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Inversions have been in the news consistently this summer as multiple companies have looked for legal paths away from the U.S. corporate tax system. Burger King became the latest corporation to add to the list after they announced their planned moved to Canada. The reason: Our corporate tax system is out of date. The average corporate tax rate across the 34 member Organization for Economic Cooperation and Development has dropped from 47.5 percent in 1981 to 25.3 percent in 2014. Since the late 1980s the U.S. rate has remained stagnant at around 40 percent . Additionally, the U.S. is one of only six OECD countries that still tax income on a worldwide basis (the lack of a territorial system is likely the main driver of inversions). So what’s the solution? Greg Mankiw has an idea. From the New York Times : “Perhaps the boldest and best response to corporate inversions is to completely rethink the basis of corporate taxation. The first step is to acknowledge that corporations are more like tax collectors than taxpayers. The burden of the corporate tax is ultimately borne by people — some combination of the companies’ employees, customers and shareholders. After recognizing that corporations are mere conduits, we can focus more directly on the people. … “So here’s a proposal: Let’s repeal the corporate income tax entirely, and scale back the personal income tax as well. We can replace them with a broad-based tax on consumption. The consumption tax could take the form of a value-added tax , which in other countries has proved to be a remarkably efficient way to raise government revenue.” Many OECD countries have been going this way as they have moved to replace taxes on corporations with taxes on consumption. This method isn’t without its critics though: “Some may worry that a flat consumption tax is too easy on the rich or too hard on the poor. But there are ways to address these concerns. One possibility is to maintain a personal income tax for those with especially high incomes. Another is to use some revenue from the consumption tax to fund universal fixed rebates — sometimes called demogrants. Of course, the larger the rebate, the higher the tax rate would need to be.” The point is: we need to reform the U.S. tax code (both corporate and individual). Not just to stop inversions, but to improve U.S. competitiveness and grow the U.S. economy (and I’m not talking about -2.1 percent growth followed by 4.2 percent, but real, long-term growth). If all sides are willing to come to the table with those goals in mind, then, as Mankiw suggests, there are solutions to be found. Trading the corporate tax for a VAT with a rebate might be one option.
New CBO report finds that debt will keep piling up unless serious reforms are enacted.
Matt Yglesias at Vox today argues that migration out of “blue states” is caused by high housing prices, not taxes, and high housing prices are essentially a function of bad zoning laws in “blue” cities. Yglesias literally wrote the book on this topic, and his argument is backed up in some ways up by some compelling academic research , so it’s well worth taking seriously. And, as far as it goes, there’s an element of truth: virtually every academic studying migration would agree that cost of living factors, especially housing costs, have an important role in determining migration patterns. But Yglesias’ “explainer” doesn’t offer a real explanation of what this means, and how housing prices relate to the broader migration debate. He suggests that the price map we created is merely a reflection of housing prices, yet doesn’t even offer a comparison to other price categories. The BEA makes available four different sets of price parities: all consumption, rents, goods, and other services. Our state and metro area maps presented just the parities for all consumption, but it’s easy enough to compare to other categories. Yglesias, and others he cites , suggests that, because the amount of variation in rent price parities is very large (larger than other categories), it is therefore the only really important component. The problem, of course, is that this argument is wrong. While rent does vary more widely than prices for goods or other services, it varies in a systematically similar way. Even when no controls for housing policies are included, variation in service prices can explain 65 percent of the variation in housing prices, and while variation in goods can explain 58 percent. These are very high numbers for a single-variable explanation. This suggests that we can’t just draw a line from housing policy to migration, because we can’t even draw a direct line from housing policy to price levels: areas with restrictive zoning policies are closely correlated with areas that also have restrictive geographies and other significant price effects. Migration and regional economics are too complicated to just blame housing policy. Zoning definitely drives up prices: but apparently a large part of high housing prices is explained by generally higher price levels for all kinds of goods. The argument that housing prices are simply driven by high demand for high wages in areas of restrictive zoning is likewise complicated by the actual data on the subject. It may be that people move to New York City for high wages, and so demand for housing rises, thus prices rise. But it also may be that firms in DC have to offer high wages in order to persuade people to tolerate high rents, bad traffic, and crowded urban living. In fact, if we look at price changes instead of price levels from 2008 to 2012, there is very little correlation between changes in nominal wages (a reasonably proxy for changes in labor demand, used in the academic research Yglesias cites) and changes in price levels, except in the most extreme cases. This suggests that, whatever the connection between local labor demand and housing prices, it isn’t as simple as Yglesias explains. It’s true that housing prices matter. Local job creation likewise obviously impacts migration and prices. But, as we’ve pointed out, local fiscal policy can also impact housing prices. Furthermore, housing prices aren’t all that matter , especially for migration. People migrate for weather, for family, for jobs, for a better quality of life , and, yes, for a lower cost of living: including both lower housing costs and lower tax burdens . The trite suggestion that everybody wants to move into “blue state” cities, but is simply priced out by zoning laws, simply isn’t true. As surprising as it may be to Yglesias, not everyone wants to live in mid-rise apartment buildings surrounded like light rail and dog parks: people have widely varying preferences, and many people (this author included) enjoy rolling hills, open land, and cheap backyard barbecue. Read our responses to Paul Krugman , CBPP , and the Upshot blog on migration issues. Read more on migration here . Follow Lyman on Twitter .
Canada is apparently becoming an attractive place to do business. This week Burger King announced plans to move its headquarters to Canada, via a merger with Tim Hortons. Other U.S. companies that have recently moved or announced plans to move to Canada include Bausch and Lomb , Allergan , and Auxilium . This Bloomberg compilation indicates Tim Hortons was once a U.S. company, until it inverted to Canada in 2009. Part of the attraction is the substantial tax reforms that occurred over the last 15 years in Canada. First among these is the dramatic reduction in the corporate tax rate, from 43 percent in 2000 to 26 percent today. The U.S. currently has a corporate tax rate of 39 percent, but lawmakers are reluctant to do what Canada did, i.e. lower the tax rate, for fear of losing tax revenue. The natural question is: how much tax revenue did Canada lose? Answer: None. According to OECD data, corporate tax revenue increased following Canada’s corporate tax rate cuts that began in 2000. The first chart below shows the data. Corporate tax revenue as a share of GDP in Canada has averaged 3.3 percent since 2000, while it averaged 2.9 percent over the years 1988 to 2000, when Canada’s corporate tax rate was 43 percent. The second chart shows the same data for the U.S. The U.S. corporate tax rate has remained at about 39 percent since 1988, but this has not translated into higher corporate tax revenue. For 15 years straight, Canada has raised more corporate tax revenue than the U.S., as a share of GDP. Since 2000, U.S. corporate tax revenue as a share of GDP has averaged 2.3 percent, compared to 3.3. percent in Canada. Follow William McBride on Twitter
Burger King’s announcement that it will move its headquarters to Canada has put the spotlight on Canada’s tax system. Just what are the tax benefits of doing business in Canada versus the U.S.? First, Canada has a much lower corporate tax rate: 15 percent at the federal level plus another 11 percent on average from provincial corporate taxes. Compare that to the U.S. federal corporate tax rate of 35 percent plus an average state corporate tax rate of about 4 percent. Second, Canada has a territorial tax system , meaning there is no additional repatriation tax on foreign profits. The U.S. has a worldwide tax system, which applies a repatriation tax to foreign profits when those profits are brought back to the U.S. The repatriation tax is basically the difference between the foreign corporate tax rate and the U.S. corporate tax rate, which is typically more than 10 percent. The average foreign corporate tax rate in the developed world is 25 percent. Third, the U.S. is not particularly competitive in terms of taxing shareholders. Canada intergrates its corporate tax with shareholder taxes to avoid double-taxation. In the U.S. it just piles up, so the integrated corporate tax rate on equity financed investment is over 50 percent. Perhaps less important to Burger King are sales taxes and property taxes, but they still matter to some extent. Canada has a superior sales tax system that largely exempts business inputs . Most U.S. states apply their sales taxes to capital goods. Canada has a superior property tax system that largely exempts business inputs. In contrast, state and local U.S. property taxes often apply to machinery and equipment and in some states to inventory. Some states also have capital taxes. Putting the domestic tax factors together, Jack Mintz and Duanjie Chen of the University of Calgary found that the U.S. Marginal Effective Tax Rate (METR) on Capital Investment is the highest in the developed world, at 35.3 percent. In contrast, Canada’s METR is about half that, at 18.6 percent. By this measure, Canada has the lowest business tax burden in the G7. In short, in terms of doing business, the U.S. has the least attractive tax regime of any developed country. That is what is causing the corporate inversions. The solution is tax reform, particularly corporate tax reform. Follow William McBride on Twitter
The Center on Budget and Policy Priorities’ Michael Mazerov has a blog post out today covering the same Upshot blog migration tool we covered recently . Mazerov points out that states with no income tax appear to have done a worse job holding onto migrants than other states. Unfortunately, what Mazerov actually discovered is that some states have just have more people than others. There’s a very basic statistical problem in the data he presents, but it’s an easy problem to miss. To see that problem clearly, it may be better to think about people who stay in a state, rather than out-migrants. A person born in a big state, like Texas or California – just like anyone else – is likely to find plentiful opportunities in Texas or California. Therefore, she is likely to live in Texas or California – not necessarily because Texas and California are superior, but because they just happen to be very large and populous. On the other hand, Rhode Island, as readers may notice, is small. Wyoming, North Dakota, Alaska, and most of Mazerov’s high-leaver states all have low populations as well. Simple statistical gravity suggests people in those states will find jobs elsewhere. For a person born in Wyoming, most potential employers are outside of her home state. This is not because Wyoming is inferior – it is just lightly-populated. If we divided California into sixty-six “states,” each the population of Wyoming, we would almost certainly find people leaving their home “states” in this divided California much more often. The data Mazerov presents doesn’t tell us much about tax policy: it mostly tells us about population. That explains why Florida, California, and Texas all have some of the least “leavers” despite having radically different net migration flows for over 20 years. Meanwhile, Wyoming, North Dakota, Alaska, Montana, Rhode Island, Idaho, and others all share similarly large amounts of leavers, even though their annual net migration rates are also very different. Of course, Mazerov’s chart only shows half the data. He shows how many people left, but not how many people moved into each state. It’s hard to talk about migration when you only look at part of the story. Indeed, that’s the same point we made in our writing on migration earlier this year. To understand how migration works , it’s important to look at all the data, and consider the options actually faced by migrants. In this case, Mazerov did not fully consider the basic distribution of employment and lifestyle opportunities around the nation, which led to the production of a chart that mostly just mirrors state level population trends. Follow Alan and Lyman on Twitter.