Tag Archives: United States

US Top Income Shares Rose Less Dramatically

That’s what Gerald Auten and David Splinter argue in a paper from last year.

… new estimates of top income shares using two consistent measures of income. Our measure of consistent market income includes full corporate profits and adjusts for changes from TRA86, including changes to the tax base and increased filing by dependent filers. In addition, we include employer paid payroll taxes and health insurance and adjust for falling marriage rates. The effect of these adjustments on estimated top income shares are dramatic. Using a consistent measure of market income shows that the increase in income shares of the top one percent since 1979 is about half of the PS unadjusted estimate. The increase since 1960 is about one-quarter of the unadjusted estimate. Moreover, our measure of broad income that includes government transfers reduces the top one percent share increase to one-tenth of the unadjusted estimate.

But in an NBER working paper, Annette Alstadsaeter, Niels Johannesen, and Gabriel Zucman argue that tax evasion and offshore wealth holdings work in the opposite direction:

Because offshore wealth is very concentrated at the top, accounting for it increases the top 0.01% wealth share substantially in Europe, even in countries that do not use tax havens extensively. It has considerable effects in Russia, where the vast majority of wealth at the top is held offshore. These results highlight the importance of looking beyond tax and survey data to study wealth accumulation among the very rich in a globalized world.

Border Adjustment Tax

On VoxEU, Mary Amiti, Emmanuel Farhi, Gita Gopinath, and Oleg Itskhoki discuss a border adjustment tax and its consequences.

… a border adjustment tax … would make export sales deductible from the corporate tax base, while expenditure on imported goods would not be deductible … Therefore, if the border adjustment extends to all imports and exports, it is akin to a combination of a uniform import tariff and an export subsidy on all international trade …

… it would limit the incentives for profit shifting across countries by means of transfer pricing towards lower tax jurisdictions … the border adjustment tax is a destination-based tax, linking the tax jurisdiction to the location of consumption, rather than the location of production.

Under certain circumstances … the border adjustment tax has no effects on economic outcomes … Lerner (1936) symmetry [implies] … that a uniform tariff on all imports is equivalent to a uniform tax of the same magnitude on all exports. As a corollary … a combination of a uniform import tariff and an export subsidy of the same magnitude … [has] no effect on imports, exports and other economic outcomes … results in an increase in the home relative wage and domestic cost of production by the amount of the tariff. … the relative cost of domestic production increases proportionally with the cost of imports, as well as with the subsidy to exports, leaving no relative price affected, nor the real wage. … As a result, tax policies that feature a border adjustment, such as the value added tax (VAT), do not have to systematically promote or demote trade.

Amiti, Farhi, Gopinath, and Itskhoki discuss several conditions for neutrality:

  • Flexible wages. If wages are sticky, a nominal exchange rate appreciation may partly substitute.
  • Uniformity of the border adjustment tax. This condition would likely not be met. Exchange rate fluctuations thus would affect some sectors more than others. And imports by non-incorporated businesses would be favored.
  • Foreign currency denomination of gross foreign assets and liabilities. (Not met, see below.)
  • Unexpected, permanent policy change, to prevent anticipation effects and currency appreciation before the fact.
  • Unchanged monetary policy stance, also in other countries, in spite of the exchange rate shock. This condition would likely not be met.

If the conditions for neutrality are met the border adjustment tax generates no international transfer. The fiscal implications depend on the sign of the trade balance. A home country exchange rate appreciation (that keeps relative trade prices and flows unchanged) generates a lump-sum transfer from households to the public sector when households hold net external assets which they use to pay for imports. When households have net external debt and thus, export on net, then the fiscal implications are reversed.

Since the US has currently a negative net foreign asset position, the US must run a cumulative trade surplus in the future. … the overall transfer would be away from the government budget and towards the private sector …

When some gross positions are denominated in domestic currency an appreciation transfers wealth internationally.

Since for the United States, the foreign assets are mostly in foreign currency, while foreign liabilities are almost entirely in dollars, this would generate a massive transfer to the rest of the world and a capital loss for the US of the order of magnitude of 10% of the US annual GDP or more.

US imports and exports are predominantly invoiced in dollars. With sticky pricing a border adjustment tax would raise the relative cost of imported inputs and consumer prices.

US exports … will likely fall together with US imports in the short run, with no clear effect on the trade balance. As trade prices adjust over time, both imports and exports will recover, resulting in a neutral long-run effect of the border adjustment tax on trade.

Tax Evasion in Hong Kong and the US

The Economist reports about new strategies to evade taxes. One is based on an occupational retirement scheme (ORS) in Hong Kong:

A German or Australian with money to hide can set up a Hong Kong shell company, appoint himself as its director, with a local employment contract, and sign up with a trust company that provides an ORS. He can throw in cash, property or other assets, oversee the account himself, retire as soon or as far in the future as he likes, and then take out as much or as little as he chooses, whenever he wants. An ORS, in short, is like a flexible bank account.

The arrangement falls outside the CRS [Common Reporting Standard] and FATCA because the Hong Kong authorities classify ORS as “low risk” from a tax-evasion standpoint, meaning those running them are “non-reporting financial institutions” under both standards. Not surprisingly, some financial firms are hawking them enthusiastically to foreigners.

Another strategy exploits the secrecy provided by the United States:

It gets all the information it needs from other countries through its heavy-handed application of FATCA, and therefore sees no need to sign up to the CRS. So it is in the unique position of being able to take a lot, give little, and continue getting away with it. Not surprisingly, lots of tainted foreign cash is believed to have flowed into American banks, trusts and shell companies in recent years.

Mankiw on the Congressional Tax Plan

In the New York Times, Greg Mankiw applauds the tax reform plan discussed in Congress. He emphasizes four points:

  • The reform would move the US tax system toward international norms, from worldwide to territorial taxation.
  • It would move the system from income towards less distorting consumption taxation, by allowing businesses to deduct investment spending immediately.
  • The reform would change the origin-based into a destination-based system (taxing imports and exempting exports, a.k.a. “border adjustment”), with similarities to a value-added tax, making it harder to game the system. “[T]he immediate impact of the change would be to discourage imports and encourage exports. … the dollar would appreciate … The movement in the exchange rate would offset the initial impact on imports and exports.”
  • The reform would abolish tax deductions for interest payments to bondholders, eliminating incentives for corporate leverage. “A business’s taxes would be based on its cash flow: revenue minus wage payments and investment spending. How this cash flow is then paid out to equity and debt holders would be irrelevant.”

Portfolio Adjustments in Money Market Mutual Funds

On the Liberty Street Economics blog,

First, institutional prime and muni funds—but not retail or government funds—must now compute their net asset values (NAVs) using market-based factors, thereby abandoning the fixed NAV that had been a hallmark of the MMF industry. Second, all prime and muni funds must adopt a system of gates and fees on redemptions, which can be imposed under certain stress scenarios.

Investors adjusted their portfolios in response to these changes:

… investors’ shift from prime and muni funds to government—and, in particular, agency—funds means that a large segment of the industry still operates under a stable NAV (and therefore is, in principle, vulnerable to runs). … Since the new regulations have resulted in a very large shift of assets into relatively safe government funds, the SEC’s reforms have made runs on MMFs less likely and the industry itself more resilient.

America’s Miserable 21st Century

In Commentary, Nicholas Eberstadt recounts how low employment, deteriorating health, and declining social mobility in the United States foreshadow a “Miserable 21st Century.”

  • Between 2000 and 2016, the work rate for Americans aged 20 or older fell by almost 5 percentage points, to 60 percent.
  • In the “prime working age” group, it fell by almost 4 percentage points.
  • While work rates for men had been falling for much longer, a similar decline for prime age women set in in 2000.
  • Death rates for white men and women aged 45–54 rose slightly since 2000; they increased sharply for the subset with high school or lower education.
  • In 2016, life expectancy at birth in the US fell for the first time in decades.
  • By 2013, more Americans died from drug overdoses than from either traffic fatalities or guns.
  • Alan Krueger’s research suggests that about 50% of prime working-age male labor-force dropouts take pain medication on a daily basis.
  • This group spends its time watching TV, movies, or playing video games, and many take drugs.
  • The “welfare state” (Medicaid) helps the unemployed pay for their drugs.
  • In 2013, roughly 20% of civilian men aged 25–55, and roughly 50% of non-working prime-age people were Medicaid beneficiaries.
  • Roughly 60% of the non-working prime-age male non-Hispanic population collected disability benefits.
  • While the U.S. has a higher incarceration rate than almost any other country, only few of the Americans ever convicted are incarcerated. “Maybe 90 percent of all sentenced felons today are out of confinement,” due to release, probation, or parole, adding to a stock of roughly 20 million people.
  • Geographical mobility and job churning are in decline.
  • Chances of surpassing one’s parents’ real income are lower than ever before in postwar America.

U.S. Health Care Spending

A blog post on Random Critical Analysis argues that high wealth (proxied by high consumption) rather than GDP explains US health care expenditures.

Total per capita health care spending increases as wealth increases because people actually demand more goods and services (volume) per capita and because it is relatively labor intensive sector that does not enjoy the productivity gains found in some other sectors of the economy, i.e., overall costs increase through both volume and price together (volume * price).  GDP per capita is a relatively weak measure for these purposes and those few other high GDP countries happen to be much more export dependent (which does not independently predict significant increases in expenditures).  If you use a better measure like Actual Individual Consumption (AIC) or run multiple regression analysis on GDP expenditure categories most of the apparent excess health care spending shrinks quite dramatically.

Additional analysis of several major claims here (e.g., high prices due to limited market power of payers, high physician incomes, etc) show that these arguments suffer from similar issues.  The best available evidence show that across multiple measures our healthcare labor costs and overall apples-to-apples price levels are generally very much inline with our material standard of living.  US total per capita costs are probably somewhat more than expected, but this appears to be driven through higher volume (~100% more than EU28 average according to PPP study estimates), though even this is significantly, if not quite entirely, explained by our higher material standards of living.

Munich Security Report 2017

Topics discussed in the report include:

  • Support for a “strong leader” as opposed to checks and balances has increased in many countries.
  • The share of households with flat or falling market incomes during the 2005-14 period has been around 65% in advanced economies, and 97% in Italy. In the preceding decade, it had been negligible.
  • The Eurasia Group’s top ten risks for 2017:
    1. Independent America
    2. China overreacts
    3. A weaker Merkel
    4. No reform
    5. Technology and the Middle East
    6. Central banks get political
    7. The White House vs. Silicon Valley
    8. Turkey
    9. North Korea
    10. South Africa
  • More than 60 percent of Americans want to keep or increase US commitments to NATO.
  • “Europe” could save 30% of its defense investments by cooperating more closely.
  • “Europe” operates many more weapon systems than the US.
  • In 2016, 94%, 73%, and 20% of US-led, Turkish, and Russian airstrikes in Syria targeted Daesh/ISIS.
  • China and Russia have strongly increased the number of their cultural institutes abroad.
  • Wikileaks has strongly gained support among Republican voters.
  • Most attacks on health care infrastructure are deliberate.

NAFTA’s Effects on the US

On his blog, Dani Rodrik comments on NAFTA’s implications for US manufacturing and jobs.

So here is the overall picture that these academic studies paint for the U.S.: NAFTA produced large changes in trade volumes, tiny efficiency gains overall, and some very significant impacts on adversely affected communities.

… Mexico has been one of Latin America’s underperformers.

So is Trump deluded on NAFTA’s overall impact on manufacturing jobs? Absolutely, yes.

Was he able to capitalize on the very real losses that this and other trade agreements produced in certain parts of the country in a way that Democrats were unable to? Again, yes.

Ayn Rand in the White House

In the Washington Post, James Hohmann reports that U.S. President-elect Donald Trump and his candidate for secretary of state, Rex Tillerson, share an affection for Ayn Rand’s “objectivist” philosophy. Trump

identifies with Howard Roark, the main character in [Rand’s] “The Fountainhead”

while Tillerson prefers “Atlas Shrugged” which I reviewed here. Other prospective members of the new administration also hold objectivist views while Stephen Bannon rejects “unenlightened capitalism” a la Ayn Rand.

Tax Evasion in a (the) New World

In the FT, Vanessa Houlder reports about the tax evasion business. The new regulatory environment has led to portfolio adjustments and new types of behavior, and it exposes vast differences in enforcement across countries:

  • Diamonds in vaults rather than financial assets.
  • Trusts in South Dakota rather than anonymous bank accounts.
  • Moving to a different country rather than just shifting assets.
  • FATCA versus the Common Reporting Standard.

The article also links to an article by Kara Scannell and Vanessa Houlder earlier in the year entitled “US tax havens: The new Switzerland.” That article includes the following quotes:

I think the US is already the world’s largest offshore centre. It has done a real good job disabling competition from Swiss banks.

In a world where it’s very hard to hide ownership or hide assets sometimes the easiest place [is one] no one would normally think of, which is the US.

Polarized Labor Markets

In the NZZ, Thomas Fuster and Jürg Müller interview David Autor. Autor on polarization:

Der Arbeitsmarkt wird immer polarisierter. Auf der einen Seite haben wir viele gutbezahlte, hochqualifizierte und interessante Stellen. Auf der anderen Seite stehen schlechter entlöhnte und niedrigqualifizierte Stellen, bei denen es quasi darum geht, dem Wohl und Komfort der Wohlhabenden zu dienen. Das ist keine gesunde Entwicklung. Sie schlägt Stufen aus der Leiter des wirtschaftlichen Aufstiegs. Das hemmt die Mobilität.

Secular Deflation Fears Are a Thing of the Past

Between November 8 and 9, medium and long-term US Treasury Yield Curve rates increased substantially:

Date1 Mo3 Mo6 Mo1 Yr2 Yr3 Yr5 Yr7 Yr10 Yr20 Yr30 Yr
11/01/160.240.350.500.650.830.991.301.611.832.242.58
11/02/160.240.370.510.640.810.981.261.571.812.222.56
11/03/160.240.380.520.640.810.981.261.581.822.252.60
11/04/160.250.380.520.620.800.951.241.551.792.222.56
11/07/160.280.410.540.630.820.991.291.601.832.262.60
11/08/160.280.430.560.710.871.041.341.651.882.292.63
11/09/160.300.450.560.720.901.121.491.842.072.522.88

Source: US Treasury.

America: Many Open Questions

US voters have abandoned political correctness. Have they also abandoned decency?

They have clearly voted for “change.” Eight years ago, they did the same.

They have voted against competence according to common standards. Maybe because they perceived competence to be correlated with “no change.” Maybe because they viewed competence as a weakness. Picking non-competent leaders can pay off in specific bargaining situations. In general, it is unlikely to pay off in the longer term.

Race was key. Whites strongly favored Trump over Clinton, and non-whites strongly favored Clinton over Trump. Non-whites will continue to grow as a share of the voting population.

Voters were unhappier than ever with the two candidates. Are they sufficiently unhappy to trigger the beginning of the end of the system of presidential primaries?

Some members of the old elite have lost. Who are the new members to follow them? How will the elites respond to this experience? By becoming more inclusive? Or by protecting themselves from the mob?

The new vision of American foreign policy is less clear than ever. Will the traditional US-allies rise to the challenge? European aerospace and defense stocks. US aerospace and defense stocks.

We have seen in the past how major political shocks can affect a country’s attractiveness for foreigners, its role as a cultural and scientific center, and in the longer run, its international influence. Will we see the same in the US?

How will the American election affect how other countries view the case for or against democracy (see earlier post)?

In the New York Times, Paul Krugman fears that America is a failed state and society. He writes

There turn out to be a huge number of people — white people, living mainly in rural areas — who don’t share at all our idea of what America is about. For them, it is about blood and soil, about traditional patriarchy and racial hierarchy. And there were many other people who might not share those anti-democratic values, but who nonetheless were willing to vote for anyone bearing the Republican label.

Young Men in the US Work Fewer Hours

More discussion about falling employment of young men in the US:

  • John Rust publicizes the facts in a speech: Unskilled young men spend more time playing video games and less time in the labor market. “In 2015, 22 percent of lower-skilled men aged 21–30 had not worked at all during the prior 12 months.” They live in the basement of their parents’ houses and are not married. (And on his 12-year old son: “If we didn’t ration video games, I am not sure he would ever eat. I am positive he wouldn’t shower.)
  • Jason Richwine argues that the trend is restricted to natives as opposed to immigrants.
  • A critical assessment on We the Pleeple.

One of the first to point to the phenomenon was Bob Hall, for example at the 2015 ASSA meetings in Boston.

Dynamics of the World Income Distribution

In a Resolution Foundation report, Adam Corlett examines the “Elephant Curve.” The curve shows that between 1988 and 2008 income growth in the 70th to 95th percentile range of the world income distribution was much lower than for almost all other percentiles. Since the lower middle class of rich countries is situated around the 80th percentile of the distribution the Elephant curve has been interpreted as evidence for stagnating middle class incomes in the rich countries.

Corlett emphasizes that

  • the country composition in 1988 and 2008 is not the same. Holding it constant the Elephant curve is less pronounced.
  • “Population changes, rather than just income changes, have driven the income growth distribution in the elephant curve.” Holding the relative population size across countries constant the Elephant curve is less pronounced.
  • There is lots of variation across developed economies. “[T]he weak figures for the mature economies as a whole are driven by Japan (reflecting in part its two ‘lost decades’ of growth post-bubble, but primarily due to likely flawed data) and by Eastern European states (with large falls in incomes following the collapse of the Soviet Union after 1988). Looking only at the remaining mature economies, far from stagnation we find average real income growth of 52 per cent with strong growth across the distribution, though slightly higher at the top. [But] there are great differences between these nations. US growth of 41 per cent was notably unequally shared, with low (but not zero) growth for poorer deciles meaning that the US comes closest to matching the stagnation and inequality narrative – despite international trade being much less important on a national level there than elsewhere [my emphasis]. But most people in most other rich countries experienced stronger growth.”