Tag Archive | "GDP"

Are Taxes in the U.S. High or Low?

The following article by Bruce Bartlett appeared in the Economix section of The New York Times here. Mr. Bartlett has served as an economic adviser in the White House, the Treasury Department and Congress.

Historically, the term “tax rate” has meant the average or effective tax rate — that is, taxes as a share of income. The broadest measure of the tax rate is total federal revenues divided by the gross domestic product.

By this measure, federal taxes are at their lowest level in more than 60 years. The Congressional Budget Office estimated that federal taxes would consume just 14.8 percent of G.D.P. this year. The last year in which revenues were lower was 1950, according to the Office of Management and Budget.

The postwar annual average is about 18.5 percent of G.D.P. Revenues averaged 18.2 percent of G.D.P. during Ronald Reagan’s administration; the lowest percentage during that administration was 17.3 percent of G.D.P. in 1984.

In short, by the broadest measure of the tax rate, the current level is unusually low and has been for some time. Revenues were 14.9 percent of G.D.P. in both 2009 and 2010.

Yet if one listens to Republicans, one would think that taxes have never been higher, that an excessive tax burden is the most important constraint holding back economic growth and that a big tax cut is exactly what the economy needs to get growing again.

Just last week, House Republicans released a new plan to reduce unemployment. Its principal provision would reduce the top statutory income tax rate on businesses and individuals to 25 percent from 35 percent. No evidence was offered for the Republican argument that cutting taxes for the well-to-do and big corporations would reduce unemployment; it was simply asserted as self-evident.

One would not know from the Republican document that corporate taxes are expected to raise just 1.3 percent of G.D.P. in revenue this year, about a third of what it was in the 1950s.

The G.O.P. says global competitiveness requires the United States to reduce its corporate tax rate. But the United States actually has the lowest corporate tax burden of any of the member nations of the Organization for Economic Cooperation and Development.

Revenue Statistics of O.E.C.D. Member Countries, 2010
If taxes are low historically and in comparison with our global competitors, how are Republicans able to maintain that taxes are excessively high? They do so by ignoring the effective tax rate and concentrating solely on the statutory tax rate, which is often manipulated to make it appear that rates are much higher than they really are.

For example, Stephen Moore of The Wall Street Journal recently asserted that Democrats were trying to raise the top income tax rate to 62 percent from 35 percent. But most of the difference between these two rates is the payroll tax and state taxes that are already in existence. The rest consists largely of assuming tax increases that no one has formally proposed and that would be politically impossible to enact at the present time.

Ryan Chittum, in Columbia Journalism Review, responded with a commentary that called the Moore analysis “deeply disingenuous.”

Nevertheless, one routinely hears variations of the Moore argument from conservative commentators. By contrast, one almost never hears that total revenues are at their lowest level in two or three generations as a share of G.D.P. or that corporate tax revenues as a share of G.D.P. are the lowest among all major countries. One hears only that the statutory corporate tax rate in the United States is high compared with other countries, which is true but not necessarily relevant.

The economic importance of statutory tax rates is blown far out of proportion by Republicans looking for ways to make taxes look high when they are quite low. And they almost never note that the statutory tax rate applies only to the last dollar earned or that the effective tax rate is substantially lower even for the richest taxpayers and largest corporations because of tax exclusions, deductions, credits and the 15 percent top rate on dividends and capital gains.

The many adjustments to income permitted by the tax code, plus alternative tax rates on the largest sources of income of the wealthy, explain why the average federal income tax rate on the 400 richest people in America was 18.11 percent in 2008, according to the Internal Revenue Service, down from 26.38 percent when these data were first calculated in 1992. Among the top 400, 7.5 percent had an average tax rate of less than 10 percent, 25 percent paid between 10 and 15 percent, and 28 percent paid between 15 and 20 percent.

The truth of the matter is that federal taxes in the United States are very low. There is no reason to believe that reducing them further will do anything to raise growth or reduce unemployment.

Posted in TaxComments (4)

Morici: 11.23.10: Third Quarter GDP Growth at 2.5 Percent: Trade Deficit Taxes Growth, Keeps Unemployment High

The following is an article by Peter Morici, a professor at the Smith School of Business, University of Maryland School.

Today, the Commerce Department announced third quarter GDP growth was 2.5 percent. Burdened by a rapidly growing trade deficit, U.S. growth remains too slow to bring down unemployment.

Growth is too slow and unemployment is kept unacceptably high by surging imports, especially from China and Germany, which enjoy undervalued currencies.

U.S. unemployment will stay near 10 percent until governments in China and elsewhere end policies that purposely undervalue their currencies to boost exports, growth and employment by imposing slow growth and unemployment on the United States and other economies. Alternatively, Washington and others could take measures to offset their currency manipulation.

Since June 2009, the U.S. economy has expanded at a 2.9 percent annual rate. Annual growth in the range of three percent is needed just to keep the U.S. unemployment rate steady—one percentage point to accommodate labor force growth and two percentage points to offset productivity growth. Four or five percent growth is needed to pull down unemployment by one or two percentage points each year.

More than a year into the recovery, the economy should be expanding at about a 5 percent annual rate; however, growth is dragging along below 3 percent, because of the surging in imports from countries whose governments engineer undervalued currencies.

Consumer and businesses are spending again, adding 1.4 and 2.3 percentage points to the 2.9 annual growth rate. Increases in government purchases of goods and services added another 0.3 percentage points. However, too much of what consumers and businesses spend goes into imports from countries with undervalued currencies, and the growing U.S. trade deficit subtracts 1.0 percentage points from growth.

But for the growth in the trade deficit, U.S. employment would be 8.2 percent instead of 9.6 percent. Were the trade deficit cut in half, it would fall to 6 percent or less.

U.S. imports and unemployment are kept high by a dollar that is overvalued against the currencies of big exporters. These currencies are kept cheap, not by private investment in the United States financed by foreign private savings, but by purposeful government intervention in currency markets designed to bolster domestic growth at the expense of the United States and other free traders.

The worst malefactors are China and Germany. China spends 35 percent of its export revenues buying U.S. dollars to keep its yuan, and this subsidizes its sales into the United States by a like amount. This unfair advantage far exceeds the benefits bestowed by its cheap labor.

Germany benefits from an undervalued euro for its economy by being grouped with Spain, Portugal, Ireland, Greece and perhaps Italy, whose fiscal woes pull down the euro.

Were Germany on an independent Deutsche Mark, its currency would trade much higher against the dollar than the euro, Germany’s trade surpluses with the United States and its southern neighbors would be much smaller, and the fiscal woes of those southern countries would be much more manageable.

Overall, without currency realignments—especially a stronger yuan and currency reform in Europe—the U.S. economy cannot grow at the pace that will pull down unemployment and the nations of southern Europe and Ireland will need perpetual bailouts or face default on sovereign debt.

Posted in Economy, TradeComments (1)

The Economic Think Tanks Were Wrong: Imports And Offshore Outsourcing Have Destroyed Millions Of American Jobs

The following article by Richard McCormack appeared in Manufacturing & Technology News here.

Outsourcing and imports are not only leading to the wide-scale destruction of American jobs, but to substantially lower manufacturing GDP growth over the decade than what has been officially reported. Imports and offshoring have also led to substantial over-reporting of productivity gains.

The problem is one of measuring. In a global economy, the federal government data collection agencies have not kept pace with changes brought about by trade, which now accounts for almost 30 percent of the U.S. economy. Researchers have verified that the U.S. government has not captured the real costs and levels of imports and their impact on the American economy.

This oversight — involving a small import data collection program run by the Bureau of Labor Statistics — turns out to be “a big problem,” says Susan Houseman of the Upjohn Institute for Employment Research and the national leader in addressing the shortcomings of government statistics.

Houseman and a group of researchers have confirmed that the dollar volume of goods coming into the country is not measured correctly. There has been a substantial under-measurement of imports.

The current import price indexes used by the federal government “fail to capture price declines associated with a shift in sourcing to low-cost suppliers,” says a new peer-reviewed research paper on the subject titled “Measurement Issues Arising from the Growth of Globalization.” As a result, the real growth in imports “has been understated and domestic productivity and real output growth have been overstated. The increased import penetration in consumer goods and intermediate inputs and the large price differentials between domestic and foreign suppliers have increased the possibility that some economic statistics are significantly biased.”

The study, which included representatives from the Bureau of Labor Statistics, the Bureau of Economic Analysis and the Bureau of the Census in its planning group, concludes that the federal government must re-assess the way it measures imports. It recommends that the federal statistical agencies create new data collection programs that capture the true effects of imports and offshore outsourcing both of products and services.

Multifactor and labor productivity measures as well as GDP are now confirmed to have been substantially overstated for the past decade, due to much higher levels of imports than have been measured. A decade of economic and trade policy predicated on the idea that productivity growth and new technology were the reasons for the rapid displacement of American workers has now proven to be wrong.

The problem arises when the government considers the import price of products entering the United States. As currently structured, the federal government compares the change in prices of the same goods that are being imported each month. What is not measured is the difference in the price of an imported product versus the one it replaced that was previously made in the United States.

Based on its current system of data collection, the government has reported that import prices have been increasing, when they should have been going down, reflecting the cost savings of up to 60 percent from buying the same products previously made in the United States from low-cost nations like China, Mexico and India.

“Import price indexes have not accurately captured the lower prices that have prompted many retailers and consumers to shift from domestic to imported goods,” says the study. “Similarly, although manufacturers increasingly have been sourcing intermediate inputs from low-cost foreign suppliers, the import materials price deflator has been rising faster than the domestic materials price deflator, indicating that these price indexes often fail to capture the cost savings driving manufacturers’ offshoring.”

When accounting for this oversight, the value of imports becomes much higher and U.S. output is lower than what has been reported. Houseman estimates that between 1997 and 2007, manufacturing GDP growth has been overestimated by as much as .5 percentage point per year, out of an average annual manufacturing growth rate of 3.0 percent due to the under-pricing of imports.

In addition, the manufacturing GDP growth rate has been widely misinterpreted because the strong growth in the computer industry has dominated the manufacturing numbers, according to the study. Technological improvements in computer capability inflate the overall industrial output numbers. Virtually all of the growth in manufacturing GDP is attributable to computers and electronic product manufacturing. Says Houseman: “Computer price indexes are falling on account of improved technology performance. So while the U.S. is losing market share in global computer shipments, it is still registering phenomenal growth rates to a large degree because of the way the price indexes are constructed for this industry. This drop in prices has nothing to do with the competitiveness of domestic manufacturing. It has nothing to do with workers being more productive. It has everything to do with improvements in the embedded technology.”

As such, given the government’s measurements, the computer industry has accounted for most of the manufacturing-value added growth during the decade ending 2007. Yet the computer sector accounts for only 10 percent of the total value in manufacturing.

When computers are excluded from the overall production numbers, the annual manufacturing growth rate from 1997 to 2007 declines by 2 percentage points. Added with the adjustment for the import price index, annual manufacturing GDP growth for the remaining 90 percent of manufacturing could be as low as 0.5 percent for the decade ending in 2007.

The computer numbers are also plagued by the same import price index issues. Most computers produced in the United States contain a majority of imported parts, the prices of which are not accounted for in government statistics. “The computers that are exported are more or less trans-shipments,” says Houseman. The federal government “needs to net out the import value of exports, which is what should be done with all domestic production, and that makes a big difference.”

The offshoring of services is also not being measured correctly. Companies are shifting their service functions overseas because it is a lot cheaper. But the federal government does not measure the prices of imported services versus those they are replacing in the United States. The difference “is even bigger than when you are importing manufactured goods because it’s all labor,” says Houseman. Currently, data on import and export prices in business services — which include IT services, engineering services and call centers and represents the most rapidly growing category of services trade — are not collected at all. “This data gap could result in significant inaccuracies in economic statistics as trade in business services expands,” says Houseman. “While the BLS recognizes this is an important gap in the statistics, there is no funding to fill it.”

There are other issues associated with offshoring and imports that need to be addressed. The federal government stimulus spending programs and tax breaks are not understood in the new global context. Borrowed money is provided to Americans who use it to buy imports, with little impact on growth and employment.

Obama’s goal to double exports is also questionable, since the United States does not know the import content of exported goods. Products that are exported with a high level of imported parts and components do not create many jobs.

Because of the lack of data on imports, do the GDP numbers need to be re-calculated for the past 10 or 15 years, Manufacturing & Technology News asks Houseman. “Ideally, the agencies would do that,” she says. “But what they are looking to do now is to fix it moving forward. What they’re trying not to do is to guess. There was no data collected on that so there is no good way of going backwards and fixing the problems.”

The Bureau of Labor Statistics has proposed a pilot program to collect import price data “and figure out a correction for all of GDP,” Houseman says. “The statistical agencies recognize this is a problem and a big enough problem that it is worthy trying to fix.” The next step is getting Congress interested enough to provide funding in a tight budgetary environment.

Houseman concludes with this thought: “The majority of Americans in public opinion polls believe that offshoring has been a major factor in the decline in employment and quite specifically in manufacturing, and yet many academic papers and think tanks are saying just the opposite. In this case, the public perception is correct and the data — and people’s interpretation of those data — are wrong.”

The Houseman paper “Offshoring and the State of American Manufacturing,” authored with Christopher Kurz, Benjamin Mandel and Paul Lengermann of the Federal Reserve Board, along with the “Conference Summary” from the meeting on “Measurement Issues Arising from the Growth of Globalization,” and conference papers on the subjects (all worth reading), are on the Upjohn Institute’s Web site, http://www.upjohninst.org/.

Posted in TradeComments (1)

Export opportunities vs. home market

UPDATE:  A reader pointed out a mistake in this post.  The $14 trillion U.S. GDP number is annual while the Chinese $1.33 trillion GDP number is quarterly.  The Chinese economy is not 1/10th the size of the U.S., but 1/3.  According to Wikipedia, through sourcing 2009 GDP numbers:

1.  U.S. GDP is 14,256,275

2.  China’s GDP is 4,908,982, excluding Hong Kong and Macao.

My point - that the U.S. domestic market is the premier market to develop and protect - remains.  But the ration of the U.S. GDP size to China’s, is different.  When all is said and done, we simply do not achieve the same volume/value of foreign access as we give up in bilateral and multilateral trade agreements.  It is false to predict that a net positive trade flow will result from future trade deals.

Original post below:

China has now surpassed Japan as the world’s second largest economy in terms of GDP.  How far out front is the U.S., which is still number one?  According to the article, the U.S. economy is valued at $14 trillion while China is at $1.33 trillion.  In other words, our economy is still over 10 times larger than China’s.

The point is not that we are doing well, and we will be number one forever.  My point is to focus upon the free trade rhetoric that we need more export opportunities instead of recapturing our own market.  The primary trend of our unilateral free trade policy is to give up market share in the U.S. in exchange for theoretical market share abroad.  Those export opportunities don’t seem to turn into near enough real money to begin to offset our ceding domestic market share.

Why not refocus upon recapturing our home market.  Indeed, it is the biggest in the world.  We could generate astounding amounts of growth with this strategy.  And we don’t need high-polluting trans-ocean shipping to get to the customer.

See this pie chart, which does not exactly correlate to the GDP numbers above, generated from www.nationmaster.com and based upon their 2006 numbers.  It shows where the real money is for sales in a pie chart showing the relative size of countries’ GDP across the world.  The biggest market for us is right here in our back yard.

Posted in Economy, TradeComments Off

Sign up for daily updates