I have it on good authority that Robert Reich isn’t entirely up with and connected to good economic thinking. Paul Krugman was quite gleefully rude about this back in the 1990s, for example.
That's fine of course, there’s no reason that everyone must be an expert in every subject. My own knowledge of Patristics ends about where there was that bishop who said he wanted to be good but not just yet, there was still more fun to be had. This would be a problem if I were to decide to tell the world about the early Church Fathers. Reich’s blind spot would be a problem if he tried to teach us about the economy.
But he does try to tell us about the economy, so that is a problem. He says foreigners own some 35 percent of United States stocks, therefore cutting corporate taxes is cutting taxes on foreigners. Well, yes, this is the point of the tax cut, something we’ll get to. He also contrasts this with other places which do it better – what, like the U.K. with 52 percent of stock foreign-owned, or Germany with 57 percent?
There is also this which I think is just magnificent in its ability to miss the point. He complains that U.S. politics is too skewed to corporations, and that unions are too weak, leading him to claim:
Which is one reason why most Europeans and Canadians receive essentially free health care, generous unemployment benefits, paid medical leave, and an average of five weeks paid vacation.
No, just no, not in the slightest. None of those things are free of course, they have to be paid for by someone, somewhere. Healthcare might be free at the point of use, but someone really is still paying the doctors obviously. As it turns out, it’s the people, through the tax system, who do. No, not the corporations, not even the rich people. For there’s something most don’t know about tax systems.
The American federal tax system is more progressive, yes more, than that of European countries. The European tax systems are more regressive than the American one. The big difference is in the sales tax, or more accurately the value-added tax system. Government at all levels in the U.S. collects about 26 percent of GDP, or 26 percent of all economic activity. The European systems collect from 35 to 45 percent. That’s why European governments can pay for things like healthcare, because they collect more in tax.
But the portion of the economy collected by income taxes upon the rich isn’t very different, the portion collected from business profits (not just corporate taxes) is about the same too. The big difference is the VAT, collecting 10 to 15 percent of GDP. And sales taxes, as we know, are paid by the consumer, you and me, when we buy stuff.
Sure, we can argue about whether government healthcare is better or worse and so on. But it’s not because U.S. taxes favor corporations that the U.S. doesn’t have it. It’s because you and I don’t pay as much tax and therefore we don’t get as much back out of government. Shrug. Maybe that’s a good system and maybe it isn’t, but that's the reason for the difference.
Which brings us back, as I said we would get back to, the corporate tax cuts. Reich complains that capital, therefore companies, aren’t nailed in place like we are. There’s no patriotism to profits. Entirely true, he’s right there. But he then rails against the corporate tax cuts. Missing, in the process, is the point that the economists are making: Profits aren’t nailed in place like we are. Therefore we have to be competitive in our tax system so that the capital (companies) will come here. If we try to tax them too much, they’ll leave.
That very lack of corporate patriotism is the very justification for lower corporate taxation. Someone who knew even a little economics would know that this is indeed the justification for the capital and corporate tax changes. That Reich can note the basic point, the mobility of capital, but not do the joined-up thinking to the tax system is really not a good sign concerning his economic knowledge, is it?
Although it is a good guide as to how much attention we should be paying to his pronunciamentos, obviously.
Tim Worstall (@worstall) is a contributor to the Washington Examiner's Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute.
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