Although the American labor market is evolving, a scarcity of data has often made it difficult to know exactly what is going on and what to make of it. Having a better understanding of how the nature of work is changing would help individuals prepare for their role in it. It would also help policymakers pass appropriate laws that promote competition, protect workers, and encourage investment in both human and physical capital.
One of the leading academics in this field has been Alan Krueger, former chairman of President Obama’s Council of Economic Advisers. Dr. Krueger has coauthored two recent studies that provide policymakers with a better understanding of how labor markets are evolving on both the macro and micro levels.
Our understanding of macro changes to the labor market is limited by the fact that, because of funding limitations, the Bureau of Labor Statistics (BLS) last conducted its Contingent Worker Survey, which gathers data on people who have contingent and alternative work arrangements, in 2005. In a recent paper, Lawrence Katz, a Harvard economist, and Dr. Krueger included a version of this survey in the RAND American Life Panel,
Perhaps without realizing it, the Obama administration sent Congress another signal that it is not serious about passing corporate tax reform this year, even a narrow bill limited to the international aspect of corporate taxation. Speaking at a conference devoted to the corporate taxation of intellectual property in a global economy, the chairman of the President’s Council of Economic Advisers, Jason Furman, listed several reasons why an “innovation box” (sometimes known as a “patent box”) would be bad policy. The problem is that an innovation box is one of the few serious components of corporate tax reform that has drawn interest from leaders in both parties in Congress. By preemptively ruling it out without proposing a serious alternative, the administration left little room for finding common ground with Congress.
There is widespread agreement that the U.S. corporate tax system is broken. In addition to imposing a significantly higher rate than most of its international competitors, the law taxes U.S. companies on all of their income earned abroad, but only when the income is brought back to the United States. This gives companies a strong incentive to keep foreign profits overseas.
It is common wisdom that the world economy is becoming increasingly competitive. This puts enormous pressure on U.S. companies to lower their prices. Anything that adds extra cost to the production of U.S. goods and services threatens their viability against foreign firms. It is also common knowledge that the United States has the highest corporate tax rate in the developed world. When state and local jurisdictions are added, American companies face an average statutory rate of 39.1 percent. The weighted average of other OECD countries is 29 percent and the rate in the United Kingdom, where a lot of U.S. headquarters are ending up, is 21 percent.
Some opponents of corporate rate reduction argue that this comparison is misleading, because effective tax rates, the amount of tax that companies actually pay divided by their profits, are much lower, and in some cases even negative. The implication is that U.S. companies do not suffer from a disadvantage and tax rates are not high enough to discourage economic activity.
A new study by PwC compares the effective tax rates of 320 international companies in six industries by looking at their annual reports.
A new coalition of trade associations, The Coalition of Small Business Innovators, has developed two innovative tax reform proposals designed to help small research companies attract more investors, even if they are many years away from profitability. These proposals would allow passive investors to take advantage of losses and research credits generated by the company and allow companies to carry net operating losses forward even when they raise new financing. The former proposal has already been included in broader bills aimed at boosting innovation and economic activity. If enacted, the proposals could increase investment in small, research-intensive firms by $14.1 billion and create 72,000 jobs in eligible companies.
Although the U.S. financial system is the most sophisticated in the world, it still contains at least one significant gap. Small, capital-intensive companies often find it very difficult to raise the additional capital needed to go from start-up through the long development phase until they are near enough to profitability to conduct an initial public offering or be attractive to a prospective buyer. This period is commonly known as the “valley of death.” Firms in this position may have a very
Earlier this month, the United Kingdom announced a new “diverted profits” tax on the profits of foreign companies operating in the United Kingdom. The government’s parliamentary majority will allow the government to implement the tax with few delays. Doing so would be a mistake, however. Although the new tax tries to address a real problem with the implementation of corporate taxes in the modern economy, a new international process led by the OECD already exists to deal with exactly this kind of issue. The effort recently issued a series of major reports and is scheduled to make final recommendations next year. The British government should delay implementation of its new tax so that it can act within a multilateral context designed to deal with the larger issues involved.
The issue of tax competition, like that of inversions, has become confused recently, with both legitimate and illegitimate activity getting thrown into the same category. Despite the unease of some countries, there is nothing illegitimate about a sovereign country lowering its corporate tax rate in order to attract foreign companies. It is immaterial whether in doing so they reduce the size of
In a new study published by the National Bureau of Economic Research, three economists study the effect of a recent change in Canada’s research and development (R&D) tax credit on subsequent spending by small companies. The question is especially interesting because small firms may lack sophisticated tax advisors, earn few profits and thus have a lower tax liability against which to deduct tax credits, and have a harder time financing the fixed costs that come with additional research.
In “Do Tax Credits Affect R&D Expenditures for Small Firms? Evidence from Canada,” the authors find that firms that qualified for a larger tax credit did spend more on R&D in the following years compared to firms of similar income whose tax situation did not change. They also find evidence that the refundable nature of the credit made a significant difference.
According to the paper, Canadian tax law allows all countries to deduct 100 percent of research performed in Canada from their taxable income. It also provides all firms with a non-refundable tax credit of 20 percent of qualifying expenditures. However, for small- and medium-size companies (determined by the previous
Productivity is one of the most fundamental determinants of our income and overall wellbeing, so the question of where productivity growth comes from is extremely important. There are many different ways to increase productivity, but increases that have a continued impact over time are the most important because accumulated productivity increases end up having a much larger impact than one-off changes.
Economists have understood for years that R&D is an important source of productivity growth. However, it hasn’t been entirely clear whether R&D affects productivity growth in short, one-time boosts, or whether it raises growth rates for longer periods.
A new paper by Italian economists Antonio Minniti and Francesco Venturini looks at data from the U.S. manufacturing sector and concludes that R&D policies have indeed created “persistent, if not permanent” changes in the rate of productivity growth. It also drills down into the type of R&D spending, finding that only R&D tax credits have a long-term impact on the growth rate while R&D subsidies provide just a temporary boost.
These results are good news for both the economy and for policymakers because they show the powerful impact that innovation policies
Since after the Great Recession Congress has put in place temporary bonus depreciation for new capital investment. Given the current state of the economy, already high levels of corporate taxation, and the need for additional investment, Congress should renew bonus depreciation for at least another year.
As ITIF recently wrote, American companies already face the highest statutory tax rates in the developed world. Their effective tax rates also tend to be high, partially because they are taxed on their worldwide income. Bonus depreciation, which temporarily allows companies to deduct equipment purchases faster than they otherwise could, partially offsets this. But the current provision expired at the end of last year.
Faster depreciation reduces the economic cost of new equipment, thereby spurring more investment. It does not reduce the total taxes paid by a company, but it does delay them. The benefit to companies exceeds the cost to the government because the latter can borrow at much lower rates. Higher investment also benefits the broader economy by increasing productivity and creating jobs.
Bonus depreciation also helps align tax liability with actual profits. Accounting methods require companies to write off equipment
As countries compete for corporate R&D locations–and the attendant jobs and technology spillovers–tax policy is an important tool governments need to be aware of. There are several types of tax policies that attempt to attract R&D: tax credits for R&D spending, special tax allowances for R&D spending, and tax rate reductions on R&D output (usually based on patents). While it is well established that R&D spending and tax allowances tend to increase the quantity of R&D spending, a new paper by UK researchers Ernst, Richter, and Riedel finds that reductions in patent income taxes increase the quality of corporate research. Higher-quality research means effective R&D that has better benefits for the entire economy.
These research results are good news for the UK, which recently enacted “Patent Box” legislation, giving companies a 50% discount on profits they earn from patents (down to 10% from their planned 2015 overall corporate rate of 20%). Other countries that offer similar tax breaks for patent income include Luxembourg, the Netherlands, and Belgium.
Noted conservative economist and former Romney advisor Greg Mankiw has just written an article with the unabashedly conservative title “In Defense of the One Percent”. The pile-on has already begun, with an excellent takedown at the Economist American Politics blog, and good pieces as well at the left-leaning CEPR and Unlearning Economics.
Mankiw defends the rich because he believes they have brought us value commensurate with their wealth. This is the essence of conservative neoclassical economics: markets allocate value the way that value should be allocated. There are theoretical exceptions to this rule, of course, like rent seeking or other market failures, but real conservatives remain “unconvinced” that such exceptions are to be found in the real world.
Mankiw prefers the idea that markets can still work as intended (optimally allocating resources) without being entirely “fair”: insufficient high-skill workers and “superstar” gains can drive inequality even in perfect labor markets. Mankiw is sympathetic to these arguments because they allow him to claim that everything is working as intended: there’s nothing to see here, the markets are working, please move along.
But wait a minute.
What Mankiw would have