Origin based vs. destination based taxes

Follow up to Greg Mankiw article on taxes:

ORIGIN-BASED VS. DESTINATION-BASED TAXATION: The corporate tax system is now origin-based. If we change to a destination based taxation (where it is consumed instead of produced), this would encourage US exports and discourage imports. But then the exchange rates would adjust:

...Americans would supply fewer dollars in foreign-exchange markets, and foreigners would demand more dollars. As a result, the dollar would appreciate, making foreign goods cheaper for Americans, and American goods more expensive for foreigners. The movement in the exchange rate would offset the initial impact on imports and exports.

If the exchange rate adjusted completely, the so called "border tax" would become equivalent to a Value-added tax, with all the attendant benefits:  low rates over a broad base (non distortionary, i.e., people would not spend lots of effort trying to avoid it), and shifts taxes to consumption rather than income (encourages production/income).

Should we be worried about discrimination based on party affiliation?

Via MarginalRevolution:

In the marketplace, consumers are much more likely—almost two times as likely—to engage in a transaction when their partisanship matches that of the seller. In our survey experiment, three quarters of all subjects forego a higher monetary payment to avoid helping the other party.

Original paper suggests that partisan affiliation is a strong potential source of discrimination:

To date, few social norms are in place to constrain it, as they are with respect to unequal treatment along other social divides (e.g., race and gender). Our analysis suggests that partisan-based discrimination may occur even in the most basic economic settings, and as such should be the subject of more systematic scrutiny.

Internet publishing jobs are on the coasts

As newspapers are being replaced by internet publishing, the new jobs are clustering, in a way that was not true of newspaper jobs, on the coasts:

As Enrico Moretti, a University of California, Berkeley, economist who has studied the geography of job creation, points out, the tech entrepreneurs who drive internet publishing could locate their companies in low-rent, low-cost-of-living places like Cleveland, but they don’t. They need the most talented workers, who tend to move to the clusters, where demand drives wages higher. And it’s the clusters that host all the subsidiary industries a tech start-up craves—lawyers specializing in intellectual property and incorporation; hardware and software vendors; angel investors; and so on. 

The online media, liberated from printing presses and local ad bases, has been free to form clusters, piggyback-style, on the industries and government that it covers. New York is home to most business coverage because of the size of the business and banking community there. Likewise, national political reporting has concentrated in Washington and grown apace with the federal government. Entertainment and cultural reporting has bunched in New York and Los Angeles, where those businesses are strong.

The result? If you look at the maps on the next page, you don’t need to be a Republican campaign strategist to grasp just how far the “media bubble” has drifted from the average American experience. Newspaper jobs are far more evenly scattered across the country, including the deep red parts. But as those vanish, it’s internet jobs that are driving whatever growth there is in media—and those fall almost entirely in places that are dense, blue and right in the bubble.

HT:  Cramer

French election results cause VIX to crash

In chapter 9, we learn that, in the long run, risky assets must return enough to compensate shareholders for bearing risk.  So when the risk suddenly declines, current stock prices increase to reduce expected return.

Colleague Bob Whaley's VIX index (previous blog posts on VIX), which measures risk in terms of the implied volatility, declined suddenly in both the US and EU as it became likely that the pro-EU candidate would win the French election.

Best selling textbook author describes principles for tax reform

In a NY Times article, Greg Mankiw demonstrates the ability that has made him a best-selling-econ-textbook author by simplifying a confusing debate down to four principles:

• WORLDWIDE VS. TERRITORIAL: Most nations aim to impose taxes on economic activity that takes place within their borders 
•  INCOME VS. CONSUMPTION: Many economists have argued that taxes should be levied based on consumption rather than income. 
•  ORIGIN-BASED VS. DESTINATION-BASED TAXATION: The corporate tax system is now origin-based. 
•  DEBT VS. EQUITY: Now, firms can deduct interest payments to bondholders, but they cannot deduct dividend payments to equity holders.

Mankiw thinks that Congress is moving in the right direction in all four dimensions.  

Sports teams do better in states without income taxes

In theory, one would expect higher after tax salaries to attract better players.  The forces behind this are the same that lead to compensating differentials in labor markets.  Evidence supports theory:

The income tax rate effect varies by league, with the largest effect in professional basketball, where teams in states without income tax win 4.5 more games each year relative to high-tax states.

HT:  Marginal Revolution

Minimum wage hurts poor people in a new way

A new working paper from HBS finds that for every $1 increase in the minimum wage, the probability of restaurant failure increases by 4-10%.  Moreoever, as zerohedge points out, the restaurants most likely to fail are those that serve lower-income workers:

... low-income workers don't just lose their jobs when minimum wages are hiked...they also lose access to cheap casual dining options as lower-rated, cheaper restaurants are much more likely to fail when their costs are artificially raised.

How to get employees to stop smoking?

Make them pay.

Employees were randomly assigned to one of three groups. The first was “usual care,” in which they received educational materials and free smoking cessation aids. The second was a reward program: Employees could receive up to $800 over six months if they quit. The third was a deposit program, in which smokers initially forked over $150 of their money, but if they quit, they got their deposit back along with a $650 bonus. 

Compared with the usual care group, employees in both incentive groups were substantially more likely to be smoke-free at six months. But the nature of the incentives mattered. Those offered the reward program were far more likely to accept the challenge than those offered the deposit program. But the deposit program was twice as effective at getting people to quit — and five times as effective as just pamphlets and Nicorette gum.

People hate losing money ("loss aversion")

Why are business people more important than the ideas they have?

Because ideas evolve into profit only if the people are clever and motivated.  Groupon is a case in point:

Andrew Mason [Groupon's founder] had played in punk bands, and the company he started, originally called the Point, was intended to help people organize around social causes. Early on, though, its users realized they could band together to save money, so Mason reoriented the company around that purpose. Eventually he realized he could just go directly to other companies to ask for discount deals, then sell those to groups of users. “Before I knew it,” Judge recalled him saying, “I was selling coupons.” Judge sympathizes with members of the tech world, he explained, because they’re not like Wall Street guys — they actually build things people use. “They don’t seem to get into it for the purpose of pure greed and trying to make money,” he said. “They end up there.”

From NY Times profile of Mike Judge.

Whole Foods reacts to competition from grocery stores

Whole Foods practically invented the PNOS segment (Premium-Natural-Organic-Supermarket), "transforming health food from a niche market into a booming retail sector attracting millions of urbanites, soccer moms and baby boomers. Whole Foods became a Fortune 500 company, and Mr. Mackey, a wealthy, foodie celebrity."

But now, competition has caught up to Whole Foods, as Kroger pushes their own in-house organic store brand and discount rivals like ALDI and LIDL expand at the low end. In response, activist investors are pushing Whole Foods start behaving more like a normal grocery store:

Jana [activist investor] ... wants Whole Foods to more quickly adopt standard grocery-industry practices it long had eschewed: loyalty cards that would allow it to target shoppers with coupons based on their buying habits; centralizing product purchasing to improve efficiency; and advertising sales and discounts.

Whether these changes cause Whole Foods to lose its foodie cachet (where else can you buy organic tofu tikka masala from a social justice warrior with a neck tattoo?) will determine its long run viability.

BOTTOM LINE:  it is not the strongest who survive, but those willing to adapt.

CFA Exam Price Discrimination

An effective way of sorting high willingness-to-pay from low willingness-to-pay consumers is by using the time to the event. The CFA Institute has learned this trick comon to airlines. By registering for exams early enough, you can save about half the fee. For example, here is the schedule for the December 2017 exam.

Early registration fee	US$ 650	(15 Mar 2017)
Standard registration fee	US$ 930	(16 Aug 2017)
Late registration fee	US$ 1,380	(13 Sep 2017)

It is likey that there are negligible costs involved with the late regestrations.

Suggested by Sameer Sathe

What can cities learn from Buffalo?

That parking minimums increase the supply of parking which drives down the price which creates traffic jams, pollution, sprawl, and segregation.  (Parking minimums are zoning requirements to add parking to buildings.)

...if you know you can park free wherever you go, why not drive? The ever-growing supply of free parking in America is one reason why investments in public transport have coaxed so few people out of cars, says David King of Arizona State University. In 1990, 73% of Americans got to work by driving alone, according to the census. In 2014, after a ballyhooed urban revival and many expensive tram and rapid-bus projects, 76% drove.

This kind of inefficiency exacts a huge toll on a city:

Free parking is not, of course, really free. The costs of building the car parks, as well as cleaning, lighting, repairing and securing them, are passed on to the people who use the buildings to which they are attached. Restaurant meals and cinema tickets are more pricey; flats are more expensive; office workers are presumably paid less. Everybody pays, whether or not they drive. And that has an unfortunate distributional effect, because young people drive a little less than the middle-aged and the poor drive less than the rich. In America, 17% of blacks and 12% of Hispanics who lived in big cities usually took public transport to work in 2013, whereas 7% of whites did. Free parking represents a subsidy for older people that is paid disproportionately by the young and a subsidy for the wealthy that is paid by the poor.

Buffalo, by the way, has realized this, and eliminated parking minimums.

Who could have predicted this?

Housing prices are climbing in Nashville, while supply dwindles.

As the supply of homes declined, the listing price climbed — especially in the trade-up and premium markets. The median listing price of trade-up homes rose 52 percent to $221,597 between early 2012 and 2017, while Trulia's data also showed the price of premium homes rose 44 percent to $437,967. Meanwhile, the median listing price for starter homes increased 36 percent to $108,783.

Supply is limited by strict zoning laws that make it difficult for supply to increase.  Since Nashville is getting about 80 new residents/day, the only thing that can adjust is price.

HT:  Campbell

FCC Chairman uses management theory to improve agency decision-making

FCC Chairman Ajit Pai wants to increase the quality of economic analysis done by the FCC staff:

...he explained that economic analysis, primarily in the form of cost-benefit analysis, is largely ignored. Actually, it is probably worse than that: Those types of analyses aren’t even done. For example, significant areas of the agency’s work in recent years ... contained nothing that would pass as economic analysis.

So how to do this?  Chairman Pai wants to change the organizational structure from an M-form (with economists mixed in with attorneys) to a functional organization, with economists in their own division.

Some middling economists had suggested exactly this in an article titled "The Economics of Organizing Economists."

... a functional organization has a couple of advantages over a divisional form. First, a functional organization is more likely to keep up with new methodologies and so be able to apply them to enforcement questions. Second, since the staff economists and attorneys produce information, not traditional goods or services, there is an advantage to the independent analyses done by attorneys and economists. Without two separate memos, the decentralization of decision making in a divisional organization is likely to result in less information reaching the ultimate decision makers.

Post Hospital Merger Product Repositioning

An interesting presentation by Joanna Piechucka at the IIOC this weekend examined how French hospitals re-positioned the offerings of the merged firms to minimize cannibalization. Moreover, they also re-position away from third-party non-profit hospitals. This occurs even in a highly regulated environment.

What Nashville can learn from Seattle

How to break up a homeowner cartel that raises prices by blocking new entry:

In large and small ways, these homeowners, who tend to be white, more affluent and older than the average resident, have shaped neighborhoods in their reflection — building a city that is consistently rated as one of the nation’s most livable, as well as one of its most expensive. ...

The homeowner-dominated neighborhood councils have typically argued against land use changes that would allow more density (in the form of townhouses and apartment buildings) in and near Seattle’s traditional single-family neighborhoods, which make up nearly two-thirds of the city. Including more renters and low-income people in the mix could dilute, or even upend, those groups’ agendas.

In other words, the neighborhood councils act like cartel managers who prevent lower-priced entrants (higher density apartments) from serving lower-income, would-be homeowners and renters. The result is higher prices that benefit the cartel members (homeowners).

What would it take to break the cartel-like function of Nashville's zoning process?