Relevant and even prescient commentary on news, politics and the economy.

The Incidence of the Obamacare Subsidies

The Incidence of the Obamacare Subsidies

Justin Fishel and Mary Bruce covers Trump’s dismantling of Obamacare:

The White House announced Thursday night that the administration will slash Obamacare subsidy payments to insurers. The “cost-sharing reduction payments,” worth an estimated $7 billion this year, are intended to reduce out-of-pocket costs for low-income Americans on Obamacare … House Democratic leader Nancy Pelosi and Senate Democratic leader Chuck Schumer issued a joint calling the action “pointless sabotage.” “Sadly, instead of working to lower health costs for Americans, it seems President Trump will singlehandedly hike Americans’ health premiums,” they said in a joint statement. “It is a spiteful act of vast, pointless sabotage leveled at working families and the middle class in every corner of America.”

Trump’s counter is that the health insurance companies are very profitable because they are reaping the benefits of these subsidies. I would argue that health insurance company profit margins are high in large part because we have not enforced the anti-trust laws and allowed a lot of market power. Brad and Michael Delong made this point last fall:

The United States’ Affordable Care Act (ACA), President Barack Obama’s signature 2010 health-care reform, has significantly increased the need for effective antitrust enforcement in health-insurance markets. Despite recent good news on this front, the odds remain stacked against consumers … It is not surprising, then, that in 2015 some of the largest private American health-insurance companies – Anthem, Cigna, Aetna, and Humana – began exploring the possibility of merging. If they could reduce the number of national insurers from five to three, they could then increase their market power and squeeze more profits from consumers.

Even five health insurance companies are two few. But suppose we did have real competition in the health insurance market – what would be the effect of subsidies. Let’s consider this primer on the incidence of taxes:

The tax incidence depends on the relative price elasticity of supply and demand. When supply is more elastic than demand, buyers bear most of the tax burden. When demand is more elastic than supply, producers bear most of the cost of the tax.

Most economists know this and we know how to translate this into the implications for the incidence of a subsidy. We have to admit, however, that Trump is really awful at economics. But he does have economic advisors. Trump is implicitly assuming a very elastic demand for health care or a very inelastic supply of health care. But where is his evidence for these claims? I guess when Kevin Hassett produces his “analysis, we might see a link from Greg Mankiw.

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IMF Fiscal Monitor: Progressive Taxation Need Not Deter Growth

IMF Fiscal Monitor: Progressive Taxation Need Not Deter Growth

The latest from the IMF is a must read for progressives even if it runs contrary to the nonsense coming out of the White House:

At the global level, inequality has declined substantially over the past three decades, but within national boundaries, the picture is mixed: some countries have experienced a reduction in inequality while others, particularly advanced economies, have seen a significant increase that has, among other things, contributed to growing public backlash against globalization. Excessive levels of inequality can erode social cohesion, lead to political polarization, and ultimately lower economic growth, but whether inequality is excessive depends on country-specific factors, including the growth context in which inequality arises, along with societal preferences. This Fiscal Monitor focuses on how fiscal policy can help governments address high levels of inequality while minimizing potential trade-offs between efficiency and equity. It documents recent trends in income inequality, including inequality both between and within countries, then examines the redistributive role of fiscal policies over recent decades and underscores the importance of appropriate design to minimize any efficiency costs. It then focuses on some key components of fiscal redistribution: progressivity of income taxation, universal basic income, and public spending policies for achieving more equitable education and health outcomes. The analysis relies on the existing theoretical and empirical literature, IMF work on inequality and fiscal policy, country experiences, and new analytical work, including various static microsimulation analyses based on household survey data. Simulations using a dynamic general equilibrium model calibrated to country-specific data and behavioral parameters illustrate the potential impact of alternative budget-neutral tax and transfer measures on income inequality and economic growth.

(Dan here…see also Yves Smith)

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Hassett’s Evidence on Transfer Pricing and the U.S. Trade Deficit

Hassett’s Evidence on Transfer Pricing and the U.S. Trade Deficit

In my last post, I questioned Kevin Hassett’s claim that transfer pricing manipulation was responsible for half of our trade deficit and asked what was the paper he referenced. We have the text of his speech:

There is another important factor to consider when thinking about how these changes will affect the economy. A recent NBER working paper (Guvenen, Mataloni, Raisser and Ruhl 2017) argues that profit shifting by large multinational firms causes part of their economic activity to be attributed to their foreign affiliates, leading to an understatement of U.S. GDP. Moreover, this profit-shifting activity has increased significantly since the mid-1990s, resulting in an understatement of measured U.S. aggregate productivity growth. The authors correct for this mismeasurement by “reweighting” the amount of consolidated firm profit that should be attributed to the U.S. under a method of formulary apportionment. Under this method, the total worldwide earnings of a multinational firm are attributed to locations based upon apportionment factors that aim to capture the true location of economic activity. The authors use equally weighted labor compensation and sales to unaffiliated parties as proxies for economic activity. Applying the formulary adjustment to all U.S. multinational firms and aggregating to the national level, the authors calculate that in 2012, about $280 billion would be reattributed to the U.S. Given that the trade deficit was equal to about $540 billion, this reattribution would have reduced the trade deficit by over half in 2012.

Formulary apportionment can take on many forms. One form is to allocate taxable profits by sales but this approach would likely lead to a different allocation of income than a true arm’s length approach especially for a nation that imported a lot of sourced produced abroad. Wasn’t this realization central to that debate over the Destination Based Cash Flow Tax idea? This NBER paper, however, does something else as noted by this summary:

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Puerto Rico, Transfer Pricing, and Kevin Hassett

Puerto Rico, Transfer Pricing, and Kevin Hassett

Scott Greenberg provided a nice summary of what section 936 was and how its expiration had contributed to Puerto Rico’s economic and fiscal difficulties:

beginning in 1976, section 936 of the tax code granted U.S. corporations a tax exemption from income originating from U.S. territories. In addition to section 936, the Puerto Rican corporate tax code gave significant incentives for U.S. corporations to locate subsidiaries on the island. Puerto Rican tax law allowed a subsidiary more the 80% owned by a foreign entity to deduct 100% of the dividends paid to its parent. As such, subsidiaries in Puerto Rico had no corporate income tax liability as long as their profits are distributed as dividends. When section 936 was in effect, U.S. corporations benefited greatly from locating subsidiaries in Puerto Rico. Income generated by these subsidiaries could be paid to U.S. parents as dividends, which were not subject to U.S. corporate income tax under section 936, and were deductible from Puerto Rico’s corporate income tax. Because of these generous tax incentives for business, Puerto Rico grew rapidly throughout the 20th century and developed a substantial manufacturing sector, though it remained relatively poor compared to the U.S. mainland. However, because section 936 made foreign investment in Puerto Rico artificially attractive – creating, in effect, an economic bubble – it left the island vulnerable to a crash if the tax provisions were ever to be repealed.

The story is that starting in 2006, the IRS would treat the Puerto Rican affiliates of life science companies as contract manufacturers which would greatly reduce the transfer pricing manipulation made legal under section 936. Greenberg notes:

2006 also marked the beginning of a deep recession for Puerto Rico, which has lasted until today. Puerto Rico’s high corporate taxes on domestic corporations along with low taxes on U.S. subsidiaries had skewed the Puerto Rican economy toward foreign investment from the U.S. When section 936 was repealed in 2006, foreign investment began to flee. Without a strong domestic corporate presence to fill the void, the economy began to contract, along with tax revenues.

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Does Kevin Hassett Understand Transfer Pricing?

Does Kevin Hassett Understand Transfer Pricing?

Howard Gleckman does:

It is true that bringing US corporate rates in line with our trading partners may reduce incentives for improper transfer pricing. But there is a flaw in Hassett’s argument: While these practices are aimed at reducing tax lability, they do not represent real economic activity. And limiting income shifting won’t significantly increase domestic employment.

He was noting this presentation:

Kevin Hassett, chair of President Trump’s Council of Economic Advisers, argued today that the corporate tax cuts in the Sept. 27 Republican Unified Framework would boost overall economic growth. How? In large part because its corporate tax rate reductions would encourage firms to shift jobs from overseas to the US. But the claim is unsupported by the evidence. In a speech at the Tax Policy Center today, Hassett said that the GOP plan would not only increase domestic employment but also raise worker wages by an average of $7,000. That is quite a promise, but after unpacking his argument, it seems improbable at best. His claim: Making statutory US corporate tax rates competitive with the rest of the developed world would encourage firms to stop inappropriate transfer pricing, corporate inversions, and other income-shifting practices. Half of the US trade deficit, he said, results from transfer pricing.

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