The Widdershins

Zombiconomics…

Posted on: August 12, 2014

Good afternoon Widdershins. With the lasting gift bestowed upon us by Dubya and the neocons going from bad to abysmal, I thought of writing a post about the mess that is the Middle East. Trying to cipher through the Rubik’s Cube of factional permutations is like trying to mold water.

In Syria alone there are five proxy wars raging, in Iraq at least another four or five, add ISIL, Hamas, Gaza, Libya, the run-of-the-mill Al Qaeda to the mix and you have a thousand years of pent-up tribal aggression acting out with last century’s weaponry. Such complexity is beyond me so I decided to write about economics and the tax code — much easier to wade through.

“Be careful what you wish for!” Pretty good advice for anyone especially for those who are snake oil salesmen. Over the Dorothy Cloudslast thirty years, time and again we have heard the supply-siders of the Right pronounce, “If only we had a full-blown experiment where taxes and regulations were cut. If only we had an economic Petri dish without the meddlesome “libruls” mucking up fiscal policy. If only…”

Be careful what you wish for supply-siders because you got exactly what you asked for in the great state of Kansas. Two years ago Kansans embarked on a remarkable fiscal experiment without the hindrance of any contravening commonsense. Kansas slashed income taxes without any clear idea of what would replace the revenue.

Kansas, under the influence of Governor Sam Brownback and obviously copious amounts of brown liquor, essentially exempted small businesses and their owners from state income tax while ushering in massive cuts for the uber-wealthy. The practical effect of what Kansas did was to create a class of people who were totally free to live in the state and prosper without paying so much as a dime in state income taxes.

The result: Total abject failure. The Kansas economy is lagging behind its neighboring states and the U.S. as a whole. It’s state budget has plunged deep into deficit. Both Moody’s and Standard & Poor’s have downgraded the Kansas debt meaning that future generations will be paying for this ill-advised experiment.

Why is this noteworthy? We have known supply-side economics is a bunch of hoo-hah sold to The Reagan by charlatans. Chief voodoo-doer was none other than Art Laffer who is still at it as is evidenced by his helping Brownback drive Kansas into the ditch. (I can’t help but think that economic historians are going to have a field day with thirty years of failed policy arising from a man named “Laffer”.)

Brownback ExperimentLaffer wasn’t alone in this Kansas kerfuffle, ALEC was there as well (American Legislative Exchange Council). ALEC supplied the obligatory window dressing of studies foretelling great things if only taxes were cut, greed was left unchecked, and the insanely wealthy were left to do their magic. Of course, the ALEC studies were flawed and little more than the droppings of gold defecating unicorns — good enough for antigovernment work.

The learning here isn’t that supply-side economics doesn’t work because we have known that since Bill Clinton raised taxes on the wealthy and the country reveled in a spectacular economic expansion. What is amazing is that supply-side theory will not die — it is like a Zombie rambling the countryside that just can’t be killed. The natural question is: Why won’t it die?

The answer is simple: There has to be justification for enriching the wealthy while making life harder for those struggling. There has to be some magical incantation for cutting things like food stamps while the one-percenters endanger their cuticles by clipping dividend coupons.

The justification for this policy butchery is the Zombiconomics of supply-side theory. It fills a need. It is like a glove looking for a hand, an M looking for another M, a James looking for Bartles, or a band of pernicious crabs looking for a Kardashian. It doesn’t matter that Zombiconomics fails. It is nothing more than the means for those in power to get their way.

It is hard to hide a train wreck. In Kansas, people have noticed the education cuts, the increased debt, the deficit Vanishing Kansas Surplusspending, the lackluster job creation, no Medicaid expansion hurting rural hospitals, and the credit downgrades. Perhaps that is why 104 Republicans have endorsed Brownback’s Democratic opponent.

The Kansas debacle is about to play itself out on a larger scale on the federal level. You will most likely be hearing about “tax inversions” quite a bit in the coming weeks. Underlying the whole issue is the same stale stench of the magical elixir — just cut taxes and the land will be strewn with the droppings of the gold-crapping unicorns.

Let’s make this simple: Tax inversions are tax dodges for corporations. They are basically the last vestige of legal tax Tax Avoidanceevasion since most of the loopholes were closed in 2004 when Senate Democrats joined Dubya and a Republican House to end most of the practices. Tax inversions were not addressed.

The way an inversion works is an American corporation buys a foreign corporation domesticated in a country where the tax rate is low. There are some qualifying hoops to jump through, but they are not important for this discussion. The American corporation then declares its domicile headquarters to be in the foreign country. In short, it is renouncing American corporate citizenship.

You will hear much braying about the onerous American corporate tax rate of thirty-five percent by the ALEC tax cutting crowd. Truth is the average effective corporate tax rate for American companies is 12.6% what with all the favorable deductions for the treatment of income and expenses.

You will also hear the supply-side crowd yammer on about rewriting the tax code in order to modernize it. Unless the cookie baking tree has fallen on the elfin Grover Norquist, that means revenue neutrality and replacing corporate tax revenue with increased taxes on the poor and middle class.

Quite coincidentally, almost dollar for dollar the cut in food stamps...

Quite coincidentally, almost dollar for dollar the cut in food stamps…

The President will attempt, through Executive Order, to address these corporate defections. It will be an all out bloodletting. He could do things like curtail government contracts for these defecting corporations. He could recalibrate some of the provisions to make inversions less fiscally rewarding. Whatever he does, it will pit economic patriotism against Zombiconomics.

Not to get too far down in the weeds, but the real harm is parking revenue and intellectual property in foreign countries. Currently, American companies are parking over $2.0 Trillion in foreign countries. Taking intellectual property created in the U.S. under our protective laws, paid for through our spending on R&D and parking it in foreign countries could represent a generational brain drain.

All of this to feed the horror story of Zombiconomics. Whether it is the debacle in Kansas or the situation on a national scale, they both have the same truth: What is really scary is the lengths to which the powerful will go to justify getting what they want. That is the truth of Zombiconomics.

Take the conversation wherever, this is an open thread.

 

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21 Responses to "Zombiconomics…"

A vision of Grover being dipped in fudge……………..

What a post, Prolix! I remember Hillary saying that she would address these offshore tax shelters (that’s what they were called pre-“inversion”) during her campaign, but haven’t heard much about it till now.

These tax shelters are one of the reasons that corporations pay so much less tax than actual, non-paper people do.

The late, much-lamented Robin Williams on corporate greed. RIP, you beautiful soul.

http://www.bloomberg.com/video/robin-williams-on-playing-wall-street-addicts-01WFclqJQ2KIyBwpgaXoxQ.html

I was going to ask: How much empirical evidence do the “Laffers” and their cohorts need to see that his schemes don’t work? But then you answered it Prolix:

Why won’t it die? The answer is simple:There has to be justification for enriching the wealthy while making life harder for those struggling. There has to be some magical incantation for cutting things like food stamps while the one-percenters endanger their cuticles by clipping dividend coupons.

I had read that Walgreens was considering doing this inversion thing and it appears that after a groundswell of protests they have backed off…at least for now.

Walgreens has been my preferred pharmacy for years and I shop there for other items too. However, when I saw they were thinking about this I had made my mind up that if they had proceeded with this I was going to transfer whatever retail prescriptions I have to CVS and then do my shopping there.

I did like the quote by the Walgreens CEO (bolding mine)

“mindful of the ongoing public reaction to a potential inversion and Walgreens unique role as an iconic American consumer retail company with a major portion of its revenues derived from government-funded reimbursement programs.”

Heh.

@5 & 6: Walgreens bailed on the full blown inversion of moving their corporate HQs out of the U.S. A couple of things: First, I bet the Walgreen family was livid with any such plan. Second, it is hard to be the “drug store at the corner of Happy and Healthy” when that corner is somewhere across the Atlantic Pond sitting amid the Swiss Alps or on an Irish moor.

@1, Grover in fudge — in some freakish way, that is an appealing image.

@2, Absolutely MB. These inversions weren’t taken up in 2004 because they have been cobbled together by inventive tax lawyers. It really is a drastic corporate move when you think about it. The company has to buy a foreign company equaling 25% of their stateside size — huge investment.

The real incentive, and it is too complicated for most 30 second news stories, is the taxation of worldwide profits once they are domesticated in a foreign country. The other is the off-shoring of the intellectual property. Once the IP is off-shored, anything flowing from the sale of the IP is then taxed at the favored foreign rate. This is why big pharma has a woody the size of a Sequoia for this whole shootin’ match.

It is shameful, but corporate paper people don’t blush.

I didn’t get into this because the post was already running too long, but the inversion issue is a good example of tax expenditures. You hear the Right caterwaul about all the spending on the social safety net, but they never seem to mention the “tax expenditures.”

Any policy wonk will tell you that spending a dollar is the exact same thing as telling a corporation, you keep that dollar, we don’t need it. That is a tax expenditure. Tax expenditures have to be made up for by increased taxation on individuals and primarily reaching down farther into the middle class on tax rates.

When corporations go on and on about their spending on something like R&D — they aren’t spending that money, it is being paid for through the tax expenditure. Corporations get a dollar for dollar credit for R&D, so that R&D is paid for by the taxpayer. There is a policy reason of wanting to encourage R&D — that is good, but taking that R&D, paid for through tax expenditures and then parking that R&D in a foreign country to evade taxes is plain, flat wrong.

This issue is worth a public war — it might be a motivator for the midterms if the pols can figure out how to explain it.

Prolix said: Corporations get a dollar for dollar credit for R&D, so that R&D is paid for by the taxpayer.

Funny how they never mention that, isn’t it?

and @7: The parents and I used a local pharmacy for years until the parents got covered under Tricare for Life. That pharmacy didn’t participate in it but Walgreens did. Then, I just started using them because it was easier to just pick up scripts all at the same place. And too, if we evacuated for a storm and perhaps missed getting a script filled, it was far easier to have them with a chain pharmacy if we were out of the area.

The Right swears that corps. will hire more people with their tax savimgs. How’s that working out for everyone?

@12: And pigs will fly, won’t they?

Fredster left me a phone message that his internet is coming and going/ We’ll continue with this most excellent post today.

@15: Thanks chat for passing that along. The internets was working fine until about midnight or so (when I normally get ready to start writing my post) and then when I went to refresh a page…bingo! it was dead!! Then shortly after that i watched as the picture on the teevee started pixelating and then saw a txt msg on there that said the connection was interrupted or something and to check the connection, and if that was okay to contact provider. Yeah, rite. Didn’t get internet back until 9ish tonigh and teevee came back around 7:30 or so. I think Charter is trying to rival Comcast in customer service. Grrrrrr!!!

They’ll have to really work at it to surpass Comcast.

@16: That entire situation is a mess. They are going to have to have an outside party to do the investigations on this. Otherwise, whatever they do will have no credibility.

Here’s another link from a WaPo writer who was with the one from HuffPo and also arrested.

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