Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
What Is the Appropriate Tax Treatment of Capital Gains?
Capital gains are currently subject to tax when the capital asset is sold or otherwise realized. Most economists believe that accrued capital gains, that is, unrealized gains, are income but they are confusing capital and income. When one owns an asset whose price has increased in value since it was acquired, he has an accrued but unrealized capital gain. He may realize the gain by selling the asset. To tax accrued but unrealized gains as income while taxing the increased yield which the capital gain capitalizes would be double taxation. It would be taxing the annual yield and its capital value. The value of a capital asset, as every economist should know but often does not, is the capitalized or discounted value of the expected stream of income it is expected to yield its owner. He pays taxes on the yields, the stream of income, as they are earned. To tax accrued gains and the yields as they accrue would be double taxation of the yields because capital value is the value of expected yields. Only realized capital gains can be considered income. Only when a capital asset is sold is the capital gain considered realized and subject to tax.
Holding on to a capital asset which has appreciated in value leaves the owner subject to taxes on its annual yield. Selling a capital asset which has appreciated in value relieves the owner from paying taxes on its future yields, which will have to be paid by the buyer. No capital value is created by the sale nor has any been destroyed. The case for taxing capital gains as income rests on the fact that in selling the capital asset, the seller is realizing the change in capital value caused by the increase in expected yields during the period of his ownership. He is, in effect, realizing the income that the change in value represents. There is no reason why the capital gain should not be considered income to him. ...
President Rand Paul would give libertarian economics a bad name
I watched Senator Rand Paul's announcement that he was running for president. He had good goals, but his economic ignorance was dismaying. For example, he argued that allowing American corporations to bring back profits from overseas at a low tax rate would encourage investment in American manufacturing.
Exactly the opposite. Doing so would not only make outsourcing more profitable, but it would also bid up the exchange rate of the dollar (American corporations would convert foreign profits to dollars), which would put even more American manufacturing workers out of work.
On the other hand, many of his goals were excellent:...
The Negative Consequences of a Free Trade Policy in an Unfree Trade World
As you have been reading on this blog, US free trade policies have resulted in huge chronic trade deficits for decades which have converted the US from the world’s leading creditor to the world’s leading debtor. Pres. Obama is seeking to extend free trade with the low-wage countries in the Pacific region. He is committed to equalizing income and wealth but his policies have only succeeded in exacerbating inequality in the US. He is equalizing wages but only with low wage countries around the world He has succeeded only in reducing wages as a proportion of US national income domestically. The policy of globalization pursued by him and previous administration has been a disaster for the United States. It is equalizing wages around the world which means that US real wages are tending lower and will continue to edge lower while real wages are increasing in the rest of the world. Unbalanced trade with low wage countries like China means lower wages for US workers in American manufacturing.
William Galston in an opinion piece entitled “How the Vise on U.S. Wages Tightened” (Wall Street Journal, 4/1/2015) writes: “According to the Wall Street Journal’s James Hagerty and Jeff Bennett in a March 24 article, the U.S. imported $138 billion in car parts last year, which works out to $12,135 of foreign content for every light vehicle built in America. …The story isn’t restricted to auto parts.” Galston also cites a paper written by Avraham Ebenstein, Ann Harrison, and Margaret McMillan published by the National Bureau of Economic Research in which they “…found significant wage declines for workers exposed to globalization, especially among workers performing routine tasks. Older workers and workers without post-secondary education are disproportionately affected.” ...
The author attempts to prove that “a market economy based on private property, if left to itself, contains powerful forces” that result in increasingly, unequal distribution of income and wealth which is “potentially threatening to democratic societies and to the values of social justice on which they are based … The principal destabilizing force has to do with the fact that the private return on capital, r, can be the significantly higher for long periods of time than the rate of growth of income and output, g.” Many economists agree that with his conclusion that income or wealth inequality has been increasing and some disagree with his methodology, his data, his conclusions, or his policy proposals. One noted economist has said, “So what?” Capitalism has made possible the huge increase in the welfare of workers and the middle class. As Keynes concluded in 1920, you cannot have economic growth without income inequality.
Piketty differs from Marx who argued that the capitalist contradiction was that the rate of return tends to fall, not increase, over time. Piketty’s view is just the opposite although some have called him a Marxist because of his policy proposals. What all the critics and supporters and Marxists alike seem to lack is an understanding of the reason economies keep growing which maintains the rate of return on capital. The reason is innovation and invention. To induce invention and innovation, governments grant patents and copyrights, legal monopolies, for a limited number of years. And the monopoly rate of return is greater than the competitive rate as a rule. Failure to recognize this fact is what makes Piketty’s Capital just a political tract....
What are the prospects of the US economy short-term and long-term?
According to the Council of Economic Advisors, the US economy is growing steadily. It recently reported that "we have now seen twelve straight months of private-sector job gains above 200,000 -- the first time that has happened since 1977” and that the “GDP report for the fourth quarter of 2014 is consistent with a wide range of indicators showing further labor market strengthening.” 252,000 jobs were added in December, 2014, 257,000 in January, 2015, and 295.000 in February, 2015. The unemployment rate fell to 5.5% in February, 2015. The stock markets have risen to new highs although they are highly volatile. Real estate values have been rising. So how good is the good news? Not so good, really.
The recovery as the ordinary man in the street knows has been sluggish and the data corroborates that. As I pointed out in a recent posting to this blog, the measures taken by the Treasury and the Federal Reserve Board have made the rich richer and poor poorer. Consider the following table which shows the changes in employment and unemployment between 2008 and 2015:
As the table shows, the number employed has grown by less than one percent in the seven years of recession and recovery. The number unemployed increased 23 percent, millions are employed part-time for economic reasons beyond their control and millions more have stopped looking for jobs and are not counted in the labor force. ...
Does Fast-Track lead to Better Deals, or just More Bad Deals?
One oft repeated argument for granting the President fast-track authority to propose a take-it-or-leave-it offer to Congress on 'trade' deals is that if the president has such authority he or she will be able to negotiate a better deal for the US.
This is a curious argument, since a little bit of elementary logic suggests that in fact the opposite is sometimes true. A common negotiating strategy is to play "good cop - bad cop" -- one of the negotiators is constrained by an ally in a way that prevents major concessions, but can leverage the fact that he or she is constrained to bond with the opponent in the negotiations -- "I wish I could give you a better deal, but the "bad cop" won't let me." More generally, a fundamental principle of bargaining models is that having less room to make concessions can lead you to be better off in a negotiation because if a deal is to be struck the other side will have to make most of the concessions.
Indeed, although Fast-Track may lead to more deals taking place, the gain in the number of deals is likely to be at least partially offset by the tendency of those deals to be worse deals for the United States relative to the deals that would have been struck in the absence of Fast-Track authority.
Here I develop an example of a simple bargaining situation in which not granting fast track authority makes both Congress and the President better off. I use the political science equivalent of the supply and demand graph -- the one-dimensional spatial model.
Basic assumptions of the model...
Do Authoritarians Use Trade Openness to Preserve their Power?
Wen-Chin Wu of National Taiwan University recently published a paper entitled "When Do Dictators Decide to Open Trade Regimes?—Inequality and Trade Openness in Authoritarian Countries" in the journal International Studies Quarterly (2014, pp 1-12) It's results suggest it may be a mistake for democracies to support or encourage open trade with autocratic regimes in the belief that trade openness will promote democratic change in those regimes. Indeed, trade may well strengthen autocratic regimes.
How the Federal Reserve and Government Policies Make the Rich Richer and the Poor Poorer
The Federal Reserve Board and the Obama Administration are chiefly responsible for the creation of two economies in the US, one for the rich and upper middle class and one for the poor and lower middle class. The Fed by its quantitative easing widened the unequal distribution of wealth by causing the prices of corporate stock and commercial real estate to rise to unprecedented levels. Obama’s countercyclical policies gave us the $18 trillion federal government debt which only hyper-inflation will pay-off. Obama’s support of the minimum wage have denied lower-class blacks jobs keeping them poor and dependent on government handouts. And Obama’s and the Republicans’ free trade policies and his permitting US corporations to our-source factories abroad and import their goods free of tariffs have cost American workers millions of jobs and the manufacturing sector of the economy to stagnate.
The Fed is largely responsible for the real estate bubble and its bursting and the ensuing financial crises that engulfed the world in 2008. It was put in charge of administering the Community Investment Act which told the Fed to keep mortgage standards high but it did nothing to prevent unqualified persons from obtaining mortgages. ...
News stories you may have missed in today’s news and blogs
I.In our blogs in the past, we dealt with the fact that the wage causes unemployment among unskilled workers, particularly blacks, and more particularly black teenagers. In today’s Wall Street Journal (2/23/2015), Prof. Thomas MaCurdy, professor of economics at Stanford university has an op-ed entitled “The Minimum-Wage Stealth Tax on the Poor” describes how, the minimum wage, in addition to causing unemployment, amounts to a sale tax, raising prices of goods consumed by low-income families and falls with greater weight on low-income families. Here is a quote: “But will low-income families earn more from an increase in the minimum wage that they will pay as consumers of the now higher-priced goods? My research strongly suggests that they won‘t.” And “My analysis, using the Bureau of Labor Statistics Consumer Expenditure showed that the 1996 minimum-wage hike raised prices on a broad variety of goods and services. …My analysis concludes that more poor families were losers than winners from the 1996 hike in the minimum wage.”
II. The David Horwitz Freedom Center today listed the “Ten Most anti-semitic campuses in the U.S.
Reference was made to the following site: www.jewhatredoncamppus.org, which listed incidents at Vanderbilt University, Northwestern University, Stanford University, and UC Davis. ...
Online Video Synopsis of our Balanced Trade book
It's little more than a slide show of our introduction,but this does do a good job of covering our key arguments. https://www.youtube.com/watch?v=t7O0fLApeAA
Is James Webb the Best Candidate in the Democratic Field?
The Democratic and Republican primary electoral campaigns are as yet in their early stages as candidates maneuver for early voter support and initial financial backing. The field remains fluid in both parties.
On the Democratic side, Clinton is clearly the dominant candidate, with a majority of Democrats polled backing her candidacy in recent polling. But Clinton's lead is eroding as voters begin to consider the broader field.
In that broader field one of the more quixotic candidates, James Webb, deserves a close look by Democratic primary voters....
The failures of the Clinton policy toward China were significant and continue to cost millions of American jobs, along with significant foreign policy costs around the world. Hopefully a strong Webb candidacy could help push Clinton to take forceful positions on trade. If Webb comes out strongly for balanced trade with China he will deserve support in the Democratic primaries.
The Short-run and the Long-run in Economics and Politics
“In the long-run we are all dead” said the late great economist John Maynard Keynes who revolutionized economic thinking. He recommended fiscal stimulation to increase aggregate demand which would increase production and employment. He was responding to the dominant view of free market economists that the free market would create full employment if wages were flexible. Because wage levels are very slow to respond to changes in the demand for labor, government intervention is required to increase aggregate demand in the short-run. Keynes’s ideas have dominated economic thinking since the 1930s. Accordingly, Pres. Obama’s administration pursued Keynesian fiscal and monetary policies which included an $800 billion stimulus program beginning in 2009 and authorized a $200 billion rescue of two private mortgage insurance companies, Fannie Mae and Freddie Mac. The preceding administration of Pres. George W. Bush began fiscal policy stimulus with a lump sum rebate of $300 per person plus dependents to all income taxpaying households. This was an application of Keynesian economics. He also enacted TARP which authorized the Treasury to buy the troubled assets of banks, investment companies, and insurance companies. This accorded with all schools of economics.
The federal debt in 2009 was $11.9 trillion and 83% of GDP while five years later it reached $18 trillion, exceeding the total production of goods and services in 2014. As for monetary policy, the Federal Reserve adopted a policy of monetary expansion and low-interest rates, buying government bonds and other assets with newly printed money. The most often used aggregate of the money stock, M2, increased from $1.6 trillion in 2009 to $10.9 trillion in 2014. The combination of a huge federal debt and money supply threatens serious budgetary and another financial crisis inflation in the not too distant future. We may have solved a short-term problem but in the process inaugurated serious long-term problems. ...
Government Interference in the Economy Has Been an Unmitigated Disaster
Few Americans know the economic harm that government mismanagement of the economy has caused. And government intervention in the economy continues to cause untold economic harm. The mere growth of government slows down the rate of economic growth. But the trend is exacerbated by numerous government interventions in the economy such as bad taxes, subsidies to favored businesses, fixing prices, levying tariffs that favor those businesses, fixing prices as in the case of the minimum wage law, building low rental but high cost housing for the poor, and encouraging loans to unqualified home buyers, ineffective projects to delay global warming, tuition loans to students whose studies do not prepare them for high-paying jobs. The list goes on and on. Here are some of the major government prograns that adversely affect the economy:. ...
Tax Corporate Income as Personal Income -- we're published in today's American Thinker
Here's how we begin:
To read the rest, go to:
Let's End Means-Tested Benefits -- we were published in American Thinker yesterday
Here's a selection
To read the whole thing, go to:
BOOK REVIEW: Ha-Joon Chang, Economics: the User's Guide (New York: Bloomsbury Press 2014)
The title of the book is Economics but aside from learning some terminology the reader will learn little economics from it. He writes that his book “differs from other economics books in that it contains a lot of information on the real world.” Much of the world he describes is the fantasy world of Marxists and leftists. He describes a multitude of old and new economic problems but there is no economic analysis in it but a lot of assertions. It has a lot of definitions of economic concepts and a bit of economic history, selected from a Marxist point of view. Not a single statement of how much the standard of living has gone up under capitalism
He defines economics as the “study of rational human choice” and defines capitalism as an economy organized in pursuit of profit, a dirty word to Marxists. Income would be a better word than profit but workers are also interested in income. A better definition of capitalism appears in Merriam-Webster’s Collegiate Dictionary 10th Ed., namely, “an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market.” ...
Let's end means-tested benefits
In his 2015 State of the Union speech, President Obama proposed programs to assist people who work. In fact, he denigrated those who sit at home, enjoying benefits without contributing. For example, he asked:
Then more of the same when he said:
And yet more of the same when he said:
Was Obama intentionally leaving out the many poor people who make no effort? Does this emphasis imply that he would favor bills that would end the means-tested work-discouraging system built by Washington over the last several decades?
Perhaps the clearest presentation of these disincentives appeared in a slide from a July 2012 presentation by then Pennsylvania Secretary of Public Welfare Gary D. Anderson. Here is one of the graphs that he presented:
The Democrats and their loving media are bent on making the distribution of wealth and income the principal issue in the 2016 campaign. President Obama in his so-called state-of-the-union message (1/20/15) proposed to raise taxes on the very wealthy, saying “let’s close the loopholes that lead to inequality by allowing the top one percent to avoid paying taxes on their accumulated wealth.” One trouble with that statement is that it suggests the rich don’t pay their fair share of taxes. In 2008, the top one percent of personal income taxpayers according to the IRS paid 38.02 % of the federal personal income tax paid, the top 10% which includes all the really rich paid 69.94%, the top 25% paid 86.34%, the top 50% paid 97.3%, and the bottom 50% paid only 2.7%.
We are all for closing loopholes but it is hard to identify a loophole? Are charitable deductions loopholes? Some believe they are. Besides the president was telling an untruth when he implied that loopholes created wealth inequality. The inequality of wealth is largely due to inventions and innovations. Steve Jobs and Bill Gates, to name only two of the thousands who became millionaires and billionaires, did so by creating the products produced by Apple and Microsoft.
The anti-poverty charity Oxfam reported ahead of the World Economic Forum in Davos that the share of the world’s wealth owned by the best-off 1% has increased from 44% in 2009 to 48% in 2014 (while Obama was President incidentally) while the least well-off 80% own just 5.5%. At the most recent meeting of the American Economic Association, economists took issue with some foolish writings about inequality written by French economist Thomas Piketty .
An Oxfam spokesman said it would use its high-profile role at the Davos gathering to demand urgent action to narrow the gap between rich and poor. How? They do not say. One would think that it would be more important to reduce the number of poor than narrow inequality. That is what American inventors and innovators have done historically. ...
Chinese stock market tumbling...
It's midnight here in Pennsylvania, but it's Monday morning in China and the stock market is already down 6.3% today. Go to the following website to see where it stands right now:
This from Bloomberg News today:
So how does this play out?...
Chinese Firms Particularly Vulnerable?
ODU Professor of International Business Shaomin Li published a piece in Fortune Magazine on the 12th which made an interesting argument about the vulnerability of Chinese firms to declining economic growth. The title is: "Corporate Ponzi Game in China?"
They report a series of interesting findings.
1. Many Chinese firms have relatively low profit margins.
2. In order to grow rapidly such firms have relied upon debt financing.
3. The debt-financed growth of capacity in the absence of substantial profits makes China's economy particularly vulnerable to a slow-down in economic growth...
China's imports up just 0.6% in 2014
China just released its December 2014 trade statistics. After rapid growth from 2005 to 2013, the dollar value of Chinese imports was stagnant in 2014.
Here is the rate of Chinese import growth:
China pulls December trade statistics
China in 2015 is like the United States in 1929. It has grown rapidly by practicing mercantilism. Instead of buying imports from its customers, it destroyed the market for its exports. The Chinese stock market may be about to lead the world down into an economic recession.
The Chinese stock market began tomorrow morning's (Monday's) trading in free fall after the default of a Chinese property developer. Zerohedge.com reports:
Meanwhile, in a supposedly unrelated development, Reuters reports that the Chinese government briefly published its trade statistics for December 2014, and then pulled them:...
November trade report suggests that a worldwide recession is starting
On Wednesday, the Bureau of Economic Analysis released the trade report for November 2014. The good news is that the U.S. trade deficit went down, despite the high flying dollar. The bad news is that the report shows a decline in investment spending in the world as a whole and in the United States in particular. It could be that the world and the United States are going into a recession at the moment....
The Corporate Income Tax Is the Worst Tax; Repeal It and Tax Corporate Earnings under the Personal Income Tax
There are taxes which treat taxpayers fairly, are progressive in their effects, and have few bad economic effects. The corporate income tax is not one of them. The corporate income tax treats taxpayers unfairly, favors the very rich, and has bad economic effects. It is probably the worst major tax, vastly inferior to the personal income tax, sales taxes, death taxes, or any other major source of revenue.
So who bears the burden of the corporate income tax? As an artificial entity, corporations cannot bear any corporate tax burden. Only living individuals bear the burden of taxation whether it be the corporate income tax, the personal income tax, sales taxes, or excise taxes. Economists are not sure who bears the burden of the corporate income tax. The most common view is that most of the tax is borne by shareholders but some of the tax is shifted forward to consumers in the form of higher prices. The amount shifted depends on the structure of the particular industry. A monopolist has more control over the prices it charges than those in a highly competitive industry or one where much of the productive activity is conducted by proprietorships and partnerships which are not subject to the corporate income tax. (And many economists believe that the corporate income tax is borne by investors in general in the form of higher interest rates and by some special classes of employees, but we’ll ignore that in our analysis.) So shareholders in some corporations bear all or most of the burden and shareholders in others may bear a lesser share of the burden. Consumers of some products may bear much of the burden and consumers of others little of the burden. These considerations make the distribution of the burden of the corporate income tax very uncertain which is one reason that makes it desirable to eliminate it and tax corporate earnings as personal income.
As to economic effects, the corporate income tax penalizes exporters and its high rates encourage inversions (moving corporate headquarters abroad) and outsourcing of factories and jobs. Facing international competition, American exporters have little or no ability to shift the tax burden and the high rate of corporate income tax places them at a disadvantage.
US Economic Growth 2.7% over last year. China about same.
On December 23, the Bureau of Economic Analysis (BEA) of the Commerce Department issued its latest revision of U.S. economic growth during the third quarter period (July through September) of 2014. According to the BEA, the U.S. economy grew at a 5.0% annual rate during that quarter.
A more accurate estimate of the U.S. growth rate can be found by comparing each quarter with the quarter one year earlier. If the third quarter of 2014 is compared with the third quarter of 2013, the growth rate was 2.7%, not 5.0%, as shown in the graph below.
Unfortunately, the once honorable Bureau of Economic Analysis of the Census Bureau tweaked the quarterly GDP numbers in order to achieve the supposedly high growth rate. This tweaking was predicted by Tyler Durden of zerohedge.com.
When Durden analyzed the final revision for the first quarter back on June 25 (Here's the reason for the total collapse in Q1 GDP), he discovered that Obamacare payments had been removed by the BEA from the already dismal results for the first quarter. He predicted that they would be added to later quarters in order to achieve 5% growth during a quarter. Specifically, he wrote:...
The Russian economy will come roaring back
Business Week published an assessment of where Russia has been and where it is going. Its analysis of the present was pretty good, but its pessimism about Russia's future was nonsense. Russia will probably come roaring back, as countries almost always do after a currency collapse.
The ruble started falling as a result of European and American sanctions and Russian counter-sanctions. These sanctions got the Russian currency falling in exchange rate. Here´s a first hand account from a commentary on the subject by Daniel Gurevich, one of my students, who was then living in Russia:...
Journal of Economic Literature:
Atlantic Economic Journal: