Thursday, June 01, 2006
National Sales Tax
I was shopping for a book last night and, to my surprise, ran across several books written in support of abolishing the national income tax and replacing it with a national sales tax. I will leave the statistical compilations to others, but even in theory this is a bad idea. Why?
Because poor people consume more (if not all) of their income because they are forced to do so. For example, let's say there's a baseline of money that it takes just to survive (rent/housing, food, etc.) We'll pick a number from the air and say that amount is $10,000 per annum per person, on average. Now take Randy and Glenda. Randy makes $25,000 a year as a call center operator. Glenda makes $250,000 a year as a securities trader. Both of them must spend at least $10,000 per year to live. Under a national sales tax, 50 percent of Randy's income is taxed, but only 10 percent of Glenda's is taxed.
Glenda, in all likelihood, will consume more than Randy. So, the percentage of Glenda's income that is taxed will probably be more than 10 percent. However, she is not required to consume more than ten percent of her income. And there is the rub. The national sales tax will result in a forced tax hike on the poorer members of society, while resulting in an optional tax hike on the richer members of society. The richer members of society have the option of reducing their consumption so that the national sales tax does not affect them as much as it could. Poorer members of society have no such option.
All of this is far and away from the economic consequences. Any rise in prices, which a national sales tax would produce, will result in a loss of consumption. A loss in consumption will result in job loss. Moreover, putting all of the government's revenues in the precarious grip of consumption will frustrate policymakers as they attempt to predict future government revenue. Income is certainly more stable than consumption.
While we all may feel a kneejerk moment of joy when the phrase "Eliminate the IRS" is uttered, the consequences of such an elimination, as posited in the current books hyping the subject, would do little aside put us in a less predictable and less equitable world.
Back In The Saddle
After almost a year-long absence, I have decided to return to blogging. This will mostly serve to keep me writing and thinking sharp, but I wound not mind the occasional comment.
I will also start requiring registration for comments. Sorry, but after getting inundated with lumber offers, penny stocks and travel to Great Britain, it's time to limit the forum.
Thursday, July 28, 2005
Sorry for the lack of posts recently. Studying for the bar exam will do that to you. In the spirit of apology, please accept the first half of a draft on the Upland Cotton decision. More updates to come as I get ready to move to China.
Thursday, May 26, 2005
Arguably, one of the biggest cases that the U.S. has lost in front of the WTO Appellate Body ("AB") is the Upland Cotton decision (WT/DS267/AB/R). In the post below I will summarize the important arguments, rulings, and implications.
The Agreement on Agriculture
In a very general sense, the Agreement on Agriculture ("Ag Agreement") commits WTO members to cut agricultural subsidies. To find a violation of the Ag Agreement is essentially a two-step process. The first step is figuring out what programs count as agricultural subsidies. There are three types of agricultural subsidies under the Ag Agreement: green box, blue box and amber box.
Green Box- these subsidies do not count toward the AMS and are classified as having no or little trade-distorting effects. They must be government-funded and have no price supports.
Blue Box - these subsidies would be trade distorting if they did not have conditions that mitigate resulting trade distortion. An example would be payments with production limits on specific crops.
Amber Box - these are all subsidies that do not qualify as green or amber box subsidies.
Step two addressed the question of why it matters what "box" any of these subsidies fall in. The Ag Agreement commits members to cut subsidies that only fall within the amber box. A member can spend as much as they want in blue and green box subsidies and not run afoul of the Ag Agreement. Therefore, members who are being challenged in front of the WTO over their agricultural subsidy programs will want to argue that their programs fit within the green or blue box, not within the amber box.
In 1996, Congress allowed for the use of flexibility contracts for cotton growers (among other things.) The contracts essentially took a baseline amount of acres used for cotton production, and then paid farmers owning those acres a set amount per acre. The farmers were paid regardless if they grew anything on the land or not, as long as they didn't grow certain types of crops ("prohibited crops"). If they grew prohibited crops on the acres in question, the payments were reduced on a sliding scale down to a possibility of zero.
In 2002, direct payments were introduced to take the place of flexibility contracts. They worked essentially in the same fashion as the flexibility contracts, with the same prohibited crops, but also added wild rice to the list of prohibited crops.
The Green Box: More Than Where You Hide Your Stash
Brazil et. al. argued that these payments were inconsistent with the Agreement on Agriculture ("Ag Agreement") . Specifically, because the payments were dependent upon farmers not growing certain crops, the U.S. was in effect conditioning its support upon a type or quantity of crops grown, i.e. the prohibited crops list. That conditionality meant that the subsidies could not qualify as green box subsidies. The U.S. responded by saying that it was not positively encouraging specific crop growth, but was negatively doing so by prohibiting support if such crops are grown. The U.S. further argued that the Ag Agreement only envisioned payments made to positively affect production, not those that would negatively affect it. The AB Panel found for Brazil, finding that the text of the agreement had no "positively-affecting" language, but prohibited payments which were "related to the type of production undertaken." The payments themselves create an incentive to produce products other than those on the prohibited list, destroyiong a link between pure risk and return. Due to this incentive, the U.S. could not classify the payments made under this program as "green box" subsidy.
Don't Tread on My Non-Specific Support
Members cannot sue each other for product-specific subsidies in the amounts that were in effect during the 1992 marketing year. For instance, if the U.S. had $3m worth of product-specific subsidies in 1992, Brazil could not sue them for having the same amount of subsidies in 2005. However, if the U.S. had $5m in product-specific subsidies in 2005, Brazil could sue them over the difference. The U.S. therefore argued that its programs, summarized above, counted as nonproduct-specific subsidies and therefore could not be the basis for a WTO challenge.
More to come later
Friday, May 20, 2005
Thanks to those of you have continued coming back during my long absence. Law school finals got the better of me. But, as promised, here are the two papers I have been working on:
So Your Kid Wants to Be An Anarchist: Separating Fact from Fiction Among Anarchist Critiques of the International Monetary Fund, World Bank and World Trade Organization
(No link yet)
Turning Offense into Defense: Making Sense of Public Citizen's Arguments Against the World Trade Organization
It should be noted that these papers are still in the 'working paper' stage, but feel free to point out errors or corrections. Stay tuned, later I will be blogging on the Upland Cotton WTO Appellate Body report, and a more abstract view on what's going on with the U.S./world economy vis a vis savings glut and comparative advantage.
Wednesday, April 13, 2005
The IMF Overstepping Its Bounds
Reuters has it that the IMF is insisting that Argentina negotiate with the hold-outs of the country's recent debt swap. If there is a better way to reinforce the idea that the IMF is the puppet of wealthy creditors, I can't think of it.
A brief catch-up. Argentina defaulted on billions of dollars in debts. Some of this debt is owed to private creditors, such as banks, bondholders, etc. Other parts of the debt is actually owed to the IMF. Argentina defaulted on both of these forms of debt.
Recently, Argentina imposed its own sort of sovereign bankruptcy proceeding. It offered the holders of the bonds it had defaulted on a new bond for about 30% of face value. It then set a deadline for accepting the new bond and threatened that those who had not accepted by the deadline would be left with bonds that Argentina would never pay. About 3/4 of the bondholders agreed to the swap.
After the completion, Argentina began to focus on its debt to the IMF. However, the IMF has told Argentina that it must have a strategy to deal with the holdout bondholders before any restructuring of IMF debt can be considered.
Make no mistake: The IMF does not hold any of the bonds that Argentina defaulted on. It has no financial stake in the bond process whatsoever. Its role is merely to give advice on impose conditions that will put Argentina back on a path to economic growth and fiscal responsibility.
If Argentina was in trouble of scaring off a flow of foreign investment due its bond swap, then the holdout strategy might be a valid condition. But no such danger exists. Argentina is running surpluses and posting solid growth. Furthermore, the IMF bent over backwards to lend Argentina money during the run-up to its crisis. Where was this tight-fisted conditionality when Argentina was running off a financial cliff and the IMF knew it? The IMF could see that the dollar peg was unsustainable, and yet it continued to throw money at Argentina in an attempt to save it. It is irresponsible for the IMF to dig the hole Argentina fell into and to then step on its fingers as the country tries to dig itself out.
It bears repeating: The IMF has no stake in the private bond swap. It has no business demanding Argentina address the holdouts. All this demand accomplishes is the reinforcement of the image of the IMF as puppet to Wall Street. President Kirchner is right to face them down.
Monday, April 11, 2005
Volcker Disagrees with Greenspan
Paul Volcker, former Fed Chair, writes that the United States is on an unsustainable economic path. Although Volcker doesn't directly criticize Greenspan, it's there between the lines. Essentially, he says no country can borrow $2bn per day, absorb 80% of world savings and consume 6% more than it produces forever. There will be an adjustment, and it won't be pretty.
Tuesday, April 05, 2005
I'm currently working on a couple of papers for graduation. They are:
So Your Kid Wants to be An Anarchist: Separating Fact from Fiction Among Anarchist Critiques of Multilateral Institutions
Who's Indeed? Five Years After Public Citizen's Review of Five Years of the WTO
The first of these papers is pretty much finished, and I'll be putting a link up to it soon. The other one is in the early stages of development.
Doing research for these papers, it has become clear that the multilateral trading regime has lost the PR war in a spectacular fashion. Try doing a google search on "WTO," "World Bank," or "IMF" and see how much supportive or even blanaced content you get. I knew that it was bad, just not this bad.