Conservatives Must Realize That Redistribution Programs Help Poor

Published in The Huffington Post: Huffpost Politics 04/12/2016

Vijay K. Mathur
, Professor of Economics, Emeritus at Cleveland State University

Income inequality in the U.S. has increased since 1979. According to the Center on Budget and Policy Priorities, October 26, 2015, real after-tax income gains of the top 1 percent of households were 200 percent, while the bottom 20 percent and mid 60 percent gained only 48 percent from 1979 to 2010. Other measures of income inequality tell the same story.

It is also well known that inequality in the US is greater than in European countries. The question then is why are conservative Americans in general, and Republicans in particular averse to the issue of redistribution programs despite such inequalities in the U.S.? I am referring to all kinds of redistribution programs, such as Supplemental Nutrition Assistance Program (SNAP), Medicaid, healthcare under ACA, Earned Income Tax Credit (EIT). Even programs such as Medicare and Social Security are redistribution programs, since a significant number of people collect more benefits over their lifetime than they contribute to the programs.

Let me briefly enumerate the findings of some academic studies that provide useful information to most conservative Americans and politicians in Congress. They challenge their views on redistribution policies and economic opportunities available to the poor.

The central result of the paper “Preferences for Redistribution in the Land of Opportunity“, by Alberto Alesina and Eliana La Ferrara (Harvard Institute of Economic Research), November 2001, is that those who believe that opportunities are equally available to the poor as well as to the rich see social and income mobility as a substitute for redistribution. People who expect to be in the upper income brackets or are wealthy are afraid to lose with redistribution and hence are opposed to redistribution schemes. However, Blacks, women and those who suffered unemployment shocks support redistribution. High income and wealthier people in general vote for Republican and conservative politicians. Pew Research Center data, December 12, 2013 show, that whites were almost 13 times wealthier than Blacks in 2013.

The above findings are consistent with the results in another study by Alberto Alesina and George-Marios Angeletos, American Economic Review, September 2005. Most Americans, as opposed to Europeans, believe that poverty is due to bad choices or lack of effort. This view reflects cultural differences between U.S. and countries such as Denmark, Sweden and Norway, where people are willing to pay more taxes to help poor and low-income people, because they do not consider the poor lazy.

These findings on attitudes of richer Americans about the poor are at odds with studies that have investigated opportunity issue, work profile and income mobility of the poor, and the remedial effect of redistribution on poverty.

The paper, “Rags, Riches, And Race“, by Tom Herts, published in Unequal Chances (2005), editors Samuel Bowes et al., found that a rich child, born in the top decile (top 10 percent of the income distribution), has 26.7 percent chance of remaining in the same decile, while a child born in the bottom decile has only 0.5 percent chance of ending up in the top decile. In the paper, “Land of Opportunity“, for the Federal Reserve Bank of Richmond, 2002 Annual Report, Kartik Athreya and Jessie Romero report that 43 percent of taxpayers in the bottom quintile (20 percent of the income distribution) were still in the same quintile after 20 years. Similarly, 46 percent of taxpayers in the top quintile were still in the same quintile. Hence, poverty and low-income status persist in a large fraction of families throughout generations.

What about the claim that poor are lazy? A study by Deborah et al., “The Working Poor Families Project 2014-2015“, using Census data, found that 32 percent of working families were below 200 percent of the official poverty threshold in 2013. The percentages for Hispanic and Blacks are almost double (48 to 49 percent) the percentage for white working families.

Two recent studies by researchers Raj Chetty et al., and Hilary Haynes et al., in The American Economic Review, April 2016, tend to dispel the myth that redistribution programs do not help the poor. Chetty et al., found that the housing voucher program, enabling children before the age of 13 to move from high poverty areas to low poverty areas, increased their college attendance, earnings and reduced single parenthood.

Hilary Hoynes et al., focused on the effect of the food stamp program (FSP), now called SNAP, on the general well being of a sample of adults born between 1956 and 1981 and their mothers. The estimates show that FSP significantly reduced “metabolic syndrome” (conditions such as obesity, high blood pressure, heart disease and diabetes) and promoted good health among adults. The FSP also significantly increased economic self-sufficiency among mothers.

Evidence shows that programs promoting better neighborhoods, schools, sufficient food supply, health care and education in the lives of poor children, have the best chance to ameliorate poverty in the long run. By now conservatives must realize that trickle-down model is flawed and is not the solution for generational poverty. They must work with progressives to implement the most efficient redistribution programs that enable the poor to get out of the poverty trap, hence minimizing waste of human resources.

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

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Poverty Trap and Emerging Underclass in the Land of Opportunity

Published blog in Huffington Post: Politics, January, 13, 2016

Vijay K. Mathur

In August 29, 1977, Time published a cover story about impoverished urban Blacks, labeling them as The American Underclass.  Those were people who were stuck in an environment of  “psychological and material destitution despite 20 years of civil rights gains and 13 years of antipoverty programs” and robust job recovery after the end of 1973-75 recession.   Since 2001 the poverty problem has worsened, and the    severe recession of 2007-08 has accelerated the downward spiral in income opportunities for many Americans.  It is making it more difficult, especially for Blacks and Hispanics and a significant proportion of Whites, to extricate themselves from the lower end of the income scale.

There is greater propensity for an increasing proportion of families and their adult children to end up in the bottom of the income distribution.   American Community Survey, Bureau of Census, September 2013, found that the poverty rate increased from 12.2percent in 2000 to 15.9 percent in 2012.  In addition, the percentage of people with income below 50 percent of the poverty threshold increased from 5 percent in 2000 to 7 percent in 2012.   The rates vary across racial groups, where Blacks and Hispanic rates are more than twice the poverty rates for Asians and Whites.

The study by Elizabeth Kneebone (http://www.brookings.edu/research/interactives/2014/concentrated-poverty#/M10420) at the Brookings Institution, July 31, 2014, found that from 2000 to the peak period 2008-12 of the great recession poverty is becoming more concentrated.  The 100 largest metro areas have 70 percent of the distressed areas with poverty rates of 40 percent or more.  The share of poor people in cities increased from 18.2 percent in 2000 to 23 percent in 2008-12; Suburban share has increased from 4 percent in 2000 to 6.3 percent in 2008-12.  Hence, the poverty problem has worsened over time despite economic growth during 2003-2006 and 2010-2012, and it has affected all ethnic groups.     

The increased concentration of poverty is especially worrisome in light of a study’s finding by Harvard researchers Raj Chetty et al., August 2015 (http://www.equality-of-opportunity.org/images/mto_paper.p). They found that children below age 13 in families given housing subsidy vouchers have significantly higher college attendance rates and earnings in mid-twenties, when they moved to lower poverty neighborhoods, as opposed to the same age children in families in the control group (with no housing subsidy vouchers).

One could argue that high poverty rates may not be of much concern if poor people have more opportunities for intergenerational income mobility.   But the findings of studies that have rigorously examined the issue are not encouraging.   In a book Unequal Chances (2005), edited by Samuel Bowles et al., a study by Tom Hertz found that, adjusting for household size, a rich child born in a household in the top income decile (top 10 percent of the income distribution), has 26.7 percent chance of remaining in that decile.  However, a poor child born in a household in the bottom decile (10 percent) has only 0.5 percent chance of ending up in the top income decile.  Hence, a rich child, as opposed to a poor child, is 53 times more likely to remain rich as an adult.   Persistence of poverty is much more severe for Blacks and Hispanics than for Whites.

Therefore, the question arises: what can be done about it, given the fact that, to some extent, parental education, traits and income determine their children’s educational attainment and incomes.  Another study by Professor Raj Chetty et al., June 2014 (http://www.rajchetty.com/chettyfiles/mobility_geo.pdf) is instructive.  They found that children have a high probability of moving up the income ladder in cities that have less residential segregation, less income inequality, better primary schools, greater social capital and family stability.  Hence, intergenerational mobility is local.

 Although income inequality in the current period affects intergenerational inequality, families stuck in the poverty trap cannot change income inequality in the short run. But they can take the initiative to improve their own skills, better their public schools, demand pre-kindergarten education, provide family stability, and create an environment for disciplined growth of children to foster love for education.  There is increasing evidence in psychological and behavioral studies that the interaction of environmental experiences and personal traits, such as impulse control, determine educational and economic success of children in adulthood.  The Washington Post story of December 20, 2015, on Jennings School District, MO., points out the success in educating primarily Black children.  In addition to requiring high academic standards, the Superintendent Tiffany Anderson has recognized and is dealing with issues related to poverty and fostering a disciplined approach to academic excellence among poor children.

Changes in the labor markets due to globalization and emerging new technologies have created a skills gap.  The skills gap, and therefore poverty, will persist if policy makers and families at the lower end of the income distribution do not respond by taking deliberate actions to remedy the problem.  Families facing prospects of sliding down the income ladder must also recognize the limitations of government income support programs and poverty policies. Hence, their own initiatives in concert with public policy assistance will be the path for economic success for themselves, as well as for their children.

A nation with persistence poverty over a period of time suffers human capital loss in perpetuity and other adverse social and cultural consequences.  Former Prime Minister of India, Atal Behari Vajpayee, once remarked, “Poverty is multidimensional. It extends beyond money incomes to education, health care, political participation and advancement of one’s own culture and social organization.”

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

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Gun Laws to Reduce Mass Murders Require Political Courage

Vijay K. Mathur

Mass murders have become such a part of life in the United States that we all go through the routine of feeling sad, comforting the families, lighting candles, and bringing flowers to the murder site.  However, Americans are so entrenched in preserving the status quo, thanks to NRA, that many politicians refuse to support some realistic cost effective solutions, such as stricter regulations of firearms sales to reduce mass murders.  This apathy has reached a point that even researchers are shying away from the topic of gun violence research.

 FBI classifies killings as mass murders when there are 4 or more victims. William Krause and Daniel Richardson of Congressional Research Service (CRS) provide some evidence on mass murders in a paper, July 30, 2015.  From 1999 to 2013 there were 317 mass shooting incidents, where 1554 people were killed and 441 wounded.  In addition, since 1990, days between mass shootings have been decreasing.  

An investigation on mass murders by Mark Follman of Mother Jones (http://www.motherjones.com/politics/2012/07/mass-shootings-map), Updated December 3, 2015, found that during 1982-2012, of the 143 guns used 99 of them were semiautomatic and rifles, and more than three-fourths were obtained legally. According to CRS, a significant number of mass murderers have mental problems.  Hence, facts show that mass murders are rising with greater frequency, high-powered weapons are the favorite tools in most shootings and a significant number of shooters have mental problems. 

 We cannot restrict the constitutional right to bear arms affirmed by the Supreme Court in 2008.  However, the Second Amendment of the Constitution or the Supreme Court ruling in 2008 did not support that right to be unlimited (http://bigthink.com/risk-reason-and-reality/the-supreme-court-ruling-on-the-2nd-amendment-did-not-grant-an-unlimited-right-to-own-guns).  Writing for the majority conservative Justice Antonin Scalia stated, “Like most rights, the right secured by the Second Amendment is not unlimited…” It is “…not a right to keep and carry any weapon whatsoever in any manner whatsoever and whatever purpose.”   The majority report also supported prohibition of “dangerous and unusual weapons”, and even carrying of concealed weapons.

 A study of 27 developed countries including US, in The American Journal of Medicine, October 2013, found that gun ownership rate is an independent predictor of firearm-related deaths.  Mark Duggan obtained similar results in an academic paper, “ More Guns, More Crimes”, Journal of Political Economy, October 2001.

Hence, it makes sense to pass laws that regulate purchases of all types of guns and high capacity magazines (without any loopholes), supplemented by requiring universal nation-wide background checks (without any loopholes), high tax rates on all types of guns and magazines and personalized gun technology.  This would require political courage despite NRA’s lobbyists.

Since different types of guns are substitutes, Tomas Philipson and Richard Posner argued for restricting ammunition as an effective strategy to curb the use of guns in their research for The Journal of Law and Economics, October 1996.  However, in addition to ammunition regulation, a proportionate tax on all guns would avoid the substitution problem.  Increase in price due to the tax would decrease demand for guns.  For example, Douglas Bice and David Hamley, The Journal of Law and Economics, April 2002, found that a 10% increase in the price of handguns reduces demand 20% to 30%.

What about millions of guns that are already in circulation?  Since I am advocating for federal guns and ammunitions regulations, I propose that the federal government could provide incentive of income tax credits, with a 5 year window, to those who come forward to register their guns and ammunitions and go through background checks.

Fear-mongering statements, often made by NRA and other opponents of any firearms regulations, defy simple logic.  We all have heard the claim that guns do not kill people but people kill people.  Precisely due to this reason, I propose nation-wide universal firearms regulations and background checks.  These regulations are meant to discourage those people who are prone to violent behavior and are mentally incapacitated from owning guns and ammunitions.  The argument for guns for self-defense cannot justify possession of sophisticated weapons with high kill factor and range accuracy, and high capacity magazines.  Finally, the argument that gun regulations would deny guns to lawful people and not outlaws is patently illogical.  The purpose of national universal guns and ammunitions regulations (without loopholes) is exactly to deny guns and ammunition to outlaws.        

Law-abiding citizens have a vested interest to make the logical choice to support common sense firearms and bullet magazine regulations and to elect politicians who have the courage to defy lobbyists to support their cause.   Such laws and regulations would protect the right to bear arms while at the same time would tend to reduce murders, suicides, familicides (killing of family members) and mass murders, thus promoting freedom from fear in daily lives of Americans.

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

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.