Sunday, June 12, 2011

Why Tax Economic Rent Rather Than Productive Contribution?


That line is probably an under-estimate of the value that was sucked out of USA and sent elsewhere.

Because when you set up a factory in a Special Economic Zone in Guangdong Province or somewhere, to manufacture something that you know you can sell, particularly in USA; because you own the patents and the distribution and the brand. You also have the luxury of “transferring” intellectual capital, outside of the beady eyes of US tax-inspectors reading up the statutes on “Transfer Pricing”; so a lot of what get’s transferred is “intangible” (as in the tax-man can’t get his sticky fingers on it).

Here is a statistic, 80% of China’s exports have “value-added”, added, in what they call “Special Economic Zones” (and what I call Free Zones). That’s huge.

Here’s another one, 50% of the earnings of S&P 500 corporations (that’s the “E” in “P/E”) are generated outside of America...

There is a popular idea that cheap labor is why America lost its manufacturing jobs, perhaps that might play a part in something (although if it did, why didn’t Germany and Japan lose more?), but there is nothing I ever saw to support that notion....

Follow the trend-line on the chart from after the War to 1979, and extrapolate, if the investment had not piled out of America, there would perhaps be 24 Million people employed in manufacturing in USA today, as opposed to just under 12 Million....

The point of Free-Zones is to create an environment where free-enterprise, and free-markets can thrive; and when all the rest is so corrupted by silly laws, regulations, and special interests, sometimes you just need to start over.

And don’t talk about the 38% corporate tax which would be “lost”, you can only lose something you got, and there are plenty of ways to make that up taxing rich people, and people with jobs.

This is an interesting post in its entirety, and it shows the thinking behind the move of manufacturing offshore. In Butter's view, the reasons are primarily corporate taxation and regulation.

This relates to Michael Hudson's proposal to tax away economic rent instead of productive contributions in order to discourage rent-seeking and promote productive activity. Since a majority of the wealth that funnels to the top is the result of economic rent, there is an alternative to taxing factors of production that are not parasitical.

Taxation is operationally unnecessary to fund government with revenue, since a government that issues a non-convertible floating rate currency is not operationally constrained and funds itself directly. Taxation serves two purposes, first, to withdraw non-government net financial assets in order to dampen effective demand when inflation threatens, and secondly, to discourage negative economic and social behavior. Taxing economic rent discourages parasitical rent-seeking while promoting efficient use of capital and labor in production.

The other question is regulation. Regulation is required for several reasons. The first and most important is to minimize cheating and ensure a level playing field. Another is to set minimally acceptable social standards such as workplace safety. Another is to limit negative externalities.

As globalization proceeds, developed countries have to choose whether to forego social gains made over the past century or to allow the lowest common denominator to operate. This is going to be an ongoing issue as capital seeks "efficiency" and citizens look to government for effectiveness in pursuing public purpose and general welfare.


googleheim said...

What about the housing bubble ?

Isn't that a similar trip such that house note debts were sucked up around the nation by the financial engineering of wall streeters by means of the "elegant" models of derivatives, and then spit out globally as cdo spam or whatever -

and all probably tax free ?

is conservative neoliberalism finally finished off ?

googleheim said...

"Taxation serves two purposes, first, to withdraw non-government net financial assets in order to dampen effective demand when inflation threatens, and secondly, to discourage negative economic and social behavior. "

We skimmed this several times since 2008 crash on this blog. Taxation is a form of regulation that would have made the investment banks' operations more transparent and safe for citizens of the United State of America.

beowulf said...

Abba Lerner wrote in The Economics of Control that the govt's economic duty is to regulate three things: aggregate demand, income inequality and monopolies. The tax code is the efficient way to regulate all three. The first by a floating payroll tax rate (moving inverse to unemployment rate); the second by progressive income tax/refundable universal credit; and the third by taxing away monopoly pricing power with a excessive gross margins tax (which could vary by industry sector), quite avoidable by simply cutting prices.

Uncle Sam should regulate as much as possible on top of this by "sin taxes" (whether on, say, tobacco sales or oil derivative transactions) before using regulatory laws and agencies to fill in the gaps.

Clonal said...

See also my comments at Krugman Says "Rentier"

There were links to some interesting comparisions btween the profitability of FIRE and Manufacturing Sectors, as of 2007.

Clonal said...

Also, my links to income inequality in the comments in MMT and Sectoral Balances — "It's the demand, stupid."

Some interesting links including one which states very strongly that free markets inevitably lead to vast wealth disparities.

Septeus7 said...

Shouldn't we have revenue sharing with the States which are revenue constrained if we are going to have this kind of tax?

What would be the economics of doing this instead of just having the Feds remove the money from circulation via a tax?

beowulf said...

What's interesting about the linked article is most of the business (and all of the zoning) red tape is at the local level. The Tea Party backers made rather brilliant use of this subtle point to derail financial reform. As Matt Taibbi put it, "the basic sales pitch of Tea Party rhetoric... cleverly exploits Main Street frustrations over genuinely intrusive state and local governments that are constantly in the pockets of small businesses for fees and fines and permits.

beowulf said...

As for taxing economic rent, this RSJ piece is phenomenal. One of the best things I've read all year.
"Leaving (Modern) Money (Theory) On The Table"

RSJ's big idea is taxing away their seigniorage profits via a bank asset tax. In April, the FDIC (per Dodd-Frank) changed its deposit insurance fee base from bank deposits to bank assets. Hmm, perhaps the govt could set policy rate by adjusting FDIC fee schedule instead of Fed Funds rate. :o)

Crake said...


That article,

could be seen as name calling but I think it is one of the more apt descriptions of that movement that I have ever read. Anti-inllectualism is the cornerstone of that movement in my opinion.

J-Victus said...
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J-Victus said...
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Tom Hickey said...

Bill Mitchell, Accelerating inflation has to be out there somewhere … in the dark or somewhere