Kevin Drum

Unchecking the Box

| Tue May 12, 2009 1:57 AM EDT

Matt Yglesias writes about the way a Clinton-era initiative to streamline and update tax rules (commonly called "check the box" for reasons that aren't very interesting) ended up becoming a gigantic loophole that allows American corporations to avoid paying taxes on profits earned overseas:

What happened is that the Clinton administration promulgated a rule that was designed to simplify the classification of different kinds of subsidiaries. Within months of the rule coming out, the career civil servants in the Treasury Department noted that there was potentially a huge tax loophole here.

....As soon as it was noted, an effort was put in place to change it. But a ferocious lobbying battle opened up, with the apologists for tax havens arguing that, basically, it was [other countries'] ox that was getting gored here so Americans shouldn’t care. Over the years, however, that turns out to be wrong. The availability of this loophole is a significant incentive for companies to invest in their overseas subsidiaries and take advantage of the tax shell game. It’s a loophole that nobody ever intended to create, and that should be done away with forthwith.

Whether this is really a big incentive to invest overseas is probably debatable, but it's nonetheless true that it was only an unanticipated side effect of check-the-box that allowed companies to use it to avoid taxes on overseas earnings.  So good for Obama for trying to partially get rid of it.

Except for one thing.  It really is true that America is virtually the last country in the world that tries to tax overseas profits earned by multinational companies in the first place. Everyone else, including all those fine social democrats in western Europe, have long since moved to a seemingly more sensible system in which each country simply taxes its own domestic profits regardless of where parent companies are headquartered.  This avoids all sorts of complications related to double taxation and allocation of expenses and seems to be genuinely more efficient as well.  You can find a pretty good discussion of the basic issues here.

So what's the deal?  Should liberals be in favor of closing this loophole, since it is, after all, a loophole?  Or should we be in favor of not just leaving it alone, but going further and changing our corporate tax law to eliminate taxation of overseas profits entirely?  Or perhaps changing the law, but only as part of a package that makes our corporate tax code more sensible overall?  What's the party line here?

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Taxing Carbon - Part 5

| Mon May 11, 2009 7:51 PM EDT

I promise this is the last post in this series.  (For a while, anyway.)

But there's one general point about the debate between carbon taxes and cap-and-trade that I want to make directly.  Namely this: it's an unfair fight.

Here's the thing.  Cap-and-trade is a real-world program for reducing pollutants.  We used it successfully with sulfur emissions in the 90s.  Europe is already doing it with carbon.  The northeastern states are doing it with RGGI.  The Waxman-Markey bill is a real piece of legislation that's hundreds of pages long and festooned with a hundred different compromises that will (we hope) allow it to survive the legislative sausage grinder.

And all of these variations of cap-and-trade are complicated.  When you read about them, you're immediately bombarded with jargon: auctions vs. allocations; caps, floors, offsets, and banking; upstream vs. downstream; how the exchange should be set up; how often permits should be sold; etc. etc.  Those are all real-life questions, and in any real-life plan they have to be addressed.  And they're confusing.  And yes, they all provide potential toeholds for special interests to game the system — something we should fight like banshees to keep to a minimum.

Tax advocates have no such worries.  They propose that we simply tax various fuels based on their carbon content, and voila!  We're done.  Simple and easy.

Ironically, though, the only reason they can get away with this is because of the very fact that a tax is a political nonstarter, which means there are no real-world taxes on the table.  But if there were, they'd have all the same questions as a cap-and-trade plan, plus a whole bunch of new ones.  Should it be levied upstream or downstream?  Can it be tax sheltered offshore?  Are you allowed to apply a tax-loss carryforward to your carbon tax levy?  How do you harmonize the tax with other countries?  Can I get a tax credit for reducing carbon emissions?  How are the revenues going to be distributed?  Should midwestern states that rely more on coal-fired plants get treated differently than, say, California?  What would it take to make a carbon tax on foreign oil compatible with WTO rules?

Rhetorically, tax advocates can pretend that none of these questions exist.  They're able to contrast the genuine messiness of a real-world cap-and-trade plan with a Platonic, whiteboard version of a tax plan.

But that's not how it would work.  If cap-and-trade goes down, we're not going to get a tax instead.  And if we do eventually get a tax instead, it's not going to be a clean and simple tax.  It's going to be a thousand-page monster with every paragraph the subject of a slugfest between a dozen different special interests lobbying half a dozen different congressional committees.  That's reality.

If you're going to compare cap-and-trade to a tax, honest advocates need to compare apples to apples.  We need to hear what a real-life carbon tax bill would be like.  And we should have a few dozen tax experts in the room to laugh at us while all this is going on.  The fact is, cap-and-trade isn't as complicated as it seems, and a tax isn't as simple as it seems.  In the end, though, despite the admitted complexities of cap-and-trade, at least it wouldn't be embedded within an existing 100,000-page corporate tax code.  A tax would be.  I'd keep that firmly in mind whenever you hear about how simple and clean a carbon tax would be.

POSTSCRIPT: Rasmussen reported today that only 24% of voters have any idea what "cap-and-trade" even means.  That doesn't surprise me.  When I set out to write my cap-and-trade piece for the magazine a few months ago, I originally planned to write about the debate between cap-and-trade and carbon taxes.  Very quickly, though, I realized that even among plugged-in people, very few of them really knew what cap-and-trade was or how it worked.  So I switched gears and decided to write a straight ahead cap-and-trade primer instead.  If you're part of the still-confused 76%, my piece is here.

Chart of the Day - 5.11.2009

| Mon May 11, 2009 6:59 PM EDT

The basic argument in favor of financial engineering is that it allocates risk more effectively and thereby increases capital formation.  Which is good.  Or would be, anyway, if that's what happened.  Via Ezra, however, Adam Posen and Marc Hinterschweiger take a look at the growth of credit derivatives over the past decade and conclude that it didn't:

Clearly, growth in new financial products has outpaced fixed capital formation both globally and in the United States by a large margin. This has been especially true since 2006, when investment stagnated, but derivatives continued to grow at a rapid rate. There only seems to be a weak link, if any, between the growth of the newest complex — and now proven dangerous if not toxic — financial products and real corporate investment.

I would just add one other observation to this: the latest and greatest conservative argument for repealing the estate tax is that it would promote capital formation.  Without an estate tax, rich people will be motivated to earn more money instead of frivolously spending it, and heirs will get nice big chunks of capital to invest in America.  As usual with right-wing economic theorizing, it's sort of vaguely plausible sounding, and the conservatives pushing it have some nice charts along with a bunch of equations filled with Greek letters to back them up.  But then, so did the Wall Street rocket scientists, didn't they?  In the event, though, that turned out to be a self-serving argument.  Even trillions of dollars in derivatives didn't have a noticeable effect.

So then, what are the odds that a change in the estate tax amounting to a few billion dollars will have a serious effect on capital formation either?  Slim.  And what are the odds that this is just another self-serving argument?  That's an exercise for the reader.

Shakeup in Afghanistan

| Mon May 11, 2009 2:45 PM EDT

Robert Gates announced today that he is firing General David McKiernan, our top commander in Afghanistan:

The abruptness of the move was an indication of the gravity of the decision. General McKiernan had served in his current command for only 11 months, while such tours are usually two years or more.

Defense officials said that General McKiernan was being replaced because of what they described as a conventional approach to what has become one of the most complicated military challenges in American history. He is to be replaced by Lt. Gen. Stanley A. McChrystal, a former commander of the Joint Special Operations Command who recently ran all special operations in Iraq.

Presumably, David Petraeus was behind this decision.  Right?  Coincidentally, BruceR, recently back from Afghanistan himself, has a few thoughts about what we're doing right and what we're doing wrong there, and it sounds like he endorses the general idea that we need a more nonconventional approach.  More later on this, I'm sure.

UPDATE: More here from James Joyner.

Pete Sessions Speaks

| Mon May 11, 2009 2:17 PM EDT

What's the deal with members of Congress named Sessions?  Via HuffPost, here's Rep. Pete Sessions (R–Tex.) describing Barack Obama's nefarious scheme to destroy capitalism:

In an interview, Mr. Sessions cited rising unemployment in asserting that the administration intended to “diminish employment and diminish stock prices” as part of a “divide and conquer” strategy to consolidate power.

Mr. Sessions, in his seventh term, said Mr. Obama’s agenda was “intended to inflict damage and hardship on the free enterprise system, if not to kill it.” By next fall, he predicted, voters may regain appreciation for the era of Republican governance when “many dreams were achieved,” the size of the economy doubled and employment and financial markets hit record levels.

Every party has goofballs who say stupid things.  But the GOP is apparently trying to get itself into the Guiness Book of World Records or something.  I'd sure like to see a complete transcript of this interview, if only for the entertainment value.

Obama to Release Torture Report?

| Mon May 11, 2009 1:17 PM EDT

The Washington Post today describes the difference between the limits placed on waterboarding by Justice Department lawyers and the practice of waterboarding once it got into CIA hands:

When the technique was employed on Abu Zubaida and later on 9/11 mastermind Khalid Sheik Mohammed and al-Qaeda planner Abd al-Rahim al-Nashiri, the interrogators in several cases applied what the CIA's Office of Inspector General described in a secret 2004 report as "large volumes of water" to the cloths, explaining that their aim was to be more "poignant and convincing," according to a recently declassified Justice Department account.

....Government officials familiar with the CIA's early interrogations say the most powerful evidence of apparent excesses is contained in the "top secret" May 7, 2004, inspector general report, based on more than 100 interviews, a review of the videotapes and 38,000 pages of documents. The full report remains closely held, although White House officials have told political allies that they intend to declassify it for public release when the debate quiets over last month's release of the Justice Department's interrogation memos.

....Although some useful information was produced, the report concluded that "it is difficult to determine conclusively whether interrogations have provided information critical to interdicting specific imminent attacks," according to the Justice Department's declassified summary of it.

Emphasis mine.  Greg Sargent says that Hill sources describe this report as the "holy grail" because "it is expected to detail torture in unprecedented detail and to cast doubt on the claim that torture works."  Doubt probably won't be enough, though.  If there's even a hint of "useful information," I imagine the torture advocates will stick to their guns.

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Quote of the Day - 5.11.09

| Mon May 11, 2009 12:51 PM EDT

From my sister, after a conversation about the death grip the financial industry continues to exert on Congress:

"Why should I even bother to vote if none of these people ever does anything that's good for me?"

Good question!  I didn't really have a very good answer.  Can anyone help?

Cui Bono?

| Mon May 11, 2009 12:38 PM EDT

Today a bunch of healthcare industry executives will announce that they plan to go shoulder to shoulder with President Obama in his quest to cut healthcare costs.  Paul Krugman is cautious but supportive.  Jon Cohn is cautious but enthusiastic.  Ezra Klein is just cautious.

Count me in Ezra's camp.  The healthcare folks are promising initiatives that will cut the growth of healthcare spending by 1.5 percentage points a year.  Here's Jon Cohn on that:

That may not sound like a lot of money. But it is. If indeed the industry could produce such savings, according to the White House, it'd be worth around $2,500 a year to the typical family — which, it just so happens, is what Obama promised during his presidential campaign. (Amazing coincidence, no?)

....This doesn't mean the groups are acting out of altruism. The five big industry groups are the Advanced Medical Technology Association (AdvaMed), America's Health Insurance Plans (AHIP), the American Hospital Association (AHA), the American Medical Association (AMA) and Pharmaceutical Manufacturers of America (PhRMA). And they've made no secret of their opposition to proposals for creating a public insurance plan, into which anybody could enroll. Monday's gesture may simply be an effort to cut a deal that leaves out the public plan.

Ya think?  My problem here isn't that the industry folks haven't proposed detailed plans or enforcement mechanisms.  That's to be expected.  My problem is that they're apparently planning to argue that things like streamlined billing and "encouraging" the use of evidence-based guidelines will be enough to entirely meet Obama's cost goals.  Cost effectiveness research?  No need!  A public plan?  No need!  It's just like 1993, when the HMO revolution was going to change medical care so dramatically that there was no need for Bill Clinton's healthcare reform.  That didn't work out so well.

Anyway.  Jon argues that the optics are good even if we should continue to watch these guys like hawks.  Ezra just thinks we should just watch them like hawks.  I'm with Ezra.  Their incentives here are simply too clear to believe they want to genuinely be of help.

UPDATE: Matt Yglesias offers a comment:

Whatever kind of backstabbing these industry groups may or may not do in the future, they won’t be able to take back the fact that once upon a time they stood beside the White House in agreeing that it’s possible to achieve massive cost-savings without compromising patient care. That argument may well prove hugely important, politically, to getting a package through congress.

True enough.

Taxing Carbon - Part 4

| Mon May 11, 2009 11:44 AM EDT

A few days ago I took Jeffrey Sachs to task for a post he wrote supporting a carbon tax in preference to cap-and-trade.  Over the weekend he sent me a response.  I'll probably have a reply later today, but in the meantime, here's Sachs:Kevin Drum is certainly right that a cap-and-trade system potentially can look a lot more like a carbon tax than actual cap-and-trade systems have done in the past.  My worries are about the reality of such systems, not the theory.  Both the Waxman-Markey draft bill and the actual experience of the European Union Emissions Trading System (EU ETS) give me concern for the reasons that I mentioned.  While a tax can be levied at a few upstream points, the EU ETS involves around 12,000 enterprises and the draft Waxman-Markey bill would apparently involve several thousand US sites as well (essentially all industrial units which emit more than 25,000 tons of carbon dioxide equivalent greenhouse gases). We would create for essentially no reason a highly expensive, Wall-Street-based system of permit trading and enterprise compliance that could be substituted by an easy-to-implement upstream tax.  Mr. Drum correctly notes that the Waxman-Markey proposal is both upstream and downstream.  I do indeed like the upstream part. The fact, however, that it is also a downstream system, which is the administratively cumbersome part that would be avoided by an upstream carbon tax.

As for the lack of price predictability, the price fluctuations of the EU ETS are notorious.  Emissions prices actually collapsed for Phase I permits at the end of that phase (2007), and recently emission permit prices have declined from more than 30 euros per ton in 2008 to less than 15 euros this year.  Some European economists are arguing for a floor price in the EU ETS, which indeed would make it much more like a tax.  I disagree with Mr. Drum that we should see the trading system as a helpful macro stabilizer and therefore like the fact that the price on carbon emissions has collapsed. We need a stable carbon price into the future to give the right incentives for a new generation of low-emissions technology development and adoption, and should use other economic instruments for cyclical policies.

I agree with Mr. Drum that an emissions system can cover most of the economy like an upstream tax, but in practice the EU ETS covers only around 50 percent of the economy.  The Waxman-Markey bill aims for much more, so perhaps I'm too pessimistic on that count and Mr. Drum is correct, but we'll see once the negotiations proceed further.  As for revenues and for revenue transparency, I still believe that a tax is the right way to go. I am not very confident about the fairness of backroom haggling over emissions rights now underway in Washington, or which has characterized the EU ETS.  I think that the tax approach can be more direct and visible, and less vulnerable to unfair insider dealing.

Finally, I would like to remind Mr. Drum and his readers that I stated clearly in my brief Yale article cited by Mr. Drum that either a tax or a cap-and-trade system is far superior to the status quo.  We are arguing about matters that are less than essential.  If Congress actually adopts a cap-and-trade system, that would be a huge advance. In fact, putting a market price on carbon emissions (through either a tax or permit system) is just one modest part of a truly comprehensive and effective carbon mitigation strategy, that must involve standards, R&D, demonstration projects, and many other kinds of incentives and public policies.

Sachs is, among other things, Director of the Earth Institute at Columbia University and author of The End of Poverty: Economic Possibilities for Our Time.

Quote of the Day - 5.10.09

| Sun May 10, 2009 12:38 PM EDT

From Bill Schneider, CNN election guru and former senior fellow at the right-wing American Enterprise Institute:

"The Republicans aren't a party, they're a cult."

Well, today's GOP does seem to check most of the boxes in the International Cultic Studies Association's "Characteristics Associated with Cultic Groups."  Except for this one: "The group is preoccupied with bringing in new members."  That doesn't seem to be much of a priority for them these days.