Normative Narratives


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Economic Outlook: Business Tax Reform is a Social Justice Issue

Since President Obama’s SOTU address, the term “middle class economics” has penetrated mainstream political discourse. These were not all new ideas, but rather a catchy phrase to sum up the priorities of the Obama administration and provide direction for the Democratic party going forward.

Of course, in a functioning democracy, broad based growth is not (or should not be) a partisan position. A recent NYT news analysis article highlighted how the G.O.P. has, in recent years, attempted to re-brand itself to be more appealing to low and middle class Americans (i.e. engage in “middle class economics”).

One potential avenue for such re-branding is compromising on a long overdue overhaul of the American tax system (the last major overhaul was in 1986). According to a recent Al Jazeera America poll, a majority of self-proclaimed Democrats (79%) and Republicans (68%) are “somewhat” or “very” willing to have their congressional leaders compromise on taxes.

Fortunately, bipartisan support for tax reform is not limited to the general public. Both the Democratic party and the G.O.P. have powerful voices in the Federal Executive and Legislative branches (respectively) advocating for compromise on tax reform:

G.O.P Stance:

“Though there are disagreements on the details, there is bipartisan support for tax reform in Congress,” said Orrin Hatch, Republican chairman of the Senate Finance Committee, at a conference for tax lawyers, analysts and economists.

“Members of both parties have expressed their support for a tax overhaul. And, I believe there is real momentum to get something done on tax reform this year, if we remain committed. And, believe me, I’m committed,” he said.

The U.S. tax code has not been overhauled thoroughly in 28 years. In that time it has become riddled with loopholes. As a result, tax avoidance is a growing problem.

At the same time, tax experts also generally agree that the system is so complex and often contradictory that compliance costs are excessive and economic productivity is harmed.

Hatch has laid out basic principles for reform. At the conference, he said he has the impression that Democratic President Barack Obama might be willing to do a deal on business tax reform alone, setting aside individual income tax issues.

“We need to lower corporate tax rates and transition toward a territorial tax system,” Hatch said. A territorial system is one that would exempt all or most of the foreign profits of U.S. corporations from the corporate income tax.

Democratic Party Stance:

Let me (Secretary of Treasury Jacob Lew) say at the outset that our entire federal tax code needs to be overhauled.  It has been almost 30 years since we last rewrote it, and since then, the tax system has become heavily burdened by loopholes and inefficiencies

I continue to believe that the best way to achieve reform today is to start with pro-growth business tax reform that protects and strengthens the middle class, lowers rates, simplifies the system, levels the playing field, and eliminates unfair and inefficient loopholes.

The fact is, there is a growing bipartisan consensus in Washington on how to achieve business tax reform, and we have a unique opportunity now to get this done.

On paper, we have one of the highest corporate income tax rates in the world, but in practice, there is a wide disparity in effective corporate tax rates.  Some corporations pay little or no income tax at all, while others pay the highest rate in the developed world.

Moreover, our business tax system is far too complicated — particularly for small businessesOne estimate suggests that a small business, on average, devotes hundreds of hours plus spends thousands of dollars, to comply with the tax code.  We can and must reduce this burden.

Our business tax system actually skews business decisions in ways that make it harder for the economy to grow.  Too many investment decisions are shaped by tax considerations when they should be driven by what will best enhance productivity and growth.  Our tax code should favor the best businesses that create the most economic value — not those that are best at taking advantage of tax deductions.

The international tax system is often looked at in terms of either what is known as a territorial system, in which a company located in a particular country only pays taxes on income earned in that country, or a system like that of the United States, in which that company must pay tax on worldwide income, regardless of the country where it is earned.  The President’s proposal strikes a sensible balance, and would move us towards a more hybrid system.  What that means is we would create a new minimum tax on foreign earnings and make it simpler for a business to bring income back to the United States.  It would also tighten the rules so that companies cannot use accounting techniques to avoid paying taxes, such as shifting profits to low-tax countries (inversions).

Of course, there are tax expenditures that make sense and that need to be protected — like the New Markets Tax Credit, expensing for small businesses, and the Research and Experimentation Tax Credit.  But these tax incentives cost money and need to be paid for to maintain adequate revenue levels.  And we cannot apply a double standard, as some have proposed, where we permanently extend business provisions without paying for them, without permanently extending critical improvements to the EITC, child tax credit, and college credits that help working families at the same time.

Secretary Lew laid out the five pillars of the administration’s proposal for a new business tax system:

1. Lower rates and close wasteful loopholes.
2. Build on the resurgence of manufacturing in the United States.
3. Reform the international tax rules that encourage companies to shift income and investment overseas.
4. Simplify and reduce taxes for small businesses.
5. Fix “our broken tax code and increase investment in a way that maintains current revenues.”

Sounds like both parties want many of the same things.

However, “revenue neutral” business tax reform does not go far enough. Looking at the Federal OMBs Historic Tables (p34-35) tells the story. Since 1934, individual income taxes have consistently made up 40+% of government receipts, while corporate income taxes have varied from as high as 30% to around 10% of receipts in recent years.

True this declining share is partially due to rising Social Security taxes, but since those are split evenly between employers and employees, it is clear that the burden of financing our government has shifted from corporations to people and small businesses. Looking at contributions as a % of GDP (p36-37) further supports this narrative.

These meager contributions by corporations are symptoms of an outdated and unfair tax code, and should not be enshrined in a new one.

Lower tax receipts skew the debate over how to invest in America and her people. Operating from a position of high debt and primary deficit, it is easy to drum up fears that accommodative economic policies will result in rising borrowing costs, ballooning deficits, and [hyper]inflation (despite the fact that America is facing the opposite–historically low borrowing costs, a shrinking deficit, and a very strong dollar).

Implementing business tax reforms would help push America into primary surplus, changing the context of this national debate.

I do not claim to know the exact amount or proper allocation of resources between public goods (education, infrastructure) and welfare programs needed to achieve greater “equality of opportunity” / social mobility. But I can say with confidence that more resources need to go to these causes, as the status-quo has long failed the vast majority of Americans.

The sooner we can have a clear-eyed debate on what policies are needed to promote broad based, sustainable American growth, the better. Holding back this debate, aside from uncompromising politicians, is a failure to overhaul our tax code.

In the interest of balance, work also needs to be done on individual tax reform, to fix high marginal tax rates affecting people who benefit from welfare programs. However, the importance of this issue has been, in my opinion, overblown by those on the political right.

Lastly, the Congressional Budget Office’s use of “dynamic scoring”, as it as been pushed through by the G.O.P. dominated congress (using it for tax proposals but not for spending bills) is another impediment to achieving social justice through tax reform and fiscal policy. 

Van Hollen (D-MD) added that while the bill requires the CBO to run dynamic analyses on major bills, it specifically excludes appropriations bills. He said that exemption shows that Republicans want to downplay how federal spending on education, infrastructure and other areas can also help the economy.

Ryan replied by saying that exemption is there because subjecting all spending bills to dynamic scoring would create significantly more work for the budget office. Rep. Gerry Connolly (D-Va.) proposed an amendment to include major spending bills, but the House rejected it 182-214.

Ryan’s argument is unfounded and offensive to the talented people employed by the CBO. It is a weak attempt to defend wealthy interests, while downplaying the awesome potential of the American people.

Ideally, this method would be implemented for both tax and spending proposals. If that is not possible, dynamic scoring should not be used at all.

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Transparency Report: The Decline of American Populism Has Been Self-Inflicted

turnout chart

Original Article:

People who feel financially secure vote, people who aren’t secure don’t, according to a Pew Research Center report released this morning. And because financially insecure Americans disproportionately identify with the Democratic Party, Democrats face a structural disadvantage, especially in mid-term elections. In 2014, fully 94% of the most financially secure Americans were registered to vote, compared to only 54% of the least secure; 63% of the most secure were likely voters, versus only 20% of the least secure.

Not surprisingly, financial security is correlated with political knowledge and activism. The most secure Americans are more than twice as likely to know basic facts about the political system, and three times as likely to have contacted an elected official during the past two years.

40% of all Americans think that government does a better job than people give it credit for compared to 56% who believe that it is almost always wasteful and inefficient. Among the least financially secure Americans who would seem to have the most to gain from effective public programs, only 48% adopt the more affirmative stance, while 49% focus on waste and inefficiency. Government’s poor reputation is one of the many obstacles impeding political mobilization along economic lines.

One can only hope that elected officials will focus on this disparity more than they have in recent years. But as the report shows, the people who most need a hand up are those least likely to vote and to make their views known to elected officials. Unless average Americans feel secure enough to afford generosity, leaders who focus on the problems of those at the bottom are likely to reap meager electoral rewards.

People have many excuses for not participating in the political process. The rise of “Super-PACs” / money in politics makes many people feel they have no voice compared to wealthy interests. Gerrymandering can take the “punch” out of an individual’s vote. Whatever the reason, too many people in this country simply feel their vote does not matter, that the “costs” of voting outweigh the benefits (notably this feeling seems to coalesce at the bottom of the economic ladder).

Just 36.4% of eligible voters turned out for the 2014 midterm elections, the lowest level since WWII.  But passive-aggressive resistance (abstaining from voting) is a counter-productive form of protest. Not voting will not make the political system go away, nor will it lead to meaningful changes in the political process. To paraphrase Thomas Picketty’s “Capital in the 21st Century“, everyone should be active participants in the democratic process; the wealthy never fail to promote their interests.

Reducing inequalities requires an active, informed citizenry. To this end, I have identified a few reforms which could have a meaningful impact on voter turnout among the financially insecure (aside from campaign finance reform measures):

1) Make National Election Day a national holiday:

Senator Bernie Sanders (I, VT.) wants to make national election days national holidays. While this is a sentiment I support, and one that should increase overall voter turnout rates, it may not directly address the issue of increasing turnout among the financially insecure.

Most of the poorest people in America are hourly wage earners. Therefore, making election day a federal holiday would not necessarily lead to higher turnout amongst the poor. In fact, since wage earners typically earn “time and a half” for working holidays, making election day a federal holiday could actually create an perverse incentive, keeping hourly wage earners away from the polls.

Perhaps in addition to making election day a national holiday, the government should consider providing businesses with tax credits in exchange for offering hourly wage employees paid leave on election day?

2) Include a political science / economics class as a required part of the high school curriculum:

I understand the federal government generally tries to stay out of educational curriculum issues, which are developed at the state level. But to me, this area seems like it should be an exception to that rule.

A primary goal of schooling is to help children develop into well rounded, successful adults. But regardless of what someone ends up doing for a living, every American citizen has a civic responsibility to be an active, informed voter. We cannot demand every American be a political buff, but we can and should empower every American citizen to make an informed decision at the polls.

Educating young adults about the functions of the different levels (municipal, state, federal) and branches (executive, legislative, judicial) of government, and the basics of economics, economic policy, personal finance, and taxation would go a long way towards producing informed voters.

A bipartisan committee could draft the curriculum, to ensure it is even-handed.

3) Remote Voting via the internet:

Assuming we can ensure security (and I see no reason why we would not be able to), it seems obvious to me that advances in ICTs should translate into greater ease of voting. Voters should be able to register and vote online, ensuring those who are strapped for time–a limited resource regardless of ones level of income / wealth–can vote.

Online voting would require registration based on SSN, allowing one vote per registered voter. Registration would have to take place ahead of time, to provide ample time to verify age, residency, and any other eligibility requirements.

Update: According to PolitifactAt least 20 states currently offer online voter registration for new applicants and a few more are in the works…Experts who study online registration say there have been no reports of actual security breaches or fraud. If designed in a way to account for security, online registration reduces opportunities for fraud and errors.

While this is a promising start, I am advocating for online registration and voting in all 50 states.

Voting is a voluntary activity. In order to increase voter turnout, we have to consider why people do things voluntarily.

Reducing the perceived “opportunity costs” of voting, both foregone wages and the time it takes to vote, is one side of the equation. Convincing people voting is in their best interests by teaching them the basics of political economy (and consequently explaining why the political system may have failed to promote their interest in the past), would increase the perceived benefits of voting.

Perhaps the financially insecure are not as “rational” as I am making them out to be. There is a strong argument that people who live in poverty do not act “rationally” (in the economic sense of long-run “utility” maximization). It may not be enough for voting to be in a financially insecure person’s “best interest”; to increase voter turnout amongst the poor, voting must be made a “no-brainer”.

Politicians come in all shapes, sizes, and ideologies. Some are progressive, some are conservative. Some serve “the people”, while other are beholden to special interests.

One thing that is consistent among all politicians is their desire to be (re)elected. It is the responsibility of voters to make a populist agenda (by whatever name it goes by), a (re)electable platform.


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Conflict Watch: The Syrian Civil War is Deadlier Than Ever

2014 was the deadliest year of the Syrian Civil War–more than 76,000 people died in 2014, including 17,790 civilians (among them 3,501 children) according to the Syrian Observatory for Human Rights. The injection of ISIL into the hurting stalemate between Assad and Syrian Rebels has further marginalized any peaceful, pluralistic forces that still exist in Syria.

Paradoxically, it seems that the Syrian Civil war has receded from international headlines. Surely the rise of ISIL has diverted both public attention and resources from removing Assad. The absence of a viable alternative to govern Syria has probably also muted calls to remove Assad. It is worth noting that both these phenomenon–the marginalization of the moderate Syrian opposition and the rise of ISIL–are partially the result of Western inaction in Syria.

By itself, lack of media attention is not such a big deal; highlighting the atrocities of war is a means to an end (pressuring parties to conflict and the international community to defend human rights / uphold humanitarian law), not an end itself. But when lack of media attention coincides with inaction by the international community, there is cause for concern:

Western states are focusing too much on tackling Islamic State and are forgetting the daily suffering of ordinary Syrians in areas of the country where the medical situation has become catastrophic, a group of Syrian doctors said.

The situation has been exacerbated since a U.S-led coalition began bombing areas of Syria controlled by Islamic State, which seized swathes of territory in both Syria and Iraq last year.

“Between 30 to 60 people are dying each day since the bombings started,” said Tawfik Shamaa, spokesman for the Union of Syrian Medical Relief Organisations (UOSSM), a non-governmental association that brings together 14 groups.

“There is only talk of extremism and Islamic State, but not the women and children who are killed, the bodies torn apart, the stomachs blown open, which is what doctors are dealing with each day.”

“There are only 30 doctors of all specialities,” he said adding that people were dying of diseases such as cholera, typhoid, scabies and tuberculosis because there were no treatments or vaccines available.

Talks of “humanitarian corridors“, which less than a year ago received unanimous support from most of the UNSC, have foundered. The introduction of a wildcard “spoiler” group like ISIL have made humanitarian corridors (which we’re difficult enough to negotiate between Assad and rebel forces) logistically impossible in areas under their control.

Support for Syrian refugees has been lacking, as Syria’s neighbors lack the resources and in some cases the desire to handle such a large influx of people.

“The economic, social and human cost of caring for refugees and the internally displaced is being borne mostly by poor communities, those who are least able to afford it.”

Mr. Guterres explained that enhanced international solidarity is a must to avoid the risk of more and more vulnerable people being left without proper support.

Among the report’s main findings are that Syrians, for the first time, have become the largest refugee population under UNHCR’s mandate, overtaking Afghans, who had held that position for more than three decades.

As of June 2014, the three million Syrian refugees now account for 23 per cent of all refugees being helped by UNHCR worldwide.

Assad tortures his opponents, he has used chemical weapons, and drops barrel bombs which kill indiscriminately. Diseases which are easily curable or had largely disappeared (polio) claim lives on a daily basis. Compared to ISIL Assad may be the lesser of two evils, but both parties are evils that must be dealt with.

To this end, the U.S. and Turkey are finalizing plans to train moderate Syrian rebels, a condition of Turkey’s in exchange for using its bases to carry out airstrikes against ISIL:

Turkey and the United States aim to finalize an agreement on equipping and training moderate Syrian rebels this month, a senior foreign ministry official said on Monday, part of the U.S.-led campaign to battle Islamic State militants.

The training is expected to start in March, simultaneously with similar programs in Jordan and Saudi Arabia, the Turkish official said. The aim is to train 15,000 Syrian rebels over three years.

Turkey has by no means been a perfect partner in the fights against Assad and ISIL. Turkey has dragged its feet in the battle against ISIL, fearful that it will empower rival Kurdish factions in the region. But in this case Turkey is right–the rise of ISIL must not detract from the goal of removing Assad from power.

As a regional power and member of NATO, I would like to see Turkey lend use of its air bases, help in training efforts, and contribute ground troops in the fights against Assad and ISIL–I will not hold my breath.

A recent United Nations report found that Syria has lost more than three decades in human development in just three-year old civil war:

The report released by the UN Economic and Social Commission for Western Asia (ESCWA) shows that almost 45 per cent of Syrians live below the poverty line, compared to 12 per cent prior to the war.

The unemployment rate has also drastically increased, from eight to almost 50 per cent.

Abdalla Dardari, a senior economist at ESCWA, says that before the war, Syria was one of the few Arab countries which had surpassed all the Millennium Development Goals (MDGs).

Today, he says Syria is only more advanced in reaching the goals than Somalia.

The report predicts that if the crisis continues until 2015, 90 per cent of Syrians will be considered as poor.

Unfortunately, the ravages of war will not end when the fighting eventually stops. Many Syrian children are dealing with psychological trauma and a lack of schooling which will greatly inhibit their future earning potential. Others are being indoctrinated by ISIL, learning to hate “the West” instead of learning the skills needed to compete in a modern, globalized world.

The road to rebuilding Syria into a modern society will be a long, expensive one. It requires an immediate influx of resources from the international community to support refugees and their host countries, deliver aid to internally displaced peoples (whenever possible), and build the capacity of the moderate Syrian opposition.

The groundwork for slipping back into conflict will exist as soon as the civil war ends. It will require unprecedented political will, a dedication to pluralism and accountable governance, and support from the international community to rebuild a modern, peaceful Syria.

But in order for a future Syrian government to even have a chance to attempt this difficult feat, both Assad and ISIL must be defeated.