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Archive for the ‘Economic Program’ Category

Why not growth?

August 4th, 2014

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Democrats’ intense focus on income inequality is understandable, but why not the same obsession over economic growth?

From 2001 to 2013, a span of thirteen years, average annual growth in the United States came out to a lumbering 1.8 percent. That is half the average annual growth rate we experienced from 1950 to 2000 —a period during which the middle class shined and the poverty rate declined.

Yes, the Great Recession contributed to substandard growth rates, but since 2001, the U.S. economy has exceeded 3 percent growth only twice. In the half century prior, we surpassed 3 percent growth per year 34 times. What was once “normal” growth is now a rarity.

Economists predict that America’s future growth rate will settle somewhere between mediocre and sickly. The Congressional Budget Office projects an average of 2.5 percent annual growth over the next ten years, while PricewaterhouseCoopers projects an average of 2.4 percent growth through 2020. Middling growth like that just won’t make an appreciable difference in the lives of average working people.

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The U.S. Corporate Tax Code is Bananas

May 22nd, 2014

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A much-too-high corporate tax is causing companies to flee for Europe.

If any U.S. company seems ripe for moving to an island tax haven, it’s Chiquita. Based in Charlotte, the company’s sale of bananas, grown largely in Central America, accounts for two-thirds of its profits. But Chiquita isn’t bound for the tropics. It’s headed to Ireland, where the climate may be hostile to banana trees, but the cool 12.5 percent corporate tax rate feels just right.

Later this year, Chiquita will merge with Fyffes, an Irish fruit distributor half its size. Usually the larger company buys the smaller one, but not anymore. Entirely because of taxes, a newly formed Irish company will control the merged companies. Chiquita will remain listed in the U.S., but its headquarters will move to Dublin, unlocking access to the favorable Irish tax code.

Chiquita’s move, called corporate “inversion,” isn’t new. It’s an old strategy that U.S. companies have rediscovered. Everyone in Washington — Democrats and Republicans — should be concerned. Though completely legal, new inversions this decade will costs the Treasury nearly $2 billion a year, and they move high-paying corporate jobs overseas, albeit in limited numbers. Inversion happens because our bloated corporate tax code is bad public policy, severely handicapping U.S. businesses relative to their foreign competitors.

Inversion first became popular in the late 1990s when companies like Ingersoll-Rand and Fruit of the Loom reincorporated in Bermuda and the Cayman Islands. Then Washington started playing whack-a-mole, but not doing it very well. IRS rules targeting inversion didn’t work, so in 2004 Congress passed a law making moves to offshore havens more difficult.

The law now requires an American company looking to move its headquarters overseas to use a merger or acquisition with a foreign company at least one-fifth its size. This mostly took the Caymans out of the picture, because only shell companies locate there. But Europe is a more attractive corporate destination than it was 15 years ago. Countries like Ireland, the Netherlands and the UK noticed that in today’s globalized world, a competitive corporate tax code matters more than ever. So they lowered their corporate tax rates and eased taxation of foreign-earned income.

Meanwhile, the U.S. tax code sat rotting on the shelf. Our 35 percent statutory rate is highest among the world’s developed economies. While few companies pay an average rate that high, numerous tax preferences raise compliance costs and skew incentives.

One example is the “lockout effect.” Because some corporate profits are taxed only when returned to the U.S., many U.S.-based multinationals keep piles of cash on the books of their overseas subsidiaries. If it’s not coming home, that cash may be deployed to purchase a foreign company. When the selling company is big enough, the U.S. buyer can invert and avoid even more taxes.

If inversion were limited to bananas, maybe we wouldn’t care. But oil and gas companies, drug companies and others have exported their U.S. headquarters in recent years. Altogether, since 2012, at least 14 U.S. companies have completed or considered inversion deals. This month’s on-again, off-again takeover talk between Pfizer and AstraZeneca is one example. U.S. companies look to inversion not because CEOs wake up one day and feel the pull of the old country, but because they are seeking to maximize profit in the face of foreign competition. The pace is likely to accelerate, because as much as we may decry it, inversion currently makes financial sense.

In response, President Obama proposed in his 2015 budget that Congress raise the inversion foreign ownership threshold to 50 percent. This month, Senator Ron Wyden, D-Ore., and Sen. Carl Levin, D-Mich., are crafting legislation modeled after Obama’s proposal.

These efforts show Congress is taking inversion seriously. But let’s also realize that our uncompetitive code is the root of the problem. Only when Washington fully reforms the corporate tax code will the pressure for companies to leave the U.S. tax system subside.

First, the 35 percent corporate tax rate must come down, at least to President Obama’s proposal of 28 percent and preferably further. The cut can be financed in part by eliminating some outdated tax breaks, but savings elsewhere may also be necessary. Second, the lockout effect has to end. Some foreign-earned income, particularly passive income, should be taxed currently no matter where it’s earned. And income from real business activity abroad should be lured home with a tax rate competitive with those of other developed countries. Third, the tax code needs to be simplified.

A simpler, more competitive corporate code shouldn’t be confused for a giveaway to corporations or the wealthy. Research suggests that if Chiquita were to spend less preparing and paying corporate taxes, its shareholders and its workers share the benefit. Most importantly, so would the broader U.S. economy, which would attract and retain more business and more jobs. It’s bananas for the U.S. to sit back and do nothing as good American companies decamp for Europe

This piece was originally published in U.S. News & World Report

Elites focus on inequality; real people just want growth

May 6th, 2014

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The economic debate is now sharply focused on the issue of income inequality. That may not be the debate Democrats want to have, however. It’s negative and divisive. Democrats would be better off talking about growth — a hopeful and unifying agenda.

Democrats believe income inequality is a populist cause. But it may be less of a populist issue than an issue promoted by the cultural elite: well-educated professionals who are economically comfortable but not rich. There’s new evidence that ordinary voters care more about growth.

Growth and inequality are not separate issues. Nobel Prize-winning economist Joseph E. Stiglitz wrote, “Politicians typically talk about rising inequality and the sluggish recovery as separate phenomena when they are in fact intertwined.  Inequality restrains and holds back our economic growth

The question is whether Democrats want to talk about punitive and confiscatory policies aimed at curbing the power of the wealthy and special interests or an agenda aimed at growing the economy for everyone.

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Next Up in Tech—Mobile Spectrum Debate

April 29th, 2014

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Mobile broadband is transforming the way we work, learn, and live. But all of us pecking away on smart phones and watching video on our tablets has put an enormous strain on the wireless networks. How, Washington is wondering, will they be able to keep pace with our voracious demand? In particular, will there be enough spectrum to meet our ever expanding need for data? Read the rest of this entry »

More on our Minimum Pension

April 10th, 2014

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We appreciate EPI’s comments on our New York Times op-ed in which we unveil a new proposal for a minimum pension. Ms. Morrissey poses several questions and calculations that we wish to answer.

Ms. Morrissey argues that a life-cycle account with its mix of stocks and bonds is too aggressive an investment for worker pensions. We respectfully disagree. However, this is immaterial because investors in our Savings Plan for Universal Retirement (SPUR) accounts would have a choice of fund options just as federal employees have today under the Thrift Savings Plan (TSP). Individuals could choose less aggressive or more aggressive options, but each fund would be well-diversified. The TSP, with fees only a fraction of those charged for 401 (k) plans, is working well for millions of current and former federal employees. A similar set-up, with low fees and diversified funds, should work well for everyone else.

Ms. Morrissey’s estimated cost to business is wildly inflated. She asserts the plan would generate new costs for the employers of all 165 million workers covered by Social Security. To reiterate from the op-ed, any employer that provides a retirement plan that is at least as generous as our proposal would face no new requirements. That would include virtually every public employee, teacher, cop, nurse, firefighter, municipal trash collector, and congressional employee. Practically any private company that provides a defined benefit or defined contribution to a plan would fulfill the requirement. That includes most white collar jobs, most union jobs, as well as jobs at think tanks like Third Way and, presumably, EPI. And as our forthcoming idea brief will explain, those who have already reached retirement age, would not have to participate.

According to the Employee Benefit Research Institute, 43 million full-time, full-year workers ages 21-64 are not currently enrolled in an employer-sponsored plan. Another 30 million part-time or part-year workers in the same age group would be affected, but their enrollment would be less expensive since the cost is based on hours worked. So in total, the magnitude of required new contributions would be about one third of what Ms. Morrissey estimates. More importantly, this is not a lost cost to businesses. It will improve the quality of their employment packages and raise the compensation of their workers. And, unlike health premiums, a minimum pension is a fixed, predictable, cost.

Still, the cost to business is real, particularly in the near-term, because wages are “sticky-down.” That is, employers are averse to cutting wages in nominal terms. So they are likely to bear most of the cost in the early years. To help employers start contributing—and to keep even modest downward pressure on working people’s wages at bay—government can pick up some of the tab. For example, modest adjustments to the maximum allowable contributions to 401 (k)-type plans would raise nearly $100 billion, according to the CBO. This revenue could be applied to help offset the costs to small and medium-sized businesses.

Ms. Morrissey also writes that workers could still outlive their savings if they opt out of an annuity and take their nest egg in a lump sum at retirement. Our plan’s default option is an annuity, which would last for the life of the owner, because we think that’s best. But if a worker prefers to take a lump sum or withdraw at her own pace, she should have that right. After all, it’s her money.

Finally, there is Social Security. Our proposal has no more impact on Social Security than private sector retirement plans do now. And nothing in our proposal will change the fact that Social Security is scheduled to become insolvent in 2031. Some believe solvency should be achieved by raising taxes alone. Some believe it should be achieved solely by cutting benefits. And some believe it will require a combination of the two. We fall into the latter category and believe it can be done while increasing benefits for low-income seniors. But that is separate and apart from our minimum pension proposal.

Capitalize Workers!

April 7th, 2014

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Raising the minimum wage has justifiably captured policy makers’ attention, but if the goal is to materially raise living standards for every American worker, we should also be calling for a minimum pension. Done right, this would not only create real wealth for the middle and working classes, it would use the power of financial markets to reduce wealth disparity instead of widening it.

There is a vast difference in the way the wealthy and the rest of Americans earn their money. In 2010, 60 cents of every dollar earned by those in the top 1 percent came from investments and businesses they owned. For the middle class, it was 6 cents.

For decades, the returns to capital have far outstripped the returns to labor. Before the mid-1980s, worker salaries constituted 65 percent of national income. In 2012, they were 58 percent. Economists rightly fret over how this contributes to wealth inequality. Well, if you can’t beat ’em, join ’em. If all working people, whatever their wage, could get a piece of these gains, it would improve their financial well-being exponentially. This is where the minimum pension comes in.

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