Are Corporate Tax Payers Less Honest?

Few people would find it surprising that another study states that the income inequality in the United States has been growing. Many conventional measures of the differences in income show that the top 1% take away a far greater proportion of the overall income than was the case in the preceding year. David C. Johnston, writing in the New York Times today, discusses the review of IRS data by two professional economists whose main conclusions are not surprising to me.

The more surprising fact in the article is the claim that the disparities may be even greater due to the fact that income tax compliance varies between individuals and corporations. The IRS is reported to state that it is able to tax 99% of wage income while netting only 70% of corporate and business income. That is not only a huge gap in percentage terms but also in the amount of cash that is foregone. But more interestingly, does it suggest that corporations are less honest than individuals?

University Education

That intellectual capital is highly correlated with growth in incomes is hardly debatable today. university education is therefore a highly sought commodity because it represents good investment. I notice too that many private or publicly-supported universities have established law and business schools with the premise that college education today should reflect the skills that are directly demanded by businesses. Writing here, it appears that John Blundell of the Institute of Economic Affairs thinks that this view is altogether too limited and even uninformed.

"I am not arguing for a university that only trains young people in vocational courses. It is a vulgar error to think universities are merely supply resources for business. A good education teaches critical and lively thinking." John Blundell

Are Financial Flows Really Subsidies?

This article in the New York Times Magazine dated the 25^th March 2007 by Tina Rosenberg identifies some of the ways in which financial transfers occur between the low and high income countries. Among the ways through which this occurs are royalty payments for products developed in the latter countries, the movement of professionals trained by developing countries and the completely idiotic incentive structures that most developing countries impose on themselves in order to attract foreign direct investments.

Given the abrupt conclusion of the piece, this blogger wonders whether it was intended to merely catalogue the ways in which financial resources and income from investments traverse borders or whether there is an implied injustice in the fact. Still, Tina Rosenberg clearly fails to acknowledge a set of facts that should be useful. Sovereign nations reserve the right to purchase US treasury bills and the extent of that purchase is left to their judgment as the US government appears to have done. In addition, the departure of the professionals trained in low-income countries reflects the fact that they seek places to apply their skills most creatively and profitably. That these nations have failed to provide this is surely not a creation of the higher income countries. The one point on which the author could have cited a wider source of arguments is on the migration of professionals to the high-income countries. The loss that occurs from the departure of trained professionals could be substantially ameliorated by ensuring that all of them reimburse their governments for any costs that went into their training. It is highly unlikely that professionals whose services are in high demand would be compelled to work in countries that do not provide sufficient support for them to stay.

Sympathy for low-income countries aside, the royalty flows in respect of pharmaceutical and entertainment products represent the returns that firms in the higher income countries have accrued by selling the products of their research and development. The main reason why the low-income countries are not recipients of such flows is because they have not developed firms who export such products. The element of subsidy that the author alludes to is altogether incorrect and misinformed.

Finally, it is obvious that the analysis of financial flows is incomplete without consideration of the flows and back flows that enable readers to appreciate the net position.

Silicon Valley Seeking Diverse Energy Sources

In spite of all its acclaim, many still associate Silicon Valley almost entirely with information technology products and software because these provide the bulk of the activity that is undertaken in that innovative circle. Biotech and pharmaceutical research also has developed within this technological and process innovation location. Firms in Silicon Valley are being established to add to the furious search for alternative energy sources. An article in the New York Times carefully compares the environment in the valley now to that which prevailed during the internet boom of the 1990s. The entrepreneurs though are aware that demonstrating the results by developing workable products are essential and that this time, few of these upstarts will survive for long merely on the basis of expected returns.

Interestingly, the research and development ideas that are being pursued are quite well-founded, judged by the fact that accountants, lawyers together with venture capitalists are reorienting firms towards participating meaningfully in the US$ 1 trillion energy market in the United States. Admittedly, there are no guarantees but with the money rushing into these firms, it is possible that the results may be just what is needed for diversifying the available sources of energy. for this blogger, the fascinating thing is how the accumulated knowledge and skills in the Valley is being deployed across several industries.

Stiglitz Endorses Prizes

It was stated in this blog in an earlier post that a substantial monetary prize would be ample incentive for finding effective and efficient solutions to contemporary problems such as HIV/Aids and the identification of any alternative sources of energy. Prof. Joseph Stiglitz argues in an article that the use of prizes as a mechanism for ensuring the development of drugs for cures and vaccines that are neglected by the pharmaceutical industries on grounds of the lack of firm markets.

The use of prizes would be in response to the need to limit the monopoly that drug companies bear in the form of patents without affecting their ability to develop drugs that are bound to be more lucrative for them. With an adequate fund, vaccines and cures for the most intractable diseases such as malaria and HIV/ADS would be at hand because the management of these diseases is more profitable for drug corporations at the moment. Still, Prof. Joseph Stiglitz acknowledges that the use of prizes will not of necessity replace patents. Over time, the distribution of innovation and rewards will be determined by the relative efficiency of either method and the degree to which competitive pressure between the two will spur innovation.

Administering the Minimum Wage

Revision of the minimum wage in the US was first in the order of business during the legislative term following the elections in November 2006. The working poor in America found support in the passage of bills by both houses of the legislature to raise the minimum wages. Apart from the standard arguments about the effects of a minimum wage on overall employment and the possibility that it may displace the workers who are most at risk of losing employment, there was less prominence accorded to the most effective way of ensuring that the proposed measures result in increases in the real wages of the working poor. Instead, the legislative houses sought to solve the question of raising the costs of labor to business by subsidizing corporations that hired lower wage workers.

Sarah Hamersma reminds readers in this New York Times opinion piece (subscription required) that this approach was far from efficient because the historical record shows that eligible firms hardly ever claim the credit. More importantly, she argues that there is no evidence that employers expanded their pay rolls in response to this measure. This latter effect is not inconsistent with the expectations of the legislators who passed the bill because it was ostensibly intended to protect those low income workers.

While the tenor of the author’s argument is that the idea of raising the minimum wage has little positive effect for the low income earner, to my mind the salient effect is the design problem which ensures that the subsidy goes through the firm when it could have been directly transferred to the worker. The merits of he minimum wage enhancement policy notwithstanding, the mechanism for channeling it is incredibly circuitous and does not subsidize the worker directly.

Quoting Larry Summers

"It is easier to start knowing economics and learn how to factor in politics than to start with politics and move to economics." Prof. Larry Summers

Unlike many professional economists who deliberately eschew commentary on public policy and the political, prof. Larry Summers tends to be uncharacteristically forthright with opinions on policy in general and in select areas of normative economics. This blogger considers that accomplished economists should increasingly tell their stories in a a world in which the opportunity and mechanisms for dispersal of ideas have unfortunately overtaken the degree of literacy on economics and the working of markets. As a consequence, very bad ideas are allowed to permeate and frame the context of policy discussions. In an interview given to the Harvard College Economic Review (HCER) for Fall 2006, prof. Larry summers offers this advise to students wondering about the confluence between politics and economics.