Tariffs or sales tax and corporate tax reduction?

The announcement, and backtracking, on a 20% tax on Mexican imports caused a lot of confusion yesterday. I assumed like most that this was a proposal for a tariff, which would both ditch NAFTA rules and run afoul of the WTO rules. The wall and the tariff led to a cancellation of the Mexican president's trip, and a souring of the diplomatic relations. But in all fairness, it seems that this had little to do with Mexico.

The Republican Tax Plan basically is to eliminate the corporate income tax, and to substitute if with a destination based cash flow tax (DBCFT, is the clumsy acronym of the beast; on this see Jared Bernstein). The idea is that this would reduce the incentive of US corporations to relocate abroad to scape the income tax, and to basically introduce a national sales tax. The tax is border adjusted, so to speak, since imports sold in the US would pay taxes, but exports wouldn't.

So it seems to me that Trump was trying to use the GOP tax plan, that already existed, and is still in place, as far as I understand, and use it to claim that as Mexican imports will be taxed, they will be paying for the wall, that it seems he really plans to build. They seem to at least temporarily backtracked on the proposal, mainly I think to avoid jeopardizing the tax plan, which seems to me to be regressive, sales taxes after all hit everybody, and solving the problem of corporate tax evasion, by making the US a tax haven, and shifting the burden to consumers (just a hunch, I'll wait for tax exports to do the hard work of calculating the effects).

The impact of such a policy, by the way, is less clear than one would think. Josh Mason wrote something about it here. Like him I'm skeptical that a sales tax on imports would bring a lot of manufacturing jobs back. But even if this reduces the trade deficit, with Mexico and other countries (China?), which again I doubt, the problem of the quality of jobs here (and manufacturing matters among other things because of the quality of jobs) in the US does not depend fundamentally on the trade deficit per se. On that front, what will be done with labor regulations, the minimum wage, and the overall macroeconomic picture seems to be more relevant, and there are reasons to be concerned.

Tim Dickinson on The Biggest Tax Scam Ever

Today, Tim Dickinson was on Democracy Now talking about the ways in which US Corporations have engineered a global scam to avoid tax obligations.  His article in Rolling Stone provides extensive details.

By Tim Dickinson

In July, the American pharmaceutical giant AbbVie, maker of the world's top-selling drug – the arthritis treatment Humira – reached a blockbuster deal to acquire European rival Shire, best known for the attention-deficit medication Adderall. The merger was cheered by Wall Street, not for what the deal will do to advance pharmaceutical science, but because it will empower the bigger firm, AbbVie, to renounce its U.S. citizenship. At $55 billion, the AbbVie deal is the largest in a cavalcade of corporate "inversions." A loophole in American tax law permits companies with just 20 percent foreign ownership to reincorporate abroad, which means that if a big U.S. firm acquires a smaller company located in a tax haven, it can then "invert" – that is, become a subsidiary of its foreign-based affiliate – and kiss a huge share of its IRS obligations goodbye. AbbVie shareholders will continue to control 75 percent of the company, which will still be managed by executives outside Chicago. But the merged company will now file its tax returns on the island of Jersey – a speck of land in the English Channel, where Shire is incorporated. AbbVie, which racked up more than $10 billion in Humira sales last year, will slash its effective corporate tax rate from 22 percent to 13. The cost to the U.S. Treasury? Possibly as much as $1.3 billion by the year 2020.

Read rest here, and for an article by David Cay Johnston on the issue, see here.

Global wealth inequality

Credit Suisse publishes a Global Wealth Report, and if you think that income inequality is bad, well you don't know anything about wealth (h/t Jorge Gaggero for the link). According to the report total wealth in 2011 was US$ 210 trillions. Figure below shows the distribution by deciles around the world.

The poor are fundamentally in Africa, India, and Asia-Pacific (mainly Bangladesh, Indonesia, Pakistan, and Vietnam), while the wealthy are in the US, Europe and Asia-Pacific (i.e. Japan). China has more people in the middle section of the wealth distribution than at the extremes. No big surprises there.

The distribution of global wealth is shown below in what the authors of the Report refer to as the Wealth Pyramid.

So 67% of the world's population (around 3 billion people) hold about 3.3% of total wealth at the basis of the pyramid. At the top of the pyramid, 0.5% of the population holds approximately 38% of the wealth. These are the dollars millionaires, which are overwhelmingly in the US, Europe and Japan.

Interestingly, in a different study, the Tax Justice Network has estimated that unreported offshore wealth held in tax havens has reached between US$ 21 and 32 trillions. That is, between 11 to 16% of all global wealth in 2010 (which was at US$ 195 trillions) is out of reach of taxing authorities. If you consider that this money comes fundamentally from the ones at the top of the pyramid, that hold wealth in more liquid forms, it is between 23 and 36% of the wealth of the top 0.5% of the wealthiest 1%. The global elites like Mitt Romney if you will.