period, and using the median considers the mid-point. We can after-all get richer as a country where that wealth accumulation is ending up in few hands, so using some sort of average is useless when considering the U.S. population for this sort of measurement. More importantly it gives us important information about how much money the midpoint is making, after taxes, for a given time period (usually a year).

    In addition liberal populists focus too much on advocating the other richer guy needs to be screwed more than us. In fact I almost always encounter not questions about the efficacy of consumption taxes relative to metrics we all want to see improve, but instead how it might favor the rich’s tax liability over the poor’s; rather than asking how it improves the lot of the poor overall by looking at their income after-taxes and their job prospects.

    A far better approach is to insure the mid-point is seeing improvement rather than worrying about the other guy. If I’m the median and my job prospects, savings, and income are all rising at a healthy rate, why should I advocate against the policies which did such if they favor a rich guy’s tax liability more than my own*? While this type of screw the rich attitude is one of the most repugnant aspects of liberal populism, it’s also stupid. That’s because those policies which best generate economic growth also require less economic disparity; so liberals win by merely promoting the best policies, without having to reveal their bigotry towards the rich. Where the bad behavior of conservatives towards the rich in no way excuses the bad behavior of liberal populists who yearn to screw the rich. In fact there’s far more to condemn about conservative attitudes towards the rich, but that doesn’t negate liberal defects.

    *I’m not arguing the rich should pay less in taxes, but instead pointing out the absurdity of this knee-jerk populist liberal argument which always seems to be the first reaction to discussions about taxes. This sort of liberal immediately focuses on a secondary concern with no apparent cognizance or concern far more imperative concerns require consideration, making it one of the most prevalent populist liberal blind spots.

  18. 18
    Rob F

    Although not explicitly mentioned here, a VAT rebate could be made by abolishing food stamps, unemployment insurance, welfare, etc, combining all this into one payment. At the same time, either tax all income of all kinds at a flat rate. Then, after setting the payment to an appropriate amount (poverty line income?), giving it to everyone. This system is known as a negative income tax. Once the rebate is taken into account (by subtracting it from actual taxes paid) it emerges that this is a progressive income tax system (the highest rate is asymptotically the flat rate). Some people get more from the government than they pay, some pay nothing (rebate=taxes) and some pay a net amount to the government.

    Compared to the current system, it has the following advantages:
    * It is a lot simpler. Since all incomes are taxed the same way (with no deductions) pretty much everyone who can do arithmetic and percents can do their taxes. Tax software will be thrown out of work.
    * It allows the combining and abolition of several government programs, resulting in less paperwork and lower administrative costs. The end result is a leaner, more efficient government. (You hear this conservatives?)
    * All taxes distort the market, but this one distorts it less since all income, no matter the source, is treated identically.
    * It eliminates the welfare trap. People always have an incentive to earn more money.
    * It makes the loss of a job easier to weather. If your employer is screwing you, it’s easier to walk through on a threat to quit and work somewhere else (which is why, if a certain group of ideologues took their principles seriously, they’d support this since it makes it easier to just “pack up and leave”). (Single-payer healthcare, or somehow making health insurance “portable” between jobs would accomplish the same thing.)

    A similar guaranteed income could be used with a VAT, with the rebate taking into account minimum (poverty-line income plus expected VAT paid?). Compared to a NIT, it has the following advantages and disadvantages:

    * If someone is sitting on a pile of cash, and then spends it on something, that wealth is also taxed, whereas it wouldn’t be under a NIT. Hence, as far as this goes, this alternative system would also tax wealth. In this sense, it is more progressive than a NIT.
    * It is sometimes argued that people’s spending varies less than their income. If this is true than a VAT is (if these are the right words) easier to plan for and it results in each person’s total taxes paid varying less.
    * However, a VAT more-or-less conscripts businesses into the role of tax collectors, and makes bookkeeping more complicated.
    * In most cases, VATs are better than sales taxes because they are harder to evade.

    Whichever of the above two suggestions are chosen, there should still be other taxes: gradually increasing carbon taxes (to encourage energy conservation and fight global warming); a tobin tax (to reduce market speculation, volatility, and bubbles); a 90% income tax on the income of lobbyists and a very heavy sales tax (maybe 100%?) on political advertisements (perhaps exempting parties?) in order to reduce the role of money, corporations, and plutocrats in politics.

  19. 19
    leftwingfox

    Corporations aren’t the only benefactors of a free market global economy. Consumers here also benefit as does economic growth in general.

    Hardly. I kept an eye on prices as everything went over to China; most of the products kept their prices. We are getting a flood of products on the very low end; the Dollarama/International Clothiers type shops, but most of the mid-range and high-end products have retained prices. Branding and market segmentation have preserved profits while minimizing labor costs.

    Our root cause problem isn’t competitive advantages in developing economies which beat our own; it is instead an increasing inability to exploit our current and projected competitive advantages.

    What advantages are those, exactly? I keep hearing economists talking about competitive advantages, but too often, that leads to education (which we are destroying via conservative delusions and massive student debt), and the financial sector, which is increasingly looking like legalized banditry.

    We have never actually had a labor-based tariff. Tariffs were selective based on which industries were to be “protected” from foreign competition. What I’m suggesting is an equal grounding on labor, so that comparative advantages can allow the market to interact within tolerable limits.

    If we want to envision a society where there is a basic minimum standard of living, we should not be providing a massive exception to that standard by exporting labor to the lowest bidder. By basing tariffs on the federal minimum wage, overseas goods remain competitive with domestic products, preserving consumer choice, but allow a method for government to repatriate corporate profits from taking advantage of differing standards of living. It would also help discourage the governments of developing nations from oppressing labor on behalf of corporate interests, as corporations would not see those as cutting into profits: the difference between wage levels lost to wages or tariffs would be equal.

  20. 20
    Michael Heath

    Me earlier:

    Corporations aren’t the only benefactors of a free market global economy. Consumers here also benefit as does economic growth in general.

    leftwingfox writes:

    Hardly. I kept an eye on prices as everything went over to China; most of the products kept their prices. We are getting a flood of products on the very low end; the Dollarama/International Clothiers type shops, but most of the mid-range and high-end products have retained prices. Branding and market segmentation have preserved profits while minimizing labor costs.

    Your observations don’t count relative to econometrics which show outsourced items are enormously cheaper than they used to be. And that doesn’t even include the fact, for example in the computer or appliance sectors, where we’re getting far more features/power for less money as well (not all attributable to outsourcing of course). Clothing is another sector where prices are far less than they used to be, as is food, not to mention we can now source some foods year-round rather than seasonally. In addition our automobiles also last far longer, and are far safer than they used to precisely because of free trade.

    You’re arguing against reality, I surmise because you hate business like conservatives hate intellectuals.

  21. 21
    PatrickG

    You’ve written quite a bit here, far too much for me to respond to in any real depth. I don’t have any real training in economics, more of an interested extreme-amateur, but some of what you’ve said seems questionable.

    I’m very time-limited at the moment, so I’ll use quotes from your last post to illustrate the qualms I have regarding your position. If I’ve misunderstood you, I hope you’ll clarify. Also note that I’m not going to cite some assertions, not for lack of ability to do so, but simply for time constraints. I’ll come back to this when I can and do so.

    In addition our automobiles also last far longer, and are far safer than they used to precisely because of free trade.

    Could you back this assertion up? I might counter-argue that increased technical knowledge, material science innovations, and strong regulation helped automobiles last longer and become safer. Attributing automobile improvements to “free trade” sounds disingenuous, particularly when it comes to safety standards issued by governmental entities. It also echoes a great deal of rhetoric that comes loaded with a lot of connotations and implications. Whatever your position, I’m sure we can agree that “free trade” is a highly loaded term.

    Clothing is another sector where prices are far less than they used to be, as is food, not to mention we can now source some foods year-round rather than seasonally.

    I’m looking at BLS numbers for apparel, and have to dispute your claim of clothing being lower priced. This isn’t a great forum to display time-series, but see here for a timeseries from 1914-2012. I made a quick chart on their site that demonstrates that clothing prices rose steadily until around 1990, then held steady until 1998-ish, dropped some, and are rising again.

    This time series does not reflect inflation (I think), so it’s clear that clothing prices have fallen. However, given the time frame of change, I would suggest that this trend could be attributed to exactly the problems with free-market solutions given by other commenters (namely, labor exploitation and an advent of “free trade” agreements that demonstrably advantaged developed nations over developing nations). This is an inherent cost factor that is not factored into the at-market price.

    Your assertion regarding food prices isn’t correct, at least at first glance. Same source: BLS data. Food prices are more volatile, but were flat from 1950-1972(ish), and have steadily risen since then, with some fluctuations that do not detract from the trend.

    I’d also point out that more efficient food production (resulting in drops in some specific food prices, notably meat) has come at increased environmental cost (land-use change, food contamination, transport costs, increased GHG emissions) which, again, typically are not factored into the at-market price. For example, Dole might have some really cheap bananas on the market, but they don’t absorb all the costs of production.

    Hopefully these objections illustrate why I’m taking some issue with your comments, and I look forward to your response. Again, I won’t be at keyboard for some time (which I hope explains the paucity of links to a number of my assertions — I’d be happy to come back and source later, if it’s not considered a derail).

  22. 22
    leftwingfox

    You’re arguing against reality, I surmise because you hate business like conservatives hate intellectuals.

    No. Just no. That was beneath you.

    I’m talking about adjusting trade policy to respect the minimum wage laws which allow local economies to set quality of life. I did not call for restricting trade, nor did I call for limiting trade in any other way. And the only logical conclusion for you is that I “hate businessmen?” By allowing local businessmen to compete on a level playing field with local labor against multinationals with Chinese labor?

    Well shoot. Nice to know that the christians are right. I must be calling for the separation of church and state because I “Hate Jesus”. Thank you so much for that.

  23. 23
    Michael Heath

    PatrickG,

    I don’t find the CPI a valid indicator of the change in value consumers are receiving over time. It’s instead an indicator of price inflation in a certain sector. A better model would be one that shows how long a median worker has to work to purchase a certain good or what share of income is spent to purchase a good, and even those are flawed because they doesn’t consider the change in quality, e.g., appliances, autos, and computers have all made enormous improvements in performance and reliability which can’t be measured using this metric. Income is also flawed because it introduces another variable that may change to see a drop in price for a given valued good, like due to an increase in income rather than a drop in the cost to purchase a good. Another method to see how much a society pays for a certain good as a share of GDP which again still doesn’t consider the quality, e.g., part of why our healthcare costs are rising to 17% of GDP is because we’re able to technically capable of providing more treatment to heal people who were previously not as treatable. That value is not reflected in any of these three metrics. Here’s a chart showing the cost of food relative to income: http://goo.gl/tx2pR

    Re your point about free trade’s impact on vehicle performance and quality: I was in that sector when it went through a sea change in its mindset because free trade introduced competition to the domestic auto sector where GM, Ford, Chrysler, and American Motors had long-enjoyed an oligopoly.

    The Japanese introduced the new requirement that to succeed, all auto manufacturers in all markets had to employ “TQM”, total quality management programs to survive. This was a cultural shift within the American manufacturers analogous to Tea Partiers having to abandon biblical truth for the truth science discovers. And the influx of European competition with thir performance features, with the Japanese quickly aping them with their luxury lines, gave way to the type of performance and engineering innovations we now take for granted in even entry level vehicles.

    Free trade has also introduced opportunities for all our companies to grow in those sectors as well, where GM and Ford are both investing heavily in the China consumer market. And where our heavy equipment manufacturers already flourish.

  24. 24
    Michael Heath

    Me earlier to leftwingfox:

    You’re arguing against reality [claiming that free trade hasn't led to lower prices for U.S. consumers], I surmise because you hate business like conservatives hate intellectuals.

    leftwing fox responds:

    No. Just no. That was beneath you. [...] Well shoot. Nice to know that the christians are right. I must be calling for the separation of church and state because I “Hate Jesus”. Thank you so much for that.

    You’re correct, that was uncalled for and I apologize. You did not deserve such a snide insult. It’s unseemly to smear behavior I encounter from others onto you if you haven’t demonstrated that behavior, which you haven’t.

    leftwing fox continues:

    I’m talking about adjusting trade policy to respect the minimum wage laws which allow local economies to set quality of life. I did not call for restricting trade, nor did I call for limiting trade in any other way. And the only logical conclusion for you is that I “hate businessmen?” By allowing local businessmen to compete on a level playing field with local labor against multinationals with Chinese labor?

    I think you were and still are calling for restricting trade, that’s effectively what labor tariffs do. Such tariffs also restrict our ability to maximize opportunities in countries whose trade is reduced by such tariffs.

    And such tariffs in no way level the playing field. Developing economies with cheap labor have all sorts of advantages and disadvantages which make it not only impossible to level the field, but would lead to less economic growth for all players – it’s not a zero-sum game. Comparative advantage” is not a mere theoretical explanatory model, but one which is continuously observed and validated as an optimal method of economic growth for all trading partners.

    As I stated earlier; we can’t solve our own growth problems by punishing countries with cheaper labor in some sectors. We can solve our stagnant growth problem by taking the initiative to exploit more lucrative opportunities than even those countries like India and China have by leveraging what is special about our country. Instead the populist left continues to act as if we don’t operate within a global economy where they continue to promote policies cherished by the left (taxing capital) and the right (not sufficiently investing in education). Taxing capital used to work because we were the only big game in town after WWII, but that’s no longer true; now we need to exploit our capital markets even more precisely because we don’t have the advantage of cheap labor.

    One of the most memorable lessons I learned in business school was in a class on business strategy; it was a truism (which I typically abhor). It went, “all successful strategies ultimately fail; that’s because conditions change”. So in this case, we can’t always consider historical trends to inform us on how to act now. We must rely on what the experts say because those past results can’t necessarily be repeated now because conditions now are so much different than they were when we did have more protectionist policies.

  25. 25
    Suido

    Bookmarked for thorough reading later.

    Quick question for Michael Heath regarding externalities:

    What do you think is the most appropriate method for governments to ensure companies appropriately value the negative externalities of their goods/services? For example, carbon tax vs cap and trade regulatory system vs punitive measures for environmental damage (assuming all revenue in each case is used in environmentally remedial fashion).

  26. 26
    Michael Heath

    Suido writes:

    What do you think is the most appropriate method for governments to ensure companies appropriately value the negative externalities of their goods/services? For example, carbon tax vs cap and trade regulatory system vs punitive measures for environmental damage (assuming all revenue in each case is used in environmentally remedial fashion).

    I support fee and dividend; we’re too far down the rabbit hole for cap and trade to work since it limits the amount you can reduce. Any of them would have worked if we’d started such in the late-1970s, it’s maybe so late now we also need a carbon tax.

    I’d like to see negative externalities nearly eradicated by regulations and the remainder still borne by the producers and consumers of the supply chain which is creating such externalities. E.g., how do we transfer the cost of having two aircraft carriers in the Persian Gulf to consumers of oil products rather than the U.S. federal income taxpayer? Probably through a federal gas tax paid at the pump where those funds are allocated to the Dept. of Defense and Dept. of Energy; but such might not work for all scenarios. I’m not sure there’s one tax scheme that would effectively work for all such scenarios.

  27. 27
    PatrickG

    @ Michael Heath:

    It’s a bit late for me, but I wanted to check in and say I’ve read your response, and appreciate you taking the time to provide more detail into your original points. So, here’s some quick responses; if they’re aggressive, I apologize, it’s late.

    I would advise you to be a bit more careful in your use of language. Your original post asserted that prices had fallen, not that prices/income had fallen. Your response to Suido does alleviate some concerns on my part, and I’ll follow those up tomorrow.

    I will add, however, that industry failures and governmental regulation re: auto makers are two separate things. A discussion for another time.

    I hope you understand that these issues are rather delicate, and that forums like this have been subjected to the viewpoints of extreme economic libertarians. Given that you’re willing to use regulation to offset externalities, I’m willing to assume you’re not one of that mindset, and please accept my apologies for casting you that way in my earlier post.

    Anyways, more tomorrow.

  28. 28
    Michael Heath

    PatrickG writes:

    I would advise you to be a bit more careful in your use of language. Your original post asserted that prices had fallen not that prices/income had fallen.

    Anyone discussing price trends over years/decades/centuries should assume the context for discussing that trend filters out inflation in order to compare apples to applles since that same inflation trend also increases wages to some degree. Prices are merely a way to normalize the description of value when economics are being discussed, the actual context is the good or service itself relative to the effort or value expended to receive that good.

    For example, if someone claims gas prices have gone up because they’re paying $4.10/gal. now and was paying, say $3.25/gal. a year ago, we can all agree prices have indeed good gone up since our low inflation rate alone can’t account for this entire rise. So we are paying more now for this good than we were paying a year ago. However, if someone says they pay more for gas now at $4.10/gal. than they did during the late-1970s oil shock era if prices then were say, $2.00/gal.; I have no idea if that’s true without first stripping out inflation which again is normally done by also considering what we pay in gas relative to some denominator, like GDP, hours worked to pay for that gallon, or income. Therefore the category error you claim for me here is not mine.

  29. 29
    democommie

    “This culture was attendant in the atrocious deals unions and businesses did in the 1950s through 1970s in the private sector, which has led to an unsustainable framework for both current business ventures and current retirees with the government picking up the tab on those failed pension plans.”

    The UNIONS did not make the “atrocious deals” in a vacuum, fucking the company, the customers or the public. Management of the companies made a series of business decisions re: union negotiations. They often made those decisions based on their profit projections for the year–and attendant bonuses–not based on what was best for the company, its customers or their employees in the long term. In many cases they guessed wrong about the true cost of those contracts, just like Roger Smith and numerous other CEO’s guessed wrong about consumer interest in a range of products. No union reps were involved in the design, marketing or “failure to thrive” sales campaigns for shitboxes like the Ford Edsel or Chevrolet Corvair. Fuel economy, airline safety standards, pollution standards and most other manufacturing/business decisions are made by the bosses, not the rank and file. The unions have their share of dead wood and dogfuckers–they are not the parties who are mostly responsible for the failures of the financial sector, auto business, U.S. electronics manufacturing going to the orient in the 60′s or hundreds of other BAD BUSINESS decisions made by the ruling class.

    Overlooked in all of the union bashing (and I’m not accusing Michael Heath of union bashing) is the idea that union reps, officers and business managers have a fiduciary interest to take care of THEIR people. When a union goes on strike and spends monies from its strike fund to help union members pay their bills or to run ads in the media, justifying their strike action, those monies have to be replaced by the members. When companies spend money to demonize unions and pay scabs they get to deduct it, IIRC, as a legitimate business expense.

    Michael Heath:

    Your proposals for a consumption tax, which I have read on other threads are admirable in the abstract. My experience in this life is that scumbags will always find a way to game the system. If there’s a consumption tax, would it include all items purchased by both private individuals and companies? Would such a tax be, more fairly, a “consumption and USE tax”? A few years ago I did a photo shoot for local company and did it as “work for hire” instead of charging them for the session and selling them photos or reproduction rights on a continuing basis. I did that because in NY (and, IIRC, Massachuesetts) the sales and use tax cover both my charging them for “product” or in the absence of that, them paying for “use”. I did not want to run afoul of the state of NY’s tax people (legendarily nasty with miscreants) or set up a business and have to file quarterlies–with substantial penalties for failure to do so–. How does your plan deal with this sort of eventuality?

  30. 30
    dingojack

    “Fuel economy, airline safety standards, pollution standards and most other manufacturing/business decisions are made by the bosses, not the rank and file”.

    I thought that was the doings of teh ebuul gubberint. :)

    Dingo

  31. 31
    dingojack

    Michael Heath – according to Measuring Worth. $2.00 in 1972 is worth in 2011:
    $10.70 based on real worth
    $9.74/$11.70 based on unskilled/production compensation wages
    $16.40 based on income value.
    See here for what these all mean.

    Sorry had to get pedantic, carry on.

    Dingo

  32. 32
    dingojack

    Oops. Try here and scroll down to the definitions links down the page.
    Sorry.
    Dingo

  33. 33
    leftwingfox

    And such tariffs in no way level the playing field. Developing economies with cheap labor have all sorts of advantages and disadvantages which make it not only impossible to level the field,

    You are still expanding my argument beyond it’s intended scope. There are absolutely competitive advantages (access to resources, climate, local regulations, trade route access, technical expertise, established successful industries) within nations which encourages trade, and I have no problem with those whatsoever. Chinese factories will still have a lot of competitive advantages, such as easy access to emerging markets, wages in line with it’s local economy and those of neighbouring nations, experience, economics of scale, an eager workforce, access to natural resources. Those don’t disappear just because the tariff equalizes the labor costs between the local economy and the federal minimum wage of the destination country, nor does the benefit of trade vanish with the opportunity of higher profits in markets capable of purchasing those goods and services at a higher price.

    My question is, why should cheap labor be an accepted competitive advantage? Wages directly affect the relative quality of life, and allow a consumer base for expanding the economy. Anytime we treat labor as just another inanimate resource, quality of life becomes an externality whenever supply of labor outstrips demand. Enforcing the local minimum wage on imported goods would reduce the political pressure on authoritarian regimes to oppress labor and keep wages low, since the difference would come out of the tariff, not the profits.

    Just so there’s no further confusion here, my ultimate position is that it should be the role of government to create the moral boundaries for a market economy to operate within. Laissez-faire markets are efficient, but they are only ethical to the extent that ethics are profitable.

  34. 34
    democommie

    dingojack:

    I should have said “what measures of compliance they will use re: the standards. It is of course true that the gummint relies on the reporting (and the honesty therein) from industry to glean a lot of the data they use to formulate policy and regualtion in those areas–hence the CheneyExxon backroom oval office deal and the Love Canal, Pinto bar-b-que, Ford uncontrollable acceleration, leaking silicone breast implants, etc.,.

  35. 35
    PatrickG

    @ Michael Health:

    Thanks for the detailed responses. Much appreciated.

    Therefore the category error you claim for me here is not mine.

    All I was saying was that your original post said “prices”, and that you might want to be a bit more specific in terms of what you mean. If simply looking at prices, the CPI seems like a perfectly reasonable measurement to use (at least in areas where quality improvement and product selection aren’t huge issues).

    Put briefly, I was not claiming an error on your part, but imprecise language that led to misunderstanding on my part.

    that same inflation trend also increases wages to some degree.

    I was under the impression that wages had been relatively stagnant (or even dropping) over the last couple of decades. Second graph here is illustrative of my point. Thoughts?

    Again, I’m not an economist, but I’m interested in this topic. If I’m not your target audience here, I’ll bow out of the technical discussion and let you talk to people who know more (of which there are a few on this thread). The discussion is interesting, and I don’t want to derail through ignorance. :)

    That said, I’m particularly interested in your thoughts on leftwingfox’s comment “Anytime we treat labor as just another inanimate resource, quality of life becomes an externality whenever supply of labor outstrips demand”, since it seems to sum up the ethical issues very concisely w.r.t labor.

  36. 36
    PatrickG

    Correction: @ Michael Heath

  37. 37
    Michael Heath

    democommie writes:

    The UNIONS did not make the “atrocious deals” in a vacuum, fucking the company, the customers or the public. Management of the companies made a series of business decisions re: union negotiations. They often made those decisions based on their profit projections for the year–and attendant bonuses–not based on what was best for the company, its customers or their employees in the long term.

    I not only agree, but almost always simultaneously argue the attendant failures you point out. Plus you need to add owners to the mix; management didn’t establish executive incentives in a vacuum either, investor/owners represented on the Boards allowed their executives to benefit in the short-term to the detriment of the long-. But I wasn’t asked to list failures by non-populist liberals, but instead populist liberals; and my comment posts are already lengthy.

  38. 38
    Michael Heath

    democommie writes:

    Your proposals for a consumption tax, which I have read on other threads are admirable in the abstract. My experience in this life is that scumbags will always find a way to game the system. If there’s a consumption tax, would it include all items purchased by both private individuals and companies? Would such a tax be, more fairly, a “consumption and USE tax”?

    Tax avoidance is always a challenge regardless of the scheme employed. Currently some of our most talented intellectual whizzes are engaged in tax avoidance schemes for their clients or employers, as opposed to using their talent to increase wealth by growth. We have trillions of U.S. owned off-short assets hid to avoid income and capital gains taxes.

    In addition as certain sectors’ growth rates start to level-out, the search for more profit in an environment where growth opportunities are decreasing naturally arrives at tax avoidance, where again we see talented individuals moved off projects which grow a company to instead avoiding taxes.

    My study of the subject, which was in the late-90s/early-00s, has tax avoidance schemes in consumption-centric economies done by those with little wealth, as opposed to those with the big bucks which is where we now observe tax avoidance (see Mitt Romney’s tax rate and where his assets are stashed). In addition I’d think we’d be far better off if the incentive for our best financial minds was focused predominately on growth rather than significantly on tax avoidance on income and capital gains. Growth is after-all the primary reason I favor VAT/consumption taxes.

    democommie writes:

    A few years ago I did a photo shoot for local company and did it as “work for hire” instead of charging them for the session and selling them photos or reproduction rights on a continuing basis. I did that because in NY (and, IIRC, Massachuesetts) the sales and use tax cover both my charging them for “product” or in the absence of that, them paying for “use”. I did not want to run afoul of the state of NY’s tax people (legendarily nasty with miscreants) or set up a business and have to file quarterlies–with substantial penalties for failure to do so–. How does your plan deal with this sort of eventuality?

    Currently there are a lot of small business owners who get paid in a way that allows them to avoid claiming this income. So again, schemes abound in with any tax scheme. My response here is that we need a dynamic regulatory framework which is constantly improving. Rather than provide an answer for this conundrum I suggest instead considering a process. A process which identifies defects, in this case unfair tax avoidance, and changes the regulatory framework to eradicate the opportunity to avoid taxes. This approach is equivalent to what world-class manufacturers use to continually improve their processes and products.

  1. 39
    America, Fuck Yeah!

    [...] China!!! Sweatshop. Sensata.Also, Romney says the tax rate on American business is 35%.  True, but their effective tax rate is much lower…like 2%.10:22pm – HOW THE FUCK DOES GETTING MARRIED BEFORE HAVING KIDS HAVE SHIT TO DO WITH GUN [...]

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