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Aparna Mathur

Two big problems with Obama’s corporate tax proposal

By Aparna Mathur

February 22, 2012, 4:59 pm

The Obama administration’s plan to cut the corporate rate to 28 percent goes some way toward improving the competitiveness of the U.S. economy as a destination for investment flows, relative to the other OECD countries. However, the plan also calls for removing loopholes and deductions and doing away with tax credits, etc. While having a simpler, uniform code is certainly desirable from the point of view of economic efficiency, we need to be sure that the base broadening does not raise effective rates for corporations. In other words, the base broadening may more than offset the benefits arising from a reduction in the top rate. As a result, effective tax rates may be higher than what firms face today. In that case, the investment effects would still be negative and there is little chance that the proposal would be a revenue raiser. Even today, effective tax rates in the U.S. are much higher than for the average OECD country, and yet we raise some of the lowest revenues in the OECD from corporate taxes.

The second issue I have is with the imposition of a minimum foreign tax on multinationals. Our current system of international taxation allows firms to be competitive in the global economy by enabling them to defer taxation on foreign profits, until those profits are repatriated to the U.S. parent. As a result, firms can pay taxes at the same rate as other firms operating in that country. With the imposition of the minimum foreign tax, we will end up imposing higher tax rates on U.S. multinationals operating abroad relative to their foreign counterparts, and make them less competitive. This would negatively impact their profitability.

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Aparna Mathur

Jeff Sachs Wrong… Again

By Aparna Mathur

April 7, 2011, 11:43 am

Jeff Sachs is in denial once again. In a podcast for BBC News, he bashes Ireland for its low corporate tax policy that, according to him, created a “bubble in the short-term” but did not really build the “long-term platform for prosperity.” In fact, Ireland enjoyed sustained economic growth for a period of 20 years after their corporate tax rates began marching lower in 1988. Gross domestic product grew at more than 6 percent per annum over this period, making it the second-richest country in the European Union, with a per-capita GDP higher than that of Germany, France, and Britain. The “bubble” has only recently burst, because like every other country around the world, including the United States, the financial crisis has hit Ireland hard. To link that to Ireland’s corporate tax policy, which has clearly proven to be a success, is simply ridiculous.

Sachs says that the United States has no money for community programs, for healthcare for the poor, and is not creating high-paying jobs for the average person, all because of the corporate tax race to the bottom. Wrong, wrong, and wrong. In fact, the problem is that the United States has not cut corporate taxes since 1993, much less engaged in any race to the bottom. As I had mentioned in an earlier blog, low corporate taxes around the OECD have been associated with increased, not lower, revenues. The United States gets little revenues from corporate taxes because it has one of the highest, most uncompetitive corporate tax rates in the OECD. As research has shown, high corporate taxes not only lead to lower investment and therefore lower revenues, but also lower worker wages. Thus the United States is a clear case study of why Sachs is wrong—high taxes lead to low revenues and poor wages.

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Aparna Mathur

Don’t Start Cheering over the March Jobs Report Yet

By Aparna Mathur

April 1, 2011, 2:56 pm

The Labor Department reported this morning that the private sector added 230,000 jobs in March, while the public sector lost 15,000 jobs, leading to a net increase of 215,000 jobs. The stock market has reacted positively to the news, since most leading forecasters expected a more modest increase of 200,000 jobs or less.

However, it is not clear that all is positive as far as the labor market is concerned. The number of long-term unemployed (those jobless for 27 weeks or more) was 6.1 million in March. Their share of the total unemployed increased from 43.9 to 45.5 percent, suggesting that more and more people are facing longer layoffs and unemployment spells, with the likelihood of finding a job diminishing over time. The number of discouraged workers, at 921,000, has changed little from over a year ago. These are workers who have simply stopped looking for work since they do not believe that there are any opportunities to find work in the market. These people are not included in the official unemployment statistics.

Clearly, much more sustained growth in employment is needed before we start cheering. By some estimates, we need at least 200,000 additions per month over a reasonably long period for the job market to return to normal. ‘Till then, it’s wait and see.

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Aparna Mathur

Jeffrey Sachs Plays Robin Hood, But His Policies Would Harm the Poor

By Aparna Mathur

March 30, 2011, 7:39 am

In a recent article in the Financial Times, Jeffrey Sachs rues the race to the bottom in corporate taxes that is forcing countries like the United Kingdom, Canada, and the United States to engage in tax cutting at a time of budget deficits and fiscal pressure. He argues for international cooperation in tax and regulatory policies so that countries can place the burden of reducing deficits “fairly” on the “rich, who are enjoying a boom in living standards and an unprecedented share of national income.” However, that is exactly the wrong advice to heed at this time. Decades of research into the effects of corporate taxes on global flows of mobile capital suggest that capital flows from high-tax to low-tax jurisdictions.

Countries that raise tax rates lose revenues. It is not surprising that the United States, with one of the highest corporate tax rates in the OECD, is at the bottom of the list when it comes to raising revenues from these high tax rates. Indeed, that is one of the reasons that the Obama administration may even be in favor of a corporate tax cut. Further, even if all countries were able to agree to a uniformly high level of corporate taxes—not an easy feat by any means given every country’s unique fiscal and budgetary needs—it is still unclear that the “rich” would bear the burden of corporate income taxes. A growing empirical literature on the incidence of the corporate income tax suggests that firms are able to pass on the burden to workers in the form of lower wages. Therefore, a Robin Hood policy of taxing the rich to give to the poor may have exactly the unintended consequence of hurting the poor.

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Aparna Mathur

What Fraction of Bankruptcies Is Caused By Medical Debt?

By Aparna Mathur

June 10, 2009, 11:36 am

A new study out in the American Journal of Medicine discusses what fraction of bankruptcies is caused by medical debt. The paper by Himmelstein, Thorne, Warren, and Woolhandler estimates that 62.1 percent of all bankruptcies in 2007 were medical. This is a steep jump up from the authors’ 2001 estimate of 46.2 percent. Have medical debts and bankruptcy filings really skyrocketed as their findings suggest?

Fortunately, there is little to suggest that this is the case. A look at the Survey of Consumer Finances (2007) shows that medical indebtedness has not changed significantly over the past decade or so. The SCF includes medical debts with other debts incurred for goods and services. These debts have barely budged from around 5.8 percent of all debt in 2001 to 6.2 percent in 2007. At the same time, consumer bankruptcies have declined markedly since 2005. The aggregate number of filings has declined from 1.45 million in 2001 to 822,000 in 2007. So what could account for the study’s results?

We don’t have to look very far for an answer. It seems that the authors are reluctant to take their respondents seriously when it comes to an understanding of their indebtedness. The survey clearly states that only 29 percent of the respondents believed that their bankruptcy was actually caused by medical bills. This number sounds like a reasonable approximation of the actual impact of medical debt on bankruptcies. In fact, it accords well with other findings in the literature, including my own. In an AEI working paper, I showed that when medical debts (as a fraction of income) rise by 10 percent, we are likely to observe an increase in bankruptcy filings induced by those debts by approximately 27 percent. In other words, if between 2001 and 2007, medical debts increased by about 10 percent (as a fraction of income), the study suggests that about 27 percent of the total filings during this period can be attributed to medical debts. The SCF shows that for all families, total debts as a fraction of income actually have increased by roughly that 10 percent figure over this period. Therefore, even if all of this increase was due to medical debts (which is unlikely since mortgage debts are ten times higher), the additional bankruptcy filings due to medical debts should be 27 percent of the total. Another paper by Domowitz and Sartain estimates the fraction of medical bankruptcies at about 30 percent, half of what the Warren study finds.

The reason the authors find a 60 percent impact is because they include a whole host of medical related issues that may or may not have directly contributed to the bankruptcy filing. In fact, like their earlier study, the sample is biased because it includes people who have already filed for bankruptcy rather than including a control group of non-filers as well and then assessing the likelihood of medical debts causing bankruptcy filings. In short, what the authors have established is correlation, but not causation.

Aparna Mathur is a research fellow at the American Enterprise Institute.

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