Carpe Diem

Workers Pay the Burden of Higher Corporate Taxes

Democratic front-runner Obama wants to raise corporate taxes, and taxes on capital gains and dividends. John Edwards says he will stand up to the interests in Washington that run government for the “glorification of corporate profits,” as he has been regularly condemning the top six oil companies for collecting over $477 billion in profits over the past six years and often criticizing Exxon Mobil for earning $40 billion last year, the largest annual corporate profit in history.

But who actually bears the burden of higher corporate taxes? The standard assumption is that shareholders absorb the impact of higher corporate taxes, and not workers. But a new Treasury research paper, “A Review of the Evidence on the Incidence of the Corporate Income Tax,” questions that assumption:

From the paper’s conclusion: The incidence of the corporate income tax is an important issue for designing tax policy. Who bears the corporate income tax can affect overall conclusions about the progressivity of the tax system. Policy analysts have often made assumptions about how to allocate the corporate income tax in measuring the distribution of tax burdens.

A common assumption, based on theoretical models of tax incidence, is that capital (i.e. shareholders) bears the burden of the corporate income tax. Recent empirical work using cross-country data on corporate taxes and wages suggests reconsidering this assumption; labor may actually bear a substantial burden from the corporate income tax.

Empirical evidence from three different studies cited in the paper includes:

1. It is estimated that 61% of any additional corporate tax is passed on in lower wages in the short run, and around 100% in the long run.

2. Using cross-country panel data from the Luxembourg Income Study, it is estimated that a 10% increase in the corporate tax rate decreases annual gross wages by 7% percent.

3. The results in this paper suggest that corporate tax rates affect wage levels across countries, and that higher corporate taxes lead to lower wages. A 1% increase in corporate tax rates is associated with nearly a 1% drop in wage rates.

Bottom Line: Corporations don’t pay taxes, individuals pay taxes in their roles as shareholders, workers and consumers. Higher corporate taxes translate to lower dividends for shareholders, lower wages for workers and/or higher prices for consumers. According to the empirical evidence presented in this paper, it appears that a substantial burden of increases in corporate taxes fall on the workers employed by corporations. Higher corporate taxes = lower wages.

(HT: Ben Cunningham)

Carpe Diem

Philippines: The New Destination for IT Outsourcing

In a bid to manage costs, rising salary levels, and attrition, Indian IT-BPO companies are now expanding to other low-cost destinations like the Philippines. In the last eight months, 12 tier I IT-BPO firms have set up shop in the country.

IT giant Wipro Technologies, for instance, opened a business process outsourcing (BPO) center in Cebu, one of the Philippine islands, as a part of its strategy to build global delivery capabilities.

And it is not just Indian firms that are lining up. American-based companies like IBM, Accenture and Citigroup are also present in the country.

Read more here.

Carpe Diem

If Pitchers, Batters Both Cheat, Is It Still Cheating?

From tonight’s “60 Minutes“: With 354 wins, Roger Clemens is one of the best pitchers in the history of baseball. There’s no question about it. But as Mike Wallace reports, there are questions now about whether Roger Clemens cheated to enhance his record and prolong his career.

At a steroid hearing in March 2005, numerous members of the House Committee on Government Reform, led by Chairman Tom Davis, R-Va., denounced performance-enhancing drugs. They offered three arguments: The drugs are illegal, they’re harmful, and they’re cheating.

Question: If the best pitchers in MLB like Roger Clemens are using performance-enhancing drugs at the same time that the best hitters in baseball like Mark McGwire and Barry Bonds are using performance-enhancing drugs, how can that really be cheating? Wouldn’t the enhanced performance of pitchers exactly cancel out the enhanced performance of hitters, with a net effect of zero?
Carpe Diem

Inconvenient 2007 Weather: Year of Global Cooling

Exhibit A: Buenos Aires Gets First Snow Since 1918 (pictured above)

Exhibit B: The weather phenomenon La Nina will bring Canada the coldest winter in nearly 15 years.

Exhibit C: Peru has been in the grip of extremly cold weather with temperatures ranging between -22º and -15º C (July 2007). The record breaking cold spell has caused the death of 55 children under five and is responsible for over 6,000 cases of pneumonia. The Government of Peru has declared a National Emergency in 14 of the 24 Peruvian provinces as severe weather continues to sweep the country.

Exhibit D: “This has been Chile’s toughest winter in the past 50 years, and the latest snow storms means less exports, job losses, less fresh vegetables and an overall negative impact for regional and local economies,” said Chile’s Agriculture Minister Alvaro Rojas. Rojas added that 30 to 40 percent of citrus and 30 percent of avocados crops “can be considered as lost.”

Exhibit E: There’s snow on the ground in Johannesburg (South Africa) today (June 27, 2007), for the first time in 26 years. The Johannesburg airport shut down, hundreds of bus passengers and 20 trucks were stranded, and one man died from exposure.

Exhibit F: Following the snowiest December on record, many areas of New Hampshire got about a foot of snow on New Year’s Day, with a couple of inches added during the night and a couple more likely Wednesday. December’s snowfall at Concord, N.H., totaled 44.5 inches, toppling a record of 43 inches that had stood since 1876. Burlington, Vt., got 45.7 inches, far above its 17.2-inch December average, and Portland, Maine, amassed 37.7 inches for its third-snowiest December on record.

Source: “Br-r-r! Where Did Global Warming Go?” by Jeff Jacoby in the Boston Globe

Carpe Diem

Globalization’s Creative Destruction and The Fate of Letter Writers in India

G.P Sawant, a professional letter writer in Mumbai for 25 years, is a winner and loser due to globalization. Mr.Sawant had made a profession out of writing more than 10,000 letters in Hindi for the poor and illiterate, who often traveled miles to the city to get letters written by him. With the telecom revolution, the price of telecommunication has dropped and his customers now use cell phones and ubiquitous telephone booths and stands. Mr. Sawant hasn’t written a letter now in three years.

But the same telecom revolution that effectively killed Mr.Sawant’s business has created an economic wave for his children’s generation to ride. In the very years that the telecommunications revolution was squashing the letter writing business, it was plugging India into the global networks that would allow its IT industry to explode. Mr. Sawant’s daughter works for India’s IT giant Infosys and earns $9,000 per year, three times as much as her father did at his peak.

Read more here in the NY Times, and watch a video here.

(HT: Sanil Kori)

Carpe Diem

Cartoon of the Day and Mencken’s Political Wisdom

H.L. Mencken is often regarded as one of the most influential American writers of the early 20th century. Here are some of his quotes on politics, democracy, government and elections.

1. Every election is a sort of advance auction sale of stolen goods (see cartoon above).
2. A good politician is quite as unthinkable as an honest burglar.
3. A politician is an animal which can sit on a fence and yet keep both ears to the ground.
4. Democracy is a pathetic belief in the collective wisdom of individual ignorance.
5. Democracy is also a form of worship. It is the worship of jackals by jackasses.
6. Democracy is the art and science of running the circus from the monkey cage.
7. Democracy is the theory that the common people know what they want, and deserve to get it good and hard.
8. Every decent man is ashamed of the government he lives under.
9. If a politician found he had cannibals among his constituents, he would promise them missionaries for dinner.

Read more here.

Carpe Diem

Business is Booming at Orlando Theme Parks

The nation’s economic jitters that contributed to lackluster holiday retail sales in December seemingly failed to make a serious dent in year-end travel to Central Florida as theme parks filled and hotels had few vacancies.

Large hotels in Central Florida’s core tourist areas say they had no problem filling rooms during the final two weeks of December. Theme park parking lots swelled past capacity, and pedestrian concourses at Walt Disney World, SeaWorld Orlando and Universal Orlando resembled Manhattan sidewalks during rush hour.

The outpouring of tourists belied consumer concerns about an economy facing a significant housing industry slump, tightening credit markets and volatile financial markets. Hoteliers acknowledged the concerns, but those catering to the higher end of the market said they haven’t seen a pullback.

Read more of this Orlando Sentinel article here.

Carpe Diem

The Redolent Smell of Profits Crosses All Borders

From the FT article “US Studios Get Taste for Bollywood“:

International investors are preparing to make an unprecedented onslaught on Bollywood this year, with several Hollywood studios and a group of London-listed funds looking to take a share of the world’s most prolific movie-making market.

Studio groups such as Sony Pictures Entertainment, Viacom – which controls Paramount Pictures – and Disney are working on new releases and partnerships that will give them an entry into India’s once closed and idiosyncratic movie industry.

Bottom Line: As developing economies like India grow and prosper, and as their middle classes emerge with increasingly higher disposable incomes, they become increasingly attractive as profitable consumer markets for firms in developed economies like the US. International trade and globalization are win-win, not win-lose as you would think from Lou Dobbs and the media. The “smell of profits” has a strong odor, penetrates globally across all international borders, and U.S. studios have picked up the redolent scent of profits in the booming Indian movie market.

Carpe Diem

Faux Populism

“You can’t create a job without a business. And unless an investor finances a business, you ain’t gonna have any jobs, you’re not going to have a middle class, and you’re not going to have any consumers. Therefore, this faux populism is a lot of crap.”

Larry Kudlow on tonight’s CNBC “Kudlow and Company,” in reponse to the anti-investor, anti-business, pro-government faux populism and political rhetoric of Huckabee and Edwards.