Archive for December, 2009
Wednesday, December 16th, 2009
After meeting yesterday with Senate Democrats regarding health care legislation, President Obama remarked to reporters, “You talk to every health care economist out there and they will tell you that whatever ideas are—whatever ideas exist in terms of bending the cost curve and starting to reduce costs for families, businesses, and government, those elements are in this bill.”
Smeal’s own health care economist, Keith Crocker, however, said in a video last month on Research with Impact that the health care proposals currently on the table will not reduce health care costs. As he has stated before on this blog, Crocker contends that there is only one way to truly reduce the cost of health care, and that is by reducing its utilization. And to do that, people must voluntarily accept less treatment or care must be rationed.
Tuesday, December 15th, 2009
The combination of a skyrocketing federal deficit, a slow economy, and Washington’s penchant for unrestrained spending is causing economists and legislators to look for new and creative ways to get their hands on more taxpayer dollars. One option that is gaining momentum is the value-added tax, a national sales tax of sorts that is assessed on goods and services at every step in the supply chain.
Below, Smeal’s resident tax expert, Charles Enis, lays out the political and economic challenges facing the value-added tax as well as some of its benefits over other forms of taxation:
Equity and efficiency are conflicting policy goals in taxation. In short, how fair is the tax and how well does it work. An income tax is imposed on production, while a value-added tax (VAT) is imposed on consumption. The former tends to embrace equity while the latter is noted for efficiency. Because all production is ultimately consumed, theoretically the major difference is timing.
A VAT is efficient because it has a broad base, is relatively simple, and is a good revenue raiser that minimally distorts economic decisions. A VAT is a multilevel sales tax on all parties in the supply chain with upstream taxpayers collecting taxes from their customers while receiving credits for taxes paid by downstream businesses. A VAT must be kept on the table when considering ways to alleviate the federal fiscal crisis.
A VAT is politically challenged on the equity dimension in that it is regressive. The rich spend less of their incomes relative to the poor. Wealthy people have surplus income that can be diverted from consumption to investment thereby escaping consumption taxes. To overcome equity deficiencies, a pure VAT must be tweaked. Such modifications include integrating the VAT into a more progressive version of our income tax system, exempting food and other necessities from the VAT, and allowing for higher tax rates on luxury goods.
Designing a politically acceptable VAT is the charge of Congress, the same institution that gave us the Internal Revenue Code, one of the most massively complex documents in human history. Instead of having just an uncompressible income tax, we will also likely have an incomprehensible VAT.
The most difficult problems in implementing a VAT will be transitional issues. For example, baby boomers headed for retirement have paid income taxes all their lives, now they will be taxed again as they consume their savings. Sales taxes are important revenue sources for state and local governments, how will they react to the federal government getting into the sales tax business. How will consumers react in anticipation of a VAT? Will they rush to stores to load up on merchandise to beat the tax increase and incur more debt? Will there be a sharp decline in consumer demand following the VAT?
Because a VAT is imposed on consumption and not investments, income attributed to the financial sector—i.e., interest, dividends, and capital gains—will be relatively unscathed by a VAT. It would be ironic that the financial sector, a major culprit in the economic crisis winds up paying little of the tax that is needed to fix the fiscal damage.
A VAT may be prescribed to restore federal revenues once the great recession is over. A VAT will be a tough sale to the public. One suggestion would be to promote it as a permanent replacement for the dreaded Alternative Minimum Tax. Nevertheless, a well designed VAT may require Congressional acts of legislation and magic.
Monday, December 14th, 2009
“Ongoing climate negotiations were temporarily upended on Monday when dozens of developing countries, including China and India, threatened to walk out in protest, saying that the world’s richer countries were not doing enough to cut their greenhouse gas emissions,” The New York Times reports.
In an op-ed in yesterday’s Pittsburgh Post-Gazette, Smeal’s Terrence Guay argues that the world’s industrialized nations are ethically bound to do more to combat climate change because they have caused most of the damage:
Committing to dealing with climate change is the ethical thing to do. Personal responsibility is a principle advocated by the political left and right. That is, individuals are accountable for their actions, receiving credit when successful and accepting blame for mistakes. We expect steroid-using athletes to take responsibility for their actions, and we demand bankers be held accountable for the role their industry played in the economic crisis.
Most of the responsibility for a changing climate falls on the shoulders of the United States, Europe and the rest of the developed world. Our increased wealth over the past two centuries is in large part a result of economic development that did not always take the best care of the environment.
True, China, India and other rising economic powers comprise an ever-larger slice of the climate-change pie. But those countries with the greatest cumulative impact on the climate, including the United States, should take more substantive steps to clean up the mess they made. It is the fair thing to do.
Thursday, December 10th, 2009
In his forthcoming 200th column for the accounting Web site SmartPros.net, Smeal’s J. Edward Ketz takes a look back at what has transpired in financial reporting since he started his column in December 2000. With scandals at Arthur Anderson, Enron, and Worldcom coupled with controversial accounting standards and legislation like Sarbanes-Oxley, Ketz has had no shortage of fodder for his previous 199 columns.
Ketz’s essays often also take aim at shortcomings he sees in the SEC and FASB as well as in the business ethics movement. He sums up all of these themes and others in his 200th column, and he leaves readers with some advice as they navigate through all of the financial statements, credit ratings, and other corporate information as they attempt to make smart investment choices:
I urge investors to increase their skepticism and cynicism. With your guard up, take a closer look at corporate accounting because breadcrumbs can often be found within the footnotes and in news outside of financial reports. Perhaps consider investing in assets other than stocks and bonds as corporate insiders have a tremendous information asymmetry that they will exploit to your disadvantage. Watch short sellers and pay attention to those investment advisers who are very good in accounting analysis. Obtaining their advice might save one from great financial loss.
Finally, if you discover a manager employing accounting shenanigans, use the courts to advance your cause. Don’t wait for the SEC or others because they have their own agenda (or should I say inertia?). By bringing suit against whoever stands in the way of truth and integrity, you will hurt managers in the only thing that matters to them. Hopefully it will also have a positive effect on those watching the case.
Tuesday, December 8th, 2009
Smeal’s Fariborz Ghadar, director of the Center for Global Business Studies, appeared yesterday on FOX News Channel’s “Studio B w/ Shepard Smith” to discuss the latest protests against the government in Iran. You can view the video online here.
Thursday, December 3rd, 2009
The ship takes a direct hit at the waterline. The alarm bells sound and the Damage Control Officers rush to the scene, assess the situation, and quickly create a plan to minimize the damage all while water pours into the ship. But this time the ship hit itself—with a fire hydrant and a tree.
Tiger Woods’ agents, publicists, handlers, and lawyers swing into action along with their counterparts at major corporations and their ad agencies, which have signed some of the biggest endorsement contracts in sports history. It’s not clear if anyone saw this coming. Maybe it was a complete surprise to them or maybe not. We likely won’t ever know.
It’s too early to see how this will play out for Tiger Woods, his family, and his strategic partners. Strategies and tactics will emerge in the days, weeks, and months ahead. Tiger is such a singular phenomenon that comparisons to Bill Clinton, Martha Stewart, and Michael Phelps are hardly relevant. There is only one Tiger.
But it will be a lot harder to repair the damage to his reputation, image, and future income than to fix up the front of his SUV.
Wednesday, December 2nd, 2009
“Facing big unfunded pension liabilities for city workers, Pittsburgh is proposing what appears to be a one-of-a-kind 1 percent tuition tax on local university and college students, who claim the tax is illegal and unfair,” The Wall Street Journal reports. “The tuition tax, which would raise an estimated $16 million, threatens to drive a wedge between the city and its universities, which have been credited with fueling much of Pittsburgh’s economic transformation from an industrial city to an education and medical-services center.”
Smeal’s Charles Enis argues that this is an unfair nuisance tax specifically designed to take advantage of students, who are typically underrepresented in government:
When I first moved to Pennsylvania, I was amazed at the proliferation of nuisance taxes such as the gross receipts tax imposed on businesses here in State College. However, the 1 percent tuition tax proposed by Pittsburgh is the epitome of such taxes.
Nuisance taxes are small excise taxes on various commodities that are imposed on consumers. Many local governments, such as Pittsburgh, are cash constrained and are seeking creative ways of raising revenues. Unlike the federal government, local governments must maintain balanced budgets. Pittsburgh has proposed to single out college students to bail out their financial problems. Why this group? Could it be that those who will pay the tax are not likely to be eligible to vote against the elected officials supporting the tax? Also, the amount of the tuition tax is small enough that the transactions cost necessary to avoid the tax (i.e., transferring to a college outside of Pittsburgh) are prohibitive, hence the term “nuisance tax.”
A rationale offered by the city to justify the “Post-Secondary Education Privilege Tax” is that students consume public services. This is the same rationale that supports highway user taxes on fuel and vehicle weights. These taxes reflect the “cost occasioned” by the users of highways. I find it difficult to fathom that those students who are attending expensive schools like Carnegie Mellon, and who will pay about 12 times the taxes paid by students attending other schools, consume such a disproportional share of public services. Also, why should students paying out-of-state tuition be taxed more than in-state students attending the same institution? Other issues include the effect of the tuition tax on students receiving scholarships (e.g., R. O. T. C.), graduate assistants receiving remission of fees, and distance learners taking courses online.
Looking at the proposal, I wonder who is next? Will other communities follow Pittsburgh’s example? Also, education is a service. Will this tax open the door for the taxation of services such as haircuts? Tax increases are unpopular, especially during recessions. In my opinion, local governments in dire economic straits should evaluate increasing existing taxes to spread the burden over many taxpayers rather than to expect a single constituency to carry the weight. Furthermore, new taxes opposed to existing taxes require governments to occur greater administrative cost.