Posts Tagged ‘Bastiat’

Grand bargains and other mistakes

Wednesday, July 31st, 2013 by Joe Kristan
Economic supergenius

Economic supergenius

The President has offered a new “grand bargain” on taxes.  While cutting corporate rates, it would be structured to generate a bunch of new revenue to finance yet another “jobs” program.  While details weren’t offered, expect pretty much the same package of deduction cutbacks and international tax increases that he has offered every year.  LIFO inventories are surely part of the package.  Some bargain.

One item that would be in the package would be a 28% corporation top rate, with a 25% top rate for manufacturers.  The President’s offer isn’t serious, so there’s no point spending a lot of time analyzing it, but it includes disorganized thinking that is found in both parties in the tax debate.

The President’s special rate for manufacturers assumes that one sort of economic activity is special and more worthy of favor than others.  (The current foolish Section 199 does the same thing).  There are two big problems with this:

1. Why is manufacturing something inherently better than other things? Is it better to make a Whoopie Cushion in America than, say, save a life with a kidney transplant?  Is making an IPhone more worthy than relieving chronic pain with a hip operation?  More worthy than making someone’s life a little more beautiful by playing music?

2.  Where does manufacturing stop?  Yes, somebody on the assembly line is manufacturing.  But he wouldn’t be able to do it very long without trucks delivering raw materials and driving off with finished products.  It wouldn’t work without trains delivering coal to the powerplant that feeds the machinery.  It wouldn’t run without lawyers keeping the company from being sued to death, or without accountants balancing the books and preparing tax returns.  Yet only the guy on the assembly line is considered “manufacturing.”  It’s a futile and false distinction.

This is just part of a bigger problem: trying to do too much with the tax law.  As anybody who has taken their first corporation tax accounting course will tell you, it’s hard enough to determine taxable income.  When you ask the tax law to finance research, provide health insurance, run the pension system, oversee national housing policy, and be a welfare program, you are asking too much.

Bruce Braley does the same thing in his Des Moines Register op-ed, Tax reform should provide incentives for innovation.  No, the tax law needs to collect revenue.  The biggest incentive for innovation would be to simplify the tax law and let innovators use the money not spent on tax advisors to pay for their own innovation.  The ability to make money after tax is all the incentive people need.

The fallacy that the government should be micromanaging the economy through “incentives” — really, tax breaks for the well-connected and well-lobbied — is bipartisan, as Iowa GOP State Senator Randy Feenstra illustrates in “Attacks on incentives harm state “:

They failed to check the facts before delving into the discussion. The tax credits being offered to the Iowa Fertilizer Company are not new. The tax credits were always part of the good faith understanding between the company and the state and were necessary to ensure that the new jobs and investment occurred in Iowa.

I am not sure what Senate Democrats are taking issue with most, if it is the 165 jobs being created or the $1.8 billion investment being made in a county struggling to lower unemployment rates. However, I take great issue with the attack on this company investing in our state, amid a history of Democratic support of tax credit programs.

Sen. Feenstra falls victim to the fallacy that the tax credits being spent on the fertilizer company are some kind of cost-free pixie dust that magically creates jobs.  Yet they are really tax dollars taken from everybody else in the state and sent to a company with connections.  If they hadn’t been taken from the rest of us, these dollars would have been used by taxpayers to buy and to invest in ways that would have been just as real, but which would have not given politicians any excuses for press releases.  It’s just another version of the broken window fallacy.

The only tax reform worthy of the name is one where politicians get out of the business of playing favorites for certain businesses and activities — something like the Tax Update’s Quick and Dirty Iowa Tax Reform Plan.  Anything else is just blowing smoke.



Tax Roundup, 9/13/2012: Winning = losing. Also: Factually-challenged fact-checkers and astute Minnesotans.

Thursday, September 13th, 2012 by Joe Kristan

Iowa’s winning the wrong race.  An opinion piece in today’s Des Moines Register by Beuna Vista College economics professor Jeremy Horpedahl:

This year, Iowa came in first place. Unfortunately, it wasn’t a bowl championship for the Hawkeyes but rather unmatched, high corporate tax rates — not an area in which anyone wants to beat out rivals.

The United States’ combined federal and state corporate income tax is the highest in the world at nearly 40 percent, and Iowa’s 12 percent corporate income tax rate is much higher than that of any other state. To make matters worse, Iowa’s corporate tax rate is significantly higher than those of its neighboring states. South Dakota doesn’t even have a corporate income tax.

It’s worse than that.  Iowa’s corporation income tax is very complicated and so full of special favors that it nets only a small portion of state revenues.  That makes it both destructive and useless.  There is a better way.


Flickr image courtesy Retrofresh! under Creative Commons license.

Economic illiteracy and fact checkers.  The Cedar Rapids Gazette has ventured into the shady “fact checker” business, with unfortunate results.  They attempt to say whether the claimed number of jobs “created” by wind energy tax credit subsidies are correct:

While the figures cited by the wind energy industry and politicians are inexact and fluid, they’re the best available information. The U.S. Bureau of Labor also relies primarily on the industry’s information. We found no evidence that these figures are misleading, but keep in mind these are estimates.

We rate the jobs claims mostly true.

There are two key words missing from the analysis: opportunity costs.  The money spent on wind subsidies wouldn’t just disappear if the tax credit went away.  It would be used to buy or invest in other things.  This is explained wonderfully in Bastiat’s broken window parable, which (slightly updated) goes something like this:

A vandal breaks a shop window, and the shopkeeper pays a glazier to replace it.  The glazier says that the vandal did good by creating a job for him.  The local fact-checker rates the claim “mostly true” because he considers the glazier “the best available information.”  But because the shopkeeper spent the money fixing the broken window, he loses the opportunity to hire an assistant to keep the store open longer, to develop a new line of merchandise, or to buy something from another business down the street.  But that “opportunity cost” is unseen by the fact-checker and ignored.

The Gazette’s “fact-check” ignores the jobs squandered by funneling resources to an economically inefficient technology, because they are “unseen,” especially by the industry that benefits from the subsidies.


Speaking of opportunity costs:  Compliance with ObamaCare Estimated at 80 Million Man-hours  (William McBride, Tax Policy Blog)


Former Corporate Raider Bilzerian rebuffed by Tax Court.  You can’t be a corporate raider without taking some risks, and sometimes those risks lead you to bankruptcy court, like they did for Paul Bilzerian.  He yesterday lost some more when the Tax Court ruled that he could not relitigate tax liabilities determined by a bankruptcy court.  Tax Court Judge Wells ruled against the former raider on the grounds that he had agreed to be bound by the bankruptcy ruling.


Getting what you pay for? TIGTA: Tax Returns Prepared Through IRS’s Volunteer Assistance Program had 51% Error Rate   (TaxProf)  To be fair to the volunteers, though, I doubt they do much worse than IRS phone helpers, and certainly paid preparers don’t always get our ridiculously complex taxes right.

They always can.  “Just when I think that our politicians can’t act any more irresponsibly, they up the ante”  (Christopher Bergin)

Anthony Nitti,  Tax Court Applies Garnett Decision to Liberalize Real Estate Professional Test

Would you jump off a cliff just because your friends all deducted it?  Never Do Something Just Because It’s Tax Deductable (Jason Dinesen)

Kay Bell,  Share and share alike: your taxes in a community property state

Paul Neiffer,  Express Saver Costs a Taxpayer Thousands

TaxGrrrl,  Amazon Sees Silver Lining With Sales Tax Collections.  She also interviews an obviously astute Minnesota tax pro, as his answer to her final question shows.