A toxic GOP debate on illegal immigration

Published in Standard Examiner, Ogden, Utah, October 16, 2015

Vijay K. Mathur

In a blog in the Standard-Examiner in 2013 I expressed my hope that the bipartisan compromise on immigration reform would result. I also commented on the futility of the argument, advanced at that time by Sen. Mike Lee of Utah, for deporting 11 million undocumented immigrants. The deportation argument is now revived by GOP presidential candidates Donald Trump and Sen. Ted Cruz, and tacitly supported by other candidates.

Trump even blames Mexico for sending criminals and rapists to the U.S., thus making the immigration debate more toxic. He also wants to build a tall wall on the border, perhaps along over 1900 miles from the Gulf of Mexico to the Pacific Ocean. Besides the issue of how he intends to pay for such a wall, he does not realize that the economics of migration drives potential migrants to cross any hurdle. By any stretch of logic, deportation of slightly more than 11 million illegal immigrants and building a wall would be so resource-consuming that other productive programs would be starved, thus slowing economic growth.

Deportation would not contribute anything to productivity, because we might lose the most productive people, since migrants in general are risk-takers. Mr. Trump considers himself a smart businessman fit for the presidency. However, he may not be aware that being a smart businessman is no guaranty for a successful presidency. History, from Herbert Hoover to George W. Bush, shows that the most successful and admired presidents were not good businessmen. We had the Great Depression in 1929 under Hoover and the Great Recession in 2008 under Bush; both were successful businessmen.

According to the Pew Research Center, the unauthorized immigrant population has leveled off since 2010. These immigrants make up 5.1 percent of the labor force and have a higher labor force participation rate than the average, thus contributing to economic activity of this nation. Since a significant fraction of undocumented immigrants are low-skilled, they tend to work in low-skilled jobs with below-market wages, where native-born are not willing to work. The competition for low-skilled jobs does cause downward pressure on wages of native-born low-skilled workers. However, lower wages tend to benefit consumers who pay lower prices for products produced by undocumented workers. The wage effect of migration is similar to the wage effect of imports from low-wage countries, but we do not ban cheaper imports.

An orderly migration process is sorely needed, and Congress had the opportunity to accomplish this task in 2013-14. Pew Research Center reports that 72 percent of surveyed Americans would like to allow undocumented immigrants to stay legally and 76 percent think of deportation as unrealistic. Taxpayers will not be very happy if Trump allocates tax revenue for deportation at the cost of other programs that benefit legal residents. His policy to reduce taxes while increasing expenditure on building the wall and deportation is incongruous at best. A study by Doris Meissner and her co-authors at the Migration Policy Institute found the U.S. government already spends more on immigration enforcement than all principle federal criminal law enforcement agencies combined.

Researchers Peter Dixon, Martin Johnson and Maureen Rimmer, in their study in the journal Contemporary Economic Policy, January 2011, find tax and/or fines on employers is the most efficient policies to curb illegal immigration. Policies that attempt to reduce the supply by border enforcement and/or deportation are costly to the nation, as they result in increasing wages for the rest of the illegal residents with little benefit to legal residents. Either a reduction in income tax rates or increasing expenditures on desirable public programs could supplement such a tax policy.

Another issue that has not been discussed in the GOP presidential campaign is the increasing share of older people and reduction of birth rate in the U.S. In a paper in American Economic Review, May 2014, Professor James Poterba of MIT finds that between 1960 and 2010, the average growth rate of the population aged 20-64 was 1.27 percent and is projected to decline to 0.43 percent between 2010 and 2050. Therefore, less and less earning members of the population are expected to support more and more people over the age of 65. Most undocumented immigrants pay Social Security tax but do not collect benefits.

Also, Pew Research Center, April 14, 2009, found a growing share of children of undocumented parents in schools and an increasing share of college-going 18- to 24-year-old undocumented immigrants. These children and college-going young adults of illegal immigrants would provide a significant cushion to public financial support system for older and retired Americans.

I hope the GOP presidential race contenders have enough wisdom and knowledge to support an immigration policy that is devoid of emotions but grounded in sound economics.

Mathur is former chairman and professor of economics and professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio.

Is the ACA reducing competition?

Published in Standard Examiner, August 26, 2015, Ogden, Utah

Vijay K. Mathur

The recent decision by the Supreme Court assures the future of the Affordable Care Act (ACA), enacted on March 23, 2010. However, former critics of the ACA in the Congress and elsewhere have not given up their dislike for the law. Some GOP congressmen are promising to put roadblocks in the ACA’s smooth operation. Other conservative critics of the ACA have now diverted their attention to another target. They claim the ACA would lessen competition among health-care providers and health-insurance markets due to merger activity.

Economists regard perfect competition in any industry as an ideal market structure, where there are a large number of sellers and easy entry into the industry (market). In reality we do not find any such ideal industry, but we do find less-than-ideal degrees of competition across industries. For example, retail grocery industry is more competitive than banking and airlines. Mergers in banking and airlines have resulted in increasing monopoly power in those industries. But we have not heard many complaints from conservative free marketers against those industries.

Mergers and acquisition in industries are guided by prospects of gaining market share that enhances monopoly power, and to benefit from cost reductions due to economies of scale. However, evidence of these gains in most mergers is mixed. Sometimes mergers are guided by self-interest of executives who stand to gain from mergers’ settlements.

The criticism of ACA is unwarranted because we expect different markets dealing with health care to respond by making changes in its structure, services, pricing strategies, consolidation, etc. Unlike other industries, the health care market has four major sectors besides government. They are hospitals, physicians’ services, insurance industry and consumers (including employers). The interaction between these sectors and the government will determine the degree of competition in the health-care market.

Herfindahl-Hirschman Index (HHI) measures the degree of concentration (monopoly power) in any market. An HHI of at least 2,500 shows high degree of concentration. The paper by Martin Gaynor, Kate Koo and Robert Town (GKT), Journal Of Economic Literature, June 2015, reports that hospital industry had a mean HHI of 3,261 in 2006, and more than 65 percent of metropolitan statistical areas were highly concentrated. This data shows high degree of monopoly power in hospital industry nationally even before the ACA.

Besides hospitals, physicians’ services represent the other major provider of health care. The GKT reports that, in general, physicians’ market is less concentrated than hospitals. However, studies show specialties like orthopedics, radiology, cardiology and oncology are more concentrated than primary care. High barriers to entry in medical schools, residencies in hospitals and length of training time increases concentration in specialties.

Reduction in barriers to entry in health providers’ market would provide incentive to new players to enter the market, thus reducing the monopoly power of incumbents. A case in point is the formation of Accountable Care Organizations (ACO) to serve Medicare patients, a large section of the health care market. ACOs are groups of doctors, hospitals and other health-care providers in the network who provide coordinated health care to Medicare patients. The ACA encourages ACOs using incentives to provide quality care. Also, telemedicine companies are now entering this market, thus threatening competition to traditional providers. Professors William Baumol, John Panzar and Robert Willig argue that even with few incumbents in the market, markets could be subject to competitive pressures if they remain contestable due to easy entry.

Anti-trust laws also restrain monopoly power. For example, in 2014 the Federal Trade Commission (FTC) denied merger of ProMedica, a dominant hospital services’ provider, and St. Luke Hospital. A petition by the company to review the FTC decision was denied by the U.S. Court of Appeals, 6th Circuit.

Merger activity in the health insurance industry is partly a response to consolidation in the hospital industry, thus providing a constraint on the pricing power of hospitals. Kaiser Family Foundation reports that, in 2013, HHI for the large-group insurance market was 4,038 for the U.S. and 3,114 for Utah.

In addition, increasing amounts of deductions and co-payments in insurance plans would make consumers more price-conscious, thus providing restraint on prices for health services. Therefore, the fear of lack of competition in health care at this time is unfounded and premature at best. GKT reports a bargaining model that shows that insurers that threaten to exclude hospitals from their networks have the ability to bargain for lower prices for consumers. Incorporating all sectors of health care market, Economist Incorporated reported in May 2006 that Utah’s health-care market is fairly competitive.

According to Peterson-Kaiser Health System Tracker, percentage change in per capita health care spending declined from 7.4 percent in 2001 to 2.9 percent in 2013. The ACA has lowered the trajectory of annual per capita spending growth rate in the future. Thus, it is too hasty to draw conclusions about market structure in health care post-ACA and its effect on cost, prices and quality of care.

Mathur is former chairman and professor of economics and now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio. His articles also appear in Mathur’s Blogonomics. He resides in Ogden.

Partisanship overcomes voters’ economic self-interest

Published in Standard Examiner, Ogden, Utah, June 30, 2015

By VIJAY K. MATHUR

Guest commentary

A significant number of Americans faced severe hardships during the recession of 2007-08 due to loss of jobs and homes. Many also suffered from the loss of their employer-based health insurance. Among those who have been lucky enough to find full-time jobs, many are not getting well-paid jobs and are facing stagnant growth in wages and benefits. There is also a trend in the labor market to hire contract workers, which are on-demand. The Economist labels them as “Workers on tap.” Such workers must make themselves available to provide services to different employers, and neither workers nor employers who use their services have any long-term commitment to each other.

These technologically driven on-demand jobs undermine work, family and locational stability, trust and allegiance to a particular employer, and perhaps ultimately productivity and growth. Even though Americans are concerned about their economic future and issues such as health care, income, wealth inequality and minimum wage, they do not seem to elect political representatives who support economic policies that benefit them. Therefore, the question is why do Americans elect such representatives?

One possible answer may lie in the psychological theory of cognitive dissonance. George A. Akerlof and William T. Dickens in a paper, “The economic consequences of cognitive dissonance” (American Economic Review, June 1982), present three propositions of this theory. First, people have preferences over different outcome scenarios in the economy but also over their beliefs about those outcome scenarios. Second, given information people can control their beliefs by making choices, as well as “manipulate their own beliefs by selecting sources of information likely to confirm ‘desired’ beliefs.” Third, the choices they make on beliefs tend to persist over time.

It is apparent from these propositions that American voters, while voting for their candidates, are governed by their belief system that is confirmed and proliferated by their political parties, their leaders and the sources of information chosen by them.

This partisan divide has been documented in a study, “Fear and Loathing Across Party Lines: New Evidence on Group Polarization,” June 2014, by Stanford University political scientist Shanto Iyengar and Princeton University researcher Sean Westwood. Iyengar and Westwood show that voters belonging to a party not only have ingrained hostility against the opposite party (out-group), but “party cues exert a powerful effect on non-political judgments and behavior.” This divide has worsened since 1980.

Iyengar and Westwood (IW) also find that partisans are poorly informed about policy positions of the party leaders, thus it is not surprising that they trust their party position even though it goes against their own economic self interest. In such a partisan environment there is hostility to economic policies advanced by the other party, even though there is agreement on the sources of problems and its solutions. IW find that, in the current partisan divide, animosity towards the out-group sends a disapproval signal to elected representatives who are willing to work across party lines. They risk being considered “appeasers.”

Leadership has to emerge to stop the vicious circle of partisanship. Leaders in both parties must forego their self-interest of being elected in order to promote self-interest of the country. Even President Ronald Reagan, who is admired by conservatives on the right and who was vocally against big government, worked with the Democrats in raising taxes, simplified the tax code, implemented temporary fix to Social Security and reform of the immigration system.

Conservatism and liberalism do not require believers in their own principles to be partisan. Leaders in the Congress have to learn to engage in the art of compromise and work across party lines to enact laws that maximize the welfare of all Americans, conservative and liberals alike. Unless leaders demonstrate through their actions that they are willing to work cooperatively with the other party to deal with the nation’s pressing issues, the general electorate, guided by their economic interests, should vote against such leaders to break the vicious circle of partisanship.

President Reagan once remarked in a speech, “Freedom is the right to question and change the established way of doing things.” I am sure voters are familiar with the gridlock in Congress on party lines on immigration, tax reform, health care, budget etc. Perhaps voters should heed President Reagan’s advice to change the status quo while exercising their freedom to vote.

Mathur is former chair and professor of economics and now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio. He resides in Ogden.  This is online version in www.standard.net.  Read Print version, July 2, 2015

Political posturing shouldn't guide corporate tax reform

Published in Standard Examiner, March 19, 2015, Ogden, Utah

By VIJAY K. MATHUR

It might be in the political interest of the GOP majority in Congress to implement federal corporate tax reform based upon facts and serious analysis. Some members of Congress from both sides of the aisle and lobbyists may want to gum-up the discussion with political rhetoric that feels good to the public at large. But political posturing may not be in the best interest of businesses, taxpayers and the country. Before discussing issues for tax reform let me present a brief history and other features of federal corporate tax.

According to Data Release (www.irs.gov), even though the Revenue Act of 1894 established the principle of taxing corporations separately from their owners, definitions of income and tax rates did not distinguish between them. The Supreme Court found the tax unconstitutional when it was challenged in 1895. President William Taft imposed corporate income tax in 1909 and also got ratification of 16th Amendment to the Constitution in 1913, thus establishing the principle of taxing income. Since then the basic structure of corporate tax remains the same.

A Congressional Research Service (CRS) paper, Dec. 1, 2014, states that a corporation pays taxes on income net of business expenses, such as labor compensation, capital depreciation, material cost, interest and advertising to produce that income. It also allows other deductions, credits and tax preferences. Corporate income tax is a progressive tax, imposing higher tax liability on corporations with higher incomes, since for most income brackets it varies from 15 percent to 35 percent.

Many who are critical of corporate tax rates in US only focus on all businesses and the maximum marginal tax rate of 35 percent. However, CRS reports that only 6 percent of businesses are subject to corporate tax. In 2013, corporate tax revenue was only 9.9 percent of federal tax revenue, as compared to 47.4 percent share of personal and payroll taxes. In addition, if one counts tax loopholes and tax breaks (tax expenditures, resulting in federal tax revenue losses of $154.4 billion in 2014), the average effective tax rate (actually paid) is 27.7 percent, same as other advanced countries. The Wall Street Journal, Jan. 6, 2015, reports that last year average profit margins at private companies with revenues of $1 million and higher were 6.6 percent, highest since 2003. These facts do not undermine competitive edge of corporations, as many claim.

My arguments are not against the reform and lowering of rates. My intention here is to emphasize that political discourse on reform should be based on facts, economic reasons and benefits to businesses and public at large.

Aside from a convoluted and patchy tax and rate structure, the following are some of the issues that must be considered in any corporate tax reform. First, corporate tax suffers from double taxation. Same income is taxed at the corporate level and also as dividends. It provides incentive to evade taxes by forming non-profit entities and S-corporations (that do not pay corporate tax since all income is distributed to shareholders). Second, interest rate deduction, favoring debt finance over equity finance, thus causing debt overload, should be eliminated. Professor John R. Graham (www.nber.org) finds that this bias creates net benefits of 3.5 percent of firm value, at the moderate end of estimates.

Third, even though most of the burden of the tax on many competitive businesses falls on capital, part of the burden also falls in the form of reduced real wages and higher consumer prices. The tax may also reduce capital expenditures, thereby decreasing productivity of labor. Real wages could decrease not only directly due to tax shifting, but also indirectly due to decline in productivity, since labor would have less capital to work with. Therefore, a case could be made for lowering tax rates within a narrow range, competitive with other advanced nations, and at the same time for closing tax loopholes and at least minimizing tax expenditures.

Fourth, reform should deal with tax deferrals where tax is deferred on incomes held abroad. Many proposals in Congress have been made over the years to fix this tax leakage. Lower rates would partly remedy this situation. In addition, as Thomas Hungerford of Economic Policy Institute suggests, tax should be on worldwide income of US companies with foreign profit tax credit. Fifth, as Professors Joel Slemrod and Jon Bakija argue, any corporate tax reform should be integrated with personal income tax, dividend tax and capital gains tax. With these changes no distinction should be made between different types of businesses, because one reform affects other tax sources of revenue. Finally, tax codes of all taxes mentioned above should be simplified, because complicated codes make it easier to devise loopholes.

I hope that Congress diligently and deliberately deals with reform for the long run to minimize uncertainties in the tax system. Uncertainty in tax policies imposes heavy cost on the nation’s economic activity.

Mathur is former chair and professor of economics and now professor emeritus, Department of Economic, Cleveland State University, Cleveland, Ohio. His articles also appear in Mathur’s Blogonomics. He now resides in Ogden.

Tax phobia in Utah hinders quality of life

Published in Standard Examiner, February 23, 2015, Ogden. Utah

By VIJAY K. MATHUR

The dictionary definition of phobia is “a persistent, irrational fear of a specific object, activity or situation that leads to a compelling desire to avoid it.” Tax phobia in Utah and elsewhere is squandering our country’s quality of life. We are falling behind other advanced nations in education, R&D, modern and advanced infrastructure and general well being.

Let us look at some of the facts about taxes in Utah. The data from the Institute on Taxation & Economic Policy, January 2013 (www.itep.org), shows a regressive tax structure in Utah. Overall tax burden in Utah falls as income rises if we count sales and excise taxes, property taxes and income taxes, with federal deduction offsets. For example, tax share of average family income, after federal deduction offsets, varies from 9.4 percent for $0 to $20,000 to 8.3 percent for $53,000 to $84,000. However, top 1 percent in the income distribution pays only 5 percent of their income in taxes. Rationality would dictate that Utahns should be willing to support higher taxes on rich.

The most regressive taxes are sales and excise taxes. However, Utah legislators have no hesitation increasing such taxes. For example, Sen. Kevin Tassell has proposed  SB160 that will increase the current state gasoline tax from 24.5 cents to 34.5 cents per gallon (40 percent increase) and diesel tax from 24.55 cents to 25.73 cents per gallon (5 percent increase). Since prices have decreased and Utahns are buying fuel-efficient cars, state legislators are concerned about falling tax revenue. Hence, a proposal is floating around to change per gallon flat tax to a percent tax, like a sales tax. It would be a highly regressive tax when there is inflation in gas prices, a double whammy to low income tax payers.

If gas prices increases to say $4 per gallon, a 13 percent gas tax, as it is now on the average price of $1.90 per gallon, would amount to a tax increase of 112 percent from the current flat tax of 24.5 cents per gallon. There are progressive ways to finance transportation infrastructure, such as state corporate tax increase above the flat rate of 5%, and/or an increase in severance tax on fracking and mining companies. Recently awakened concern among Republicans in Utah and Congressional Republicans about the economic plight of lower income people is heartening, but so far it has not resulted in any concrete actions beneficial to those groups.

Rep. Paul Ryan of Wisconsin has called President Obama’s tax proposal, that reduces income tax on lower income people and increases it on the rich, “envy economics”. Tax phobia and supply side economics took hold during President Reagan’s Administration. Taxes were decreased more for the rich than for lower income people. It was claimed that it would stimulate economic growth, benefit lower income Americans and reduce budget deficits. However, research has shown that none of the claims met expectations. The same argument is now being advanced by Congressional Republicans to counter President Obama’s tax proposal.

Politicians are not paying attention to the facts and wishes of Americans. Research by Levy Economics Institute, April 20, 2014,shows that relative disposable income (after taxes) of the top 10 percent to bottom 90 percent increased from close to 65 percent in 1986 to 90 percent in 2012. In addition, the wealthiest 10 percent gained 90 percent of the total wealth created during 1983-2010. Pew Research Center reports, May 22, 2013 (www.pewresearch.org), that 57 percent of Americans in a survey are very much bothered that the wealthy are not paying their fair share of taxes; however less Republicans than Democrats and independents are bothered.

The Irony is Republican politicians, who now claim to be concerned about middle class and poor, are not paying attention to facts and Americans’ views on tax system. Assisted by ideologically driven media, they are too busy in fanning tax phobia and distrust of government in which they serve. Armed with misinformation and American exceptionalism, voters seek refuge in their ideology when voting for those politicians.

Research findings by Henrik Jacobsen Kleven, The Journal of Economic Perspective, Fall 2014, on attitudes on taxes, other social and cultural factors in Scandinavian countries relative to US, are instructive. He found that despite high tax to GDP ratio, Scandinavian countries, as opposed to US, have least tax avoidance and higher male and female employment rates, notwithstanding subsidies, for example, for child care, pre-school, elderly care etc. In addition, relative to US, they also have much higher trust among people, more charitable donations, voter turnout and more willingness to pay taxes to help poor since they don’t consider them lazy.

Factual information about tax burdens of various income groups, promotion of collective responsibility and trust, and crucial role of government for the wellbeing of all Americans, especially low income, would be a good start to conquer this phobia. Vince Lombardi once said, “ The challenge for every organization is to build a feeling of oneness…”

Mathur is former chair and professor of economics and now professor emeritus, Department of Economics, Cleveland State University, Cleveland, OH. This version was published on line at www.standard.net. The print version excluded 8^th paragraph.

Time right for Utah wood burning ban

Published in Standard Examiner, January 12, 2015, Ogden, Utah

By VIJAY K. MATHUR

Governor Herbert recognizes the inversion problem in Utah, especially along the Wasatch Front, and is pushing for a ban on wood burning to heat homes (www.airquality.utah.edu). Recently Salt Lake County decided to ban such fireplaces. There is no excuse for homeowners to continue to burn wood to heat homes, given that natural gas prices are so low. Wood burners and other such polluters must realize that clean air is a public good and its pollution causes health hazards to all.

Public goods such as clean air and water are distinct from private goods. A private good provides benefits only to the person who pays the price. If a person uses clean air to emit pollutants, he/she uses that resource without paying the price, hence free market leads to its overuse. In the case of Wasatch Front, we have an inversion problem because too much pollution overwhelms the capacity of the air shed (so called sink) to clean itself. Thus it imposes health cost and property damage. Therefore, the market fails in the absence of regulation and/or price for the resource air.

As opposed to direct regulation, it would be more economical to impose tax price on polluters to promote cleaner air. But political courage is lacking to impose such a price. Hence we have to tolerate regulations, a less efficient strategy to curb pollutants in the air.

EPA standards for small particulate matter (PM 2.5) require that annual average concentration should not exceed 12 micrograms per cubic meter, and daily average should not exceed 35 micrograms per cubic meter. The Atmospheric Department, University of Utah (http://home.chpc.utah.edu), reported that during 1999-2005 in some mid-winter weeks, more than half of the days had PM 2.5 concentrations above 17.5. Actual 24 hr average concentration has worsened (though below EPA standard) when I compared data from UDEQ for December 2004 to December 2013 and January 2005 to January 2014.

The enforcement of pollution standards has taken a backseat to politics in Utah. It appears that political ideology has assigned higher priority to job growth at the cost of clean air, developed a shortsighted view on health benefits to Utahns, and has not recognized that job growth in the service based economy is greatly influenced by environmental amenities. It is ironic that defenders of free market do not recognize that environmental degradation is the result of market failure, because air, water and open spaces are common property resources. The solution is for government to intervene and impose a tax price on polluters to incentivize them to efficiently use natural resources to reduce harmful effects.

A recent academic paper in the journal Economic Inquiry, January 2015, by Robert Innes and Arnab Mitra (IM), sheds some light on the issue of political influence on enforcement of regulations under the Clean Air Act (CAA). Their findings are relevant for Utah.

EPA proposes a budget and the inspection rate of facilities in each Congressman’s district. Inspection rate and enforcement of regulations have a deterrent effect on emissions of pollutants. However, even though Congressmen do not directly convey their preferences over the EPA budget, they do let EPA know about their preferences for inspection intensity. IM used data for a sample of Congressional elections, “close” with a margin of victory of less than 2.5% and “open” where no incumbent was running, from1989 to 2005. Controlling for other variables affecting inspection rates such as income, population density and regional differences, IM found that as opposed to Democrats, new Republican representatives lead to the decrease in Clean Air Act inspection rates by 11% to 12%.

It seems that the dominance of Republican Party and its ideology in Utah plays a significant part in the lack of air quality enforcement. I hope politicians pay more attention to science and adverse affects of pollution on human health, property and future job losses in clean industries in Utah.

Mathur is former chair and professor of economics and now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio. He lives in Ogden.