Excellent discussion of U.S. corporate taxes by Veronique de Rugy Wednesday at NRO’s The Corner, “How Punishing Is the Corporate Income Tax?” The Mercatus Center research fellow addresses the issue often raised by critics of U.S. businesses, that yes, the U.S. corporate tax rate is high, but corporations take advantage of exemptions and deductions. It’s a legitimate issue to raise but should not be considered independently of the U.S.’s reliance on a worldwide tax system.

As it turns out, the U.S. not only imposes high rates, it also taxes corporations on a worldwide basis: Profits made by an American-owned computer plant are subject to U.S. taxes whether the plant is located in Texas or Ireland. Most major countries don’t tax foreign business income. In fact, about half of OECD nations have “territorial” systems that tax firms only on their domestic income.

De Rugy then raises an issue we were unfamiliar with, that is, studies that show a correlation between higher corporate tax rates and lower wages.

In recent years, several much-discussed studies have found that it is likely that much of the burden of the tax is borne not by capital but by domestic labor, in the form of lower wages. For instance, this December 2010 paper by economists Aparna Mathur and Kevin Hassett shows the link between corporate tax rates and the average manufacturing wage (in U.S. dollars) for 65 countries over a period spanning 1981–2005. They find that there is a clear negative link between the two, suggesting that higher corporate tax rates lead to lower worker wages. They test this theory using regressions controlling for a bunch of other factors, and find that a 1 percent increase in the corporate income tax leads to an almost 0.5–0.6 percent decrease in hourly wages.

This is consistent with the results of many recent empirical papers — Arulampalam et al. (2007) , Mihir A. Desai, C. Fritz Foley, and James R. Hines (2007), Felix (2007) — that use real-world data to look at who really pays the corporate income tax. These studies find that between 45 and 70 percent of the cost of the corporate tax is borne by labor rather than shareholders.

Very informative, timely piece.

Via EconStories, “Fight of the Century, Keynes vs. Hayek Round Two.”

Veronique de Rugy, is a senior research fellow at the Mercatus Center at George Mason University. She has a new analysis, “U.S. Manufacturing: Output vs. Jobs Since 1975“:

This week, Veronique de Rugy examines changes in employment and productivity in the American manufacturing sector. Since 1975, manufacturing output has more than doubled, while employment in the sector has decreased by 31%. While these American job losses are indeed sobering, they are not an indication of declining U.S. competitiveness. In fact, these statistics reveal that the average American manufacturer is over three times more productive today than they were in 1975 – a sure sign of economic progress.

The true cause of dwindling American competitiveness is a tax code that puts domestic firms at a clear disadvantage – not a lack of skill or innovation on the part of the American worker.

Veronique de Rugy explains why the price of our tax code is hurting American jobs at Reason Online.

The Reason column is very helpful for getting one’s head around the anti-investment U.S. global system of taxation versus the more common territorial system. De Rugy writes:

Not only is the U.S. rate too high, but the U.S. government also taxes corporations on their worldwide income. That means profits made by an American-owned computer plant are subject to U.S. tax whether the plant is located in Texas or Ireland.

Most other major countries do not tax foreign business income as aggressively. In fact, about half of OECD nations have “territorial” systems that tax firms only on their domestic income. (continue reading…)

Two excellent commentaries on taxes, business and the economy…

Kevin A. Hassett and Alan d. Viard of the American Enterprise Institute wrote Friday in The Wall Street Journal, “The Small Business Tax Hike and the 97 Percent Fallacy,” demonstrating that the expiration of the 2001 and 2003 federal tax cuts on individual income would indeed hit small business. The “97 percent fallacy” is a reference to Vice President Biden and House Speaker Pelosi’s argument that the higher tax rates will only affect 3 percent of small business, so what’s the big deal?

The numbers are clear. According to IRS data, fully 48% of the net income of sole proprietorships, partnerships, and S corporations reported on tax returns went to households with incomes above $200,000 in 2007. That’s the number to look at, not the 3%. Would Mrs. Pelosi and Mr. Biden deny that the more successful firms owned by individuals in the top income-tax bracket are disproportionately responsible for investment and job creation?

At National Review’s The Corner, Veronique de Rugy, an economist and researcher at the Mercatus Center, makes the case that the temporary tax credits and rebates that the Administration favors to spur job creation are ineffective. For example, the $1,000 tax credit for hiring — which the President wants to boost to $5,000 — is useful only if a small business has a tax liability, much less likely given the current economic climate. In her post, “More on Small Business and the Administration,” de Rugy writes:

If the administration were so eager to help businesses, large or small, it would end the constant public-policy uncertainties that businesses are facing: The health-care overhaul, which will bring new but still unknown obligations to insure employees, and legislation aimed at tackling climate change, which could raise businesses’ energy costs, add to the uncertainty about the economy. The new financial regulation, which will take years to put in place, adds its share of uncertainty, as does the potential expiration of the tax cuts. Meanwhile, as government spending increases, so do the chances of more taxes in the future.

Her arguments about the deleterious effects of uncertainty dovetail well with the conclusions of the National Association of Manufacturers’ 2010 Labor Day report, “Labor Day 2010: The Impact of Anti-Labor Policies on Working Men and Women.”

It appears that yesterday’s House Judiciary subcommittee hearing on midnight regs featured the usual political huffing and puffing, but it also elicited a sober and detailed analysis of regulatory practices in testimony from Veronique de Rugy, PhD, Senior Research Fellow at the Mercatus Center at George Mason University.

The phenomenon of midnight regulations — the rush of new rules issued in the last days and months of an administration — does exist, she argued, offering statistical evidence to prove the point. Furthermore, the additional number of consequential and costly rules undermines effective review by the Office of Information and Regulatory Analysis of OMB.

The solution?

Until now, the most common solutions to the midnight regulations problem have suggested steps that an incoming president can take to undo his predecessor’s last-minute actions. Our solution tries to mitigate the negative effects of midnight regulations by changing the incentives on the outgoing administration. We suggest placing a cap on the number of economically significant regulations OIRA can be expected to review during a given time period.

Doing so would help prevent OIRA oversight of new regulations from being diluted. A flexible cap would afford OIRA time and resources to carefully consider new rules while preserving Congress and the President’s prerogative to increase the cap by allocating more resources to OIRA. To the extent more resources are not allocated and end-of-term regulatory spikes are eliminated, a cap would also have the effect of addressing some of the other concerns raised by midnight regulations, including a lack of accountability and democratic legitimacy.

Sounds good in theory, but first it assumes that a White House would want to cede that authority. And we can’t imagine an activist agency couldn’t cirumvent such such a cap in any case. Agency staff could do all the preliminary work, collect all the data and arguments and commentary, try to issue the regulation and if blocked by OMB or OIRA, simply have their activist friends sue in the 9th Circuit. For example.

P.S. Gee, such interesting testimony and substantive proposals for reform. Guess ProPublica’s interest has waned now that the Bush Administration has left town.

From today’s Washington Post, “Obama to Name Lawyer Friend To Regulatory Affairs Position“:

President-elect Barack Obama will name Cass R. Sunstein, a close friend and one of the nation’s top constitutional lawyers, to a senior-level post in charge of government regulation, a transition official said.

Sunstein, a Harvard University law professor who grew close to Obama during their years at the University of Chicago, will become the administrator of the Office of Information and Regulatory Affairs.

Obama talked on the campaign trail about the need to revamp the nation’s regulatory structure, especially in housing and finance, areas in which lapses contributed to the current economic crisis.

In his new position, Sunstein will oversee reform of regulations, seeking to find smarter approaches and better results in health, environment and other domestic areas, a transition source said.

The Office of Information and Regulatory Affairs can do good things in imposing discipline and regulatory restraint on the executive branch agencies, examining the costs and unintended consequences that result from excessive rulemaking. For that reason, the Bush OIRA has been the subject of intense, often personalized criticism from the activist crowd who never met a regulation it didn’t like. (See below.)

We don’t know enough about Sunstein (Harvard CV) to offer an informed opinion, although he’s certainly mentioned prominently enough in legal publications and the blogosphere. In any case, we promise not to engage in the kind of smearing that was practiced against Susan Dudley and her predecessors.

Earlier posts (2007)

• WSJ: The Value of Susan Dudley’s Appointment
• Congratulations, Susan Dudley
• Noli Illegitimi Carborundum, Susan
• Experienced? Dispassionate? Analytical? How Dare She!

P.S. Speaking of Susan Dudley, she came to the Bush Administration from the Mercatus Center at George Mason University, a free-market oriented think thank. Indeed, George Mason University is often seen as an outpost of University of Chicago economics in northern Virginia. So President-elect Obama gives his economic stimulus speech today at GMU. How interesting.

From the White House press briefing, September 4^th, with spokeswoman Dana Perino:

Q At the end of the Clinton administration, the White House was criticized for putting out a lot of so-called midnight regulation, and this May, Josh Bolten put out a memo instructing federal agencies not to do that. Yet have they — has the White House reversed its policy? Because several federal agencies have proposed rules since the cut-off date.

MS. PERINO: I’ll go back and look at the memo, but I think that all the agencies are complying with what Josh asked for. And I think what he was wanting is, one, good government so that you weren’t rushing things through at the last minute. And to my knowledge, the agencies that have put forward proposed regulations have done so in a timely fashion and in a way that they can get sufficient public comment so that they meet the obligations and laws of this country.

The memo in question came from Chief of Staff Bolten on May 9^th (a copy is here), setting the deadline for new regs on June 1, as reported in The New York Times in “Administration Moves to Avert a Late Rules Rush” and a Bloomberg column by Cyndi Skrzycki, “Bush Aims to Stop Midnight Surge of New Rules.”

The Clinton Administration set a record with its last-minute “Midnight regulations,” sharply criticized by Susan Dudley when she was at the Mercatus Center; she now heads the Office of Information and Regulatory Affairs at OMB, so actions match rhetoric match philosophy. Good.

As the Administration argues, this really is good government. Regulations are given full and fair scrutiny, those to be regulated aren’t hit with new and expensive surprises, and the next Administration doesn’t have to spend its first six months undoing all the mischief and defusing all the mines left over from its predecessor.

But, you can just bet the next time America is blessed with Administration that embraces the expansion of the regulatory state, Executive Branch officials will feel no such compunction. The scale only tilts one way.