Let's Eliminate the Corporate Tax

Article: Wall Street Journal, A Short History of the Income Tax, John Steele Gordon

Lately there has been a lot of talk about corporations who do not pay their fair share of tax, big oil getting all matter of tax-based subsidies, General Electric  paying an effective tax rate of 0% last year, etc.

When Democrats go after millionaires and billionaires, corporate jet owners and the like, and ask them to pay their fair share, I'm all for it.  The gap between rich and poor in this country is greater than it's ever been, and rich folks have been making a sport out of hiring talented tax advisers to game our country's Byzantine tax code for decades.

But when it comes to bashing corporations, and asking them to pay more, I have mixed emotions.  Corporations are not people.  But they do hire people.  They pay wages, produce useful goods, add value and innovate.  And they are highly regulated--depending on the industry.

But the key fact is that corporations are owned by individuals, and individuals are taxed.  So why tax corporations as well as individuals?  In the interest of simplicity and fairness, lets' just stop taxing corporations.  Instead, let's impose a truly progressive tax on all individual earnings--including on the money that people earn from their corporate investments.    Then we could stop doing silly things like taxing capital gains and dividend income at a lower rate than ordinary income.   If we did this, Warren Buffet would be paying a higher tax rate than his secretary, and all would be right with the world.  And we would see a massive shrinkage in the the tax compliance industry--a wasteful drag on our nation's productivity.

Graphic from www.taxpolicycenter.org
Note the small portion of revenue that corporate tax actually comprises.....

Not only that, but we would see the U.S. become much more competitive as a location for corporate headquarters.  This could only be good for employment.

Mr. Steele's article notes that the Corporate Income Tax was instituted in the early 20th Century as a stop-gap measure.  Unfortunately, it was never phased out.  I hope that Mr. Obama will take up tax simplification, as he promised.  It is an issue with bi-partisan support, which can do the country a world of good.  And I hope he will give serious consideration to the simple but dramatic step of eliminating the corporate tax altogether.

More to Worry About: Russia Commits to Chernobyl-Style Reactors

Article: Wall Street Journal, Russia to Extend Life of Aging Reactors, by David Crawford and Rebecca Smith

To take my mind off the 400+ drop in the Dow Jones Industrial Average, I was thumbing through the international section of the paper, and found this article about nuclear reactors in Russia.

Despite Western pressure to shut them down, there are still 11 Chernobyl-style reactors, also known RMBK reactors, operating in Russia.  All of them are on the Western edge of Russia, near the cities of St. Petersburg (pop. 4.8 million), Smolensk (pop. 327,000) and Kursk (pop. 415,000).  These reactors originally had a life-span of 30 years; they have now been extended to 45 years.

from www.wsj.com

As per the article: "Many Western nuclear experts believe the RMBK reactors are among the world's most dangerous and still suffer from fundamental design shortcomings."  Such as:

• No containment structure to keep in radiation in case of an accident.  A containment structure is a standard feature on modern nuclear reactors.
• No central crucible to hold fuel rods.  Each fuel rod sits in its own tube, so engineers have to monitor and maintain 1,000 separate tubes, instead of one central crucible.

Although Russia is rich in natural gas, they are reluctant to replace their aging stock of Soviet-era nuclear reactors with natural gas plants, because they prefer to export their natural gas for profit.

I hope that Europe will become less reliant on Russian natural gas soon, and that this will change the equation.  In the meantime, let's all keep our fingers crossed.

The Human Cost of Greece's Debt Crisis

Article: Wall Street Journal, Greek Crisis Exacts Cruelest Toll, by Marcus Walker

This front page article in today's WSJ tells the tragic story of Vaggelis Petrakis, a hard-working family man from Crete who had a company that supplied vegetables to hotels and supermarkets. He was brought low by a “credit economy”, namely clients who paid him with 6-month postdated checks. I won’t paraphrase the story; you’re better off clicking on the link and reading the original.

The article quotes Constantine Michalos, president of the Athens Chamber of Commerce and Industry, who says that the practice of paying with post-dated checks exploded in Greece in the 1990's. "This was a para-banking system of enormous size. It is one of the main reasons for the crisis."

(There was also an interview with Michalos on CNBC today, where he says that about 80,000 small business have gone under in Greece over the last year)

Walker's article notes that the suicide rate in Greece has roughly doubled since the beginning of the crisis.

This morning on CNBC, I saw an interview with Mark Grant, Managing Director of Southwest Securities, who said that total Greek debt, including sovereign, corporate and municipal debt is around $1.1 trillion, roughly 3.5 times their annual GDP -- much larger than the sovereign debt alone, which was reported as $454 billion at the end of 2010 (143% of GDP).

Notwithstanding the outcome of the European debt crisis, it looks like Greece is in for a hell of a de-leveraging, which will weight down their economy for years to come.

What is Going on in the Eurozone?

Fiscal problems in the euro zone have been a primary cause for the gyrations in the U.S. stock market this year and last.  There is an element of panic that a default by one or more countries (ie, Greece) and/ or financial institutions (Societe Generale?) will cause a cascading "contagion" in the markets, similar to what happened with the bankruptcy of Lehman in 2008.  Whenever the euro zone countries step up to do something, often through the efforts of the European Central Bank, or ECB, the market goes up.  When they are seen as hanging back, markets go down.

This week, we have seen markets go up on what seems to be a concerted effort by the ECB along with other major central banks.  Today it was announced that 3-month USD loans will be made available to European banks who have been having problems placing their commercial paper, which has traditionally been an important source of US dollar funding for them (See AP Story, ECB to Provide Banks with Dollar Loans).  And in a CNBC interview yesterday, U.S. Treasury Secretary Tim Geithner was unambiguous in his statement that Europe would not allow its major financial institutions to default a la Lehman -- Europe is by and large less market oriented than the U.S., and not so concerned about "moral hazard".  (See No European Lehman-Like Collapse?)  

There seems to be a growing consensus that Greece will default and probably exit the euro--its bonds are now yielding 25%-- that this will not be the catastrophe some have been fearing, and that Germany will eventually face the inevitable choices that it has to make in order to save the euro experiment--more central planning of fiscal policy, including some kind of central euro treasury.    (See George Soros' article in The New York Review of Books, Does the Euro Have a Future?)

Nothing is decided yet, but markets have been moving up this week on these less-than apocalyptic assumptions.  As of this writing, the Dow is up over 100 points today (1%) and over 350 points since Wednesday (about 3%).

There will surely be more ups and downs on this roller coaster in the future, but as an investor, it is nice to see gains.  Hopefully they will last.

Is Wall Street Shrinking?

Articles:
Wall Street Journal, BofA Readies the Knife, by Dan Fitzpatrick
CNN Money, More Layoffs Looming on Wall Street, by Maureen Farrell

The Wall Street Journal reports that Bank of America is planning to cut $5 billion in costs by the end of 2013, including the elimination of about 30,000 jobs.  CNN reports that their major competitors will probably follow suit.

Is Wall Street shrinking?  Well, it depends how you measure it.  If you look at the number of people employed, yes it is.  Those of us who are producers and even consumers of financial products have seen great increases in efficiency over the years--everything from online brokerage, to ATM machines, to exchange traded funds, to decimalization have allowed Wall Street to service investors more cheaply than ever before.  As the below chart shows, the number of people dedicated to finance has barely budged since 1998 (the first year that the Bureau of Economic Analysis makes figures available), and is now trending downward.

To the extent that Wall Street is part of the "overhead" of our economy, and produces no real wealth, that is good news.   (Although this is little consolation if you are a BofA teller who gets laid off).

But look at the green line on the graph.  This is the percentage of GDP that is produced by the financial industry, which has been going nowhere but up for decades. Except for a few down years, GDP has been steadily increasing over those years, so we are seeing finance making up a steadily larger piece of a steadily growing pie, and doing it without employing more people.  In other words, some people are making a lot more money.  And who are these people?  Shareholders?  You wouldn't know it by me!  Tentatively (until someone proves me wrong) I think we are talking about individuals with out-sized compensations: hedge fund managers, traders, C-suite executives, lawyers.

And again, to the extent that financial services produce no real wealth, and are part of the overhead of our economy (which I believe is the case), this is done at an overall cost to our prosperity as a society.  How has this happened?  I guess that a big part of the answer is "financial innovation", which is a fancy word for getting more people to borrow more money at a higher cost than ever before.  For individuals this means things like new types of mortgages, home equity loans, and credit cards.  On the corporate side there are things like securitization, over the counter derivatives, credit default swaps, all generating hidden fees and spreads which over the years have greatly outpaced any efficiency gains coming from automation and downsizing of clerks.

I believe Wall Street needs to shrink more and become more efficient.  But I hope that the next arena for efficiency gains will be fees, spreads and six or seven figure bonuses, not just clerks' salaries.

Bashing President Obama and Pushing Dirty Energy

Article: Wall Street Journal, Canada's Oil Sands are a Jobs Gusher, by Mary O'Grady

I'm glad that in his speech on Thursday President Obama didn't say a word about green energy jobs.  As I said in a previous post, I'm fairly convinced that subsidies for forms of energy that are not yet economically viable (e.g., solar and wind) are a waste of taxpayer money.   (Research, on the other hand, is another story).

It seems like Ms. O'Grady, a columnist for the Wall Street Journal listened to a different speech than I did, or perhaps she didn't listen at all, just trotted out the old cliches one more time.  Here is the first paragraph of her article:
For all its soaring rhetoric, President Obama's "jobs speech" last week didn't demonstrate a lick of insight into why economies grow or how wealth is created. It was merely trademark Obamanomics: using government diktat to move money that's over here, over there.

What is she referring to, exactly?  Cutting payroll taxes?  I thought conservatives believed tax cuts were the key to prosperity.  Investing in infrastructure projects a la Eisenhower?  Investing in education?  Cutting government red tape and streamlining regulation?  Yes, these were the core elements in the President's speech.  

She mentions Alberta's oil sands as an example of the type of exploration that will lead to increased jobs, then blasts Obama for allowing regulators to slow down drilling on Federal lands.  My understanding is that the oil sands remained unexploited for years is because the oil that they contain is filthy, expensive to exploit and high in greenhouse gases and replete with negative environmental effects.  The only reason Canada has had success with this energy source in the last few years is that the cost of imported oil has gotten so high.  But what is the way forward for our energy future?  Clean natural gas from the U.S.?  Maybe.  Dirty tar from Canada?  Highly doubtful.

Ms. O'Grady also mentions that the market tanked 300 points the day after Obama's speech.  Come on!  Anyone following the market that day knows that this move was all about Europe, notably the highly scary resignation of German ECB official Jurgen Stark.  As I recall, the market was up on Friday morning (largely on Obama's well-received speech and plan) before this news hit.

Obama's plan is not the be-all end-all, but it is a practical, centrist step in the right direction, which may actually have a chance of passing.  Given budgetary constraints and a divided government, this may be the best we can hope for right now.  

If Mary O'Grady wants to criticize the speech, perhaps she should start by actually listening to it.  

The USA's Aging Energy Infrastructure

Articles:
Wall Street Journal, Nuclear Backlash Energizes Old Plants, by Rebecca Smith
Wall Street Journal, Gas Pipeline Operators Sweat Test, by Daniel Gilbert

Two articles in Thursday's WSJ about the USA's aging energy infrastructure.

The first points out that the anti-nuclear backlash caused by the Fukushima disaster in Japan is stalling construction of new nuclear reactors around the world, which will have the perverse effect of increasing our reliance on an aging stock of nuclear power plants.  The U.S. produces more nuclear power than any other country in the world, with 104 power plants.   Ground was broken on virtually all of these in the 1970s.  They were originally licensed for use for 40 years, but according to the article, over 70 of the plants have already received 20 year extensions.  Are 60-year-old nuclear reactors safe?  I hope so.  Meanwhile, regulators are conducting research to see if it would be feasible to operate a nuclear reactor for as much as 80 years.

from WSJ.com

The article also points out that the energy industry has been finding it more attractive to construct natural gas fired plants as an alternative to nuclear plants.  This sounds reasonable, except that over 60% of the U.S.'s natural gas pipelines were built before 1970--around 178,000 miles worth.  A large portion of these older pipelines were never subject to pressurized water tests for leaks.  The test became a requirement after 1970.  Now regulators are considering making the industry go back and perform this test on all of the old pipelines.  At between $125,000 and $500,000 per mile, the cost will be in the tens of billions.

I don't have the expertise to say how safe it is to continue using nuclear facilities and gas pipelines for 40, 50, 60 or more years.  But it's pretty surprising to learn how truly old our country's energy infrastructure is.

GOP Facing Reality on Immigration?

Article: Wall Street Journal, Farmers Press GOP on Hiring, by Miriam Jordan

I have already blogged about a couple of Miriam Jordan's articles on illegal immigration from Mexico.

This latest one says: "Recent Republican solidarity on illegal immigration is showing cracks under pressure from agricultural groups..."  It says that a bill to be introduced today by Texas Republican Lamar Smith will revise an existing guest worker provision, and allow for up to half a million foreign farm workers to work in the U.S.  The number may not be high enough, but it is a step in the right direction.

The article points out that "...concern is also rising for a wider swath of corporate America about the need for a more business-friendly rationalization of immigration policy."

My view is that politicians are simply facing reality.  Demagoguery from Presidential candidates aside, migration from the south to the north to work the seasonal harvest has been a feature of American life for centuries, since before there was a border.  The idea that the 2000-mile long border can be sealed is a silly impractical waste of money.  The sooner politicians recognize this, the better, for our budget and for the economy, among other things.  You can't fight nature, history and culture.

We share a continent with Mexico.   This is not only a geographical fact, it is also cultural and historical.  With an ongoing brutal drug war in Mexico, this may not be the right time for a wide open border, but it should be the ideal towards which we move.


Related posts:
Change to U.S. Immigration Policy, 8/19/11
Illegal Immigration and the Need for Reform, 8/15/11

FHA Sues Banks: Bad Timing?

Articles:
Wall Street Journal, U.S. Sues Big Banks Over Home Mortgages, Nick Timiraos, Robin Sidel, Ruth Simon
The Economist, Fannie Mae and Freddie Mac: Self Harm

The Economist notes that the two U.S. Government Sponsored entities, FNMA (Fannie Mae) and FHLMC (Freddie Mac) which have a mandate to encourage home ownership in the U.S., mainly by guaranteeing mortgages, have received around $140 billion from U.S. taxpayers.

Their regulator, the Federal Housing Finance Authority (FHFA) has said that they are legally required to conserve assets and protect taxpayers from further losses.  In this spirit, apparently, they have filed suit against 17 banks, for failing to adequately disclose the risks of $196 billion in mortgages which they sold to Fannie and Freddie during the housing bubble.

There may be some sense of justice here.  The banks made a lot of money during the boom (and paid out huge bonuses) by loosening credit standards and making all manner of risky loans.  Why should taxpayers have to shoulder losses when the banks are still around to pay out?

But the problem is, it's bad for the economy.  The banks are in bad shape now, especially Bank of America, which recently received $5 billion in capital from Warren Buffett.  The last thing they need now is a huge open-ended liability coming from the federal government.  The Bush and Obama administrations made a conscious decision that the best way forward out of the recession was to keep the banks alive, recapitalize them and prop them up.  Now the Obama administration is kicking them when they're down.   As a result, they can be expected to re-trench and cut back on risky lending, which will slow the economy further.

I'm not sure if the President approved these lawsuits because of populist political considerations, or if it is just an example of the left hand not knowing what the right hand is doing.  But if the goal is to strengthen the economy and create jobs, it sure looks counterproductive to me.

Its easy to criticize the decision to prop up the existing Wall Street system that was made a couple of years ago.  But that was the decision that was made, and we can't have it both ways.  Wall Street can't be the savior and the villain at the same time.

Here is the picture (again from The Economist) that tells 1,000 words:

Is Green Energy a Waste of Our Money?

Article: Wall Street Journal, 'Green Jobs' vs. Real Energy Jobs, by Stephen Moore

The author of the above article is a member of the Wall Street Journal's editorial board, which will give you some idea of his politics.  I am embarrassed to say that I am largely in agreement with much of what he says.  In the near future I may have to blog about a couple of New York Times editorials and perhaps an Atlantic Monthly piece to wash the bad taste from my mouth.

Moore argues that the administration has spent large amounts of stimulus money on green energy projects that basically could never work, while putting roadblocks before technologies like fracking for natural gas which have the potential to generate decades worth of (relatively) clean energy to our country and are already providing jobs.

I understand that fossil fuels are dirty, bad for our planet and bad for our health.  But natural gas is much cleaner than coal, and fossil fuels obtained locally are vastly preferable to petroleum imported from countries like Saudi Arabia.  I remember when President Obama was campaigning, he talked about three long-term priorities: education, health-care, and energy independence.  We shouldn't forget this last priority, which would have saved us all manner of economic and political headaches over the last 50 years.

I agree with many of the arguments made by Matt Ridley in his book "The Rational Optimist", that fossil fuels have largely been the basis for the last 200 years of remarkable human progress, and , that throughout history "renewable" energy has been a synonym for human, animal or wood power, which is another way of saying poverty, misery and back-breaking subsistence farming.  Not to mention that with a world population approaching 7 billion, the environmental impact of the above would be far more devastating than any coal, oil or gas-fired future.

Now obviously the ideal of something like solar power is to generate oodles of clean, cheap energy.  The problem is, it has been a pipe dream for the last 50 year and has not yet panned out.  It is not viable.  Can it be in the future?  Maybe, but not yet.  So why should the government pay me to put an inefficient solar panel on my roof, the pre-tax cost of which is greater than the cost of the energy I save?  Isn't that just throwing our money away?

I am all for research and development, and certainly the government should be funding renewable energy research projects in our nation's great research universities.  But until green energy is economically viable, I wonder is it really a good basis for economic stimulus?

As far as fossil fuels go, I don't believe in tax breaks for oil companies, but neither do I believe in distorting markets by imposing things like fuel economy standards by fiat.  Let's tax fossil fuels so that their price will include the full cost of the damage they inflict on human health and the environment.  Then it will be in everyone's interest to use less, conserve, and find cleaner alternatives.  I have read that this is politically impossible, but that doesn't stop it from being the right way to use energy wisely.

In the meantime, why turn our backs on the stated long-term goal of energy independence when it may be realistically in sight?