issue: Tax

Unleashing Innovation and Growth: A Progressive Alternative to Populism

Posted on by The Progressive Policy Institute

As Americans choose a new president in 2016, populist anger dominates the campaign. To hear Donald Trump or Senator Bernie Sanders tell it, America is either a global doormat or a sham democracy controlled by the “one percent.” These dark narratives are caricatures, but they do stem from a real dilemma: America is stuck in a slow- growth trap that holds down wages and living standards. How to break this long spell of economic stagnation is the central question in this election.

Today’s populists peddle nostalgia for our country’s past industrial glory but offer few practical ideas for building a new American prosperity in today’s global knowledge economy. Progressives owe U.S. voters a hopeful alternative to populist outrage and the false panaceas of nativism, protectionism, and democratic socialism. What America needs is a forward-looking plan to unleash innovation, stimulate productive investment, groom the world’s most talented workers, and put our economy back on a high-growth path. It’s time to banish fear and pessimism and trust instead in the liberal and individualist values and enterprising culture that have always made America great.

Download Unleashing Innovation and Growth: A Progressive Alternative to Populism

Washington Post: The new Democratic Party proposal to rival Bernie Sanders’ socialism

Posted on by The Progressive Policy Institute

Simplicity is one of Bernie Sanders’ great strengths: Corporations and the rich have rigged the economy. His solutions sound simple, even when the plans behind them are complicated: college for all, health care for all, tax the rich, break up big banks. He trails Hillary Clinton in presidential delegates to this point, and he remains an underdog for the Democratic nomination, but Sanders has already pulled Clinton, and the party, toward a more populist, more socialist policy agenda, thanks in part to that clarity of message.

The centrist Democrats who oppose that leftward lurch have struggled to match his simplicity. They tend to view the economy through a lens of skills and adaptation, not power and treachery. Many of them pushed in the 1990s, under President Bill Clinton, to expand global trade and deregulate the financial sector. They now concede those efforts did not go according to script, particularly for middle-class workers, but they are not calling for a full rewrite in response.

Their risk, in this election and moving forward, is to define themselves solely as anti-Democratic-socialist – the folks who don’t like the stuff that a lot of Democrats like about Sanders.

The Progressive Policy Institute is the latest centrist Democratic institution to try to counter that image. Today it will release what its president, Will Marshall, calls a “radical” agenda to get America working for the working class again. The report is called “Unleashing Innovation and Growth: a Progressive Alternative to Populism,” and it is organized around a straightforward, if not perfectly simple, principle.

Read more at The Washington Post

PPI Urges Congress to Support Internet Tax Freedom Act

Posted on by The Progressive Policy Institute

WASHINGTON—The Progressive Policy Institute today released the following statement urging Congress to pass the Internet Tax Freedom Act:

“The development of the Internet has been the single biggest driver of growth in the United States over the last two decades, disrupting and transforming industries in every corner of our economy. Not only has it been the most valuable resource for America’s entrepreneurs and innovators, but along with its advancement has come innumerable positive externalities that have spread broadly across the rest of the economy benefitting us all. That’s why, for nearly twenty years, PPI has opposed the taxation on Internet access by states and localities that threatens to stunt the future growth and dynamism of the Internet ecosystem.

“PPI is pleased to see the Internet Tax Freedom Act (ITFA), which would permanently block these taxes on access, included in the Trade Facilitation and Trade Enforcement Act currently being considered in Congress, and we urge pro-growth Democrats to support its passage. We would also like to thank Senator Ron Wyden for championing this issue since he first introduced the original ITFA in 1998 on behalf of millions of Americans whose livelihoods rely on a healthy, open and viable Internet.”

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The Trans-Pacific Partnership and Small Business: Boosting Exports and Inclusive Growth

Posted on by The Progressive Policy Institute

With the release of the full text of the Trans-Pacific Partnership (TPP), America now has an important—and extensive—opportunity to review the agreement’s actual terms. Critics are certain to reprise old arguments, including those that blame trade for economic disruptions whose origins often lie elsewhere. And they’ll offer newer criticisms, including the claim that TPP isn’t really about trade or cutting tariffs but, rather, is a scheme to advance the agenda of large multinational corporations.

This latest charge will likely be news to the hundreds of thousands of small and mid-sized American firms that currently export—and the growing numbers of small entrepreneurs who are seeking greater opportunity through trade. America’s smaller exporters will note that the TPP has made small business trade a key point of emphasis, and that it includes groundbreaking provisions to boost their ability to export to key TPP markets.

Increasing exports by U.S. small business can also be a vital opportunity to promote stronger—and more inclusive—economic growth. Small and medium-sized enterprises (SMEs) that export have higher sales, hire more employees, and pay higher wages than non-exporting SMEs. And because exporters account for only about one percent of all U.S. SMEs, America has significant untapped potential to support growth, good jobs, and economic mobility through increased small business trade.

But to meet this potential, it’s vital for the United States to reduce the extensive and often onerous foreign trade barriers that often keep SME traders on the sidelines. High duties and costs, customs red tape, unnecessarily complex regulations, and other barriers negatively impact American exporters of all sizes, but they can loom particularly large for small entrepreneurs that lack the resources, personnel, contacts, and extensive support networks of bigger competitors.

In this policy brief, we first review the TPP agreement and explain how it would eliminate significant trade barriers to U.S. small business and enable more American SMEs to prosper by exporting to fast-growing Asia-Pacific markets. We then highlight how the TPP’s support for small business trade can play a vital, broader role, helping to boost the overall economy and “democratizing” trade by assuring that trade’s significant benefits are shared more widely by more Americans.

Download “2015.11-Gerwin_The-Trans-Pacific-Partnership-and-Small-Business_Boosting-Exports-and-Inclusive-Growth”

 

Agenda 2016: Reviving U.S. Economic Growth

Posted on by The Progressive Policy Institute

The Progressive Policy Institute (PPI) teamed up with Columbia University’s Richard Paul Richman Center for Business, Law, and Public Policy to co-host a compelling symposium Nov. 6-7 in New York on revitalizing the U.S. economy. The event featured a distinguished roster of Richman Center economists and scholars, as well as PPI analysts and special guests, and more than two-dozen top policy aides to Members of Congress, Governors, and Mayors.

Held on Columbia’s Manhattan campus, the symposium examined the U.S. economy’s recent performance, as well as the causes of the long-term decline of productivity and economic growth. Against the backdrop of the 2016 election debate, the participants grappled with specific ideas for unleashing more economic innovation, modernizing infrastructure, reforming taxes, improving regulation, expanding trade and reducing inequality by ensuring that all children have access to high-quality public schools.

The discussions, which were off-the-record to encourage maximum candor, featured the following speakers and topics:

  • An overview of the U.S. economy’s recent performance by Abby Joseph Cohen, President of the Global Markets Institute and Senior Investment Strategist at Goldman Sachs.
  • A roundtable on key elements of a high-growth strategy, led by Michael Mandel, Chief Economic Strategist at PPI, Andrew Stern, former head of the Service Employees International Union and now Ronald O. Perelman Senior Fellow at the Richman Center, and
Philip K. Howard, Founder of Common Good, a nonpartisan reform coalition. The conversation touched on ways to improve the regulatory environment for innovation, including reducing regulatory accumulation and requiring faster permitting for big infrastructure projects, as well as a lively debate on the future of work in a tech-driven knowledge economy.
  • An insightful macroeconomic analysis of why productivity and economic growth have slowed, by Pierre Yared, Associate Professor at the Columbia Business School and Co-director of the Richman Center. Yared highlighted three potential contributors to the slowdown: labor demographics and participation; “capital intensity” or business investment; and the “production efficiency” of U.S. companies.
  • A detailed examination of the impact of energy innovation—from the shale boom to renewables and the construction of a new, “smart” grid—on jobs and economic growth. Leading this segment were Jason Bordoff, formerly energy advisor to President Obama and Director of Columbia’s Center on Global Energy Policy, and Derrick Freeman, Director of PPI’s Energy Innovation Project.
  • A dinner conversation at the Columbia Club with Edmund Phelps, the 2006 Nobel Laureate in Economics and Director of Columbia’s Center on Capitalism and Society at Columbia University. Drawing on his recent book, Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge and Change, he stressed the importance of indigenous innovation in creating the conditions for broad upward mobility. He also emphasized the crucial role of “modern” or individualistic cultural values in sustaining the mass innovation and entrepreneurship America needs to flourish again.
  • A detailed look at business taxation and reform as a potential driver of economic growth. It featured Michael Graetz, Alumni Professor of Tax Law at Columbia Law School, David Schizer, Dean Emeritus and the Harvey R. Miller Professor of Law and Economics at the Columbia Law School and Co-director at the Richman Center, as well as PPI’s Michael Mandel. The discussion ranged widely over global tax frictions, including the OECD’s new “BEPS” project; the need for corporate tax reform; “patent boxes” and mounting U.S. interest in consumption taxes.
  • A roundtable on trade and productivity growth with Ed Gerwin, PPI Senior Fellow for Trade and Global Opportunity and the versatile Michael Mandel. Noting President Obama’s controversial call for a Trans-Pacific Partnership, Gerwin stressed the agreement’s potential for “democratizing” trade by making it easier for U.S. small businesses to connect with customers abroad. Mandel underscored another PPI priority: raising awareness among policymakers of the growing contribution of cross-border data flows to growth here and abroad, and the need to push back against proposals that would impede “digital trade”
  • A luncheon presentation on “financial regulation after the crisis” by Jeffrey Gordon, Richard Paul Richman Professor of Law at Columbia Law School and Co-director of the Richman Center. Gordon described the new regime put in place by Dodd-Frank and other rules to guard against “systemic risk” of another financial meltdown, and suggested its “perimeter” may been to be expanded beyond banks.
  • The symposium’s final panel featured a vigorous discussion on K-12 education reform and the economy. The discussants were Jonah Rockoff, Associate Professor at the Columbia Business School and David Osborne, who directs PPI’s Reinventing America’s Schools Project, and is a co-author of the seminal “Reinventing Government.” Rockoff highlighted research showing that the returns to school improvement are enormous, and recommended reforms that could increase school quality. Osborne traced the evolution of school governance in America, and offered detailed looks at new models emerging in cities like New Orleans and Washington, D.C., both of which are leaders in the public charter school movement.

The symposium gave the policy professionals who participated a rare opportunity to delve deeply into complicated economic realities, guided by presenters of extraordinarily high caliber. The conversations were highly illuminating and will inform PPI’s work on Agenda 2016—a new blueprint for reviving U.S. economic dynamism and opportunity.

Understanding the Meaning of BEPS for the United States

Posted on by The Progressive Policy Institute

Multinationals are about to get hit with a big tax penalty for operating in the United States. Is it finally time for corporate tax reform?

On Monday October 5 the OECD will release the “final package of measures for a co-ordinated international approach to reform the international tax system.”  These BEPS recommendations (standing for Base Erosion and Profit Shifting) are intended to address “gaps and mismatches in existing rules which allow corporate profits to ‘’disappear’’ or shift to low/no-tax locations, where no real value creation takes place.”  In other words, the goal is to make sure that multinationals pay their fair share of taxes globally. This is a laudable objective.

But BEPS also exposes the huge difference between the U.S. corporate tax rate, and that of many of our rivals. According to KPMG, the posted U.S.  corporate tax rate, including both federal and state, stands at about 40%.  By comparison, the average corporate tax rate in the European Union is about 22%. That includes Ireland (12.5%),  United Kingdom (20%) and Germany (roughly 30%). To put this in perspective, a company earning an extra $1 billion in profits in the United States would pay roughly $400 million in corporate taxes, versus only $200 million in taxes if the profits were booked in the United Kingdom. That difference of $200 million could fund thousands of jobs.

Before BEPS, many U.S.-based multinationals were able to legally reduce their U.S. tax bills by  shifting income to other countries with lower rates. They used a variety of tax strategies. The result for the companies: Lower effective taxes. The result for the United States: Higher competitiveness, since multinationals could avoid the full brunt of the excessively high U.S. corporate income tax rate. Continue reading “Understanding the Meaning of BEPS for the United States” →

Forbes: Don’t Tax Broadband In Order To Subsidize It

Posted on by The Progressive Policy Institute

The Federal Communications Commission (FCC) recently proposed amending its low-income “Lifeline” program—which provides a $9.25 per month credit for consumers of voice services—to permit recipients to apply that same subsidy instead to broadband services. Who could argue against increasing options for low-income Americans?

Before critiquing the FCC’s proposal, it’s important to point out that expanding broadband access is a laudable goal. But financing this expansion through the Lifeline program will eventually lead to the perverse outcome of taxing broadband in order to subsidize it. Better to raise the funds for subsidized broadband from taxes imposed on behavior we want to discourage.

To an economist, a subsidy (or a tax) is warranted only in the presence of a market failure. When the market produces too much a product—think driving—it’s because producers are not internalizing a negative externality (traffic or air pollution). When the market produces too little—think general (as opposed to applied) research and development (R&D)—it’s because producers are not internalizing a positive externality or spillover.

This understanding leads to a simple policy prescription: Tax the industries that produce negative externalities and subsidize those that produce positive spillovers. Yet our politicians won’t support a gas tax to finance our crumbling roads, reflecting their constituents’ myopic desires, even if the result runs counter to economic theory.

Broadband is a classic case of positive spillovers in that every person who joins the network makes the network more valuable for existing users and for application providers. In addition to tapping into those positive spillovers, a broadband subsidy could stimulate more broadband investment: If a broadband provider needs a 30 percent take rate to deploy fiber to a neighborhood, and if a broadband subsidy gives it assurance that that target will be exceeded, the neighborhood has a better chance of being deployed.

Now back to the FCC’s Lifeline proposal. Lifeline is currently funded by a “universal service fee” that shows up on your phone bill for services that are designated as interstate (as opposed to intrastate). The FCC imposes a fee on providers of these voice services, who in turn pass that fee onto their customers. Roughly half of the funds that flow to low-income residential users are raised on the backs of businesses, creating a cross-subsidy of sorts. The FCC proposes to leave the funding alone (for now), but to give Lifeline recipients the option to apply the existing subsidy to broadband instead of voice service.

By my calculations (produced below), to induce non-adopting Americans to share in the costs of broadband, the annual subsidy would cost between $1.1 billion (for a modest addition of 10 million of the 32 million disconnected homes) and $4.3 billion (for 20 million homes, leaving just 12 million disconnected). The immediate problem is that a large chunk of this cost estimate does not fit within the contours of the existing Lifeline budget, which stood at $1.7 billion in 2014.

How did I arrive at these cost estimates? A 2014 study by three FCC economists estimates that up to 10 million disconnected homes would be willing to subscribe to broadband if a subsidy of 15 percent were offered. The annualized cost of connecting the first 10 million disconnected homes would be $1.1 billion (equal to 10M x 15% x $60 per month x 12 months). Because the next tranche of non-adopters are less inclined to adopt, a larger subsidy would be required to reduce the disconnected share further. To the extent that 20 million homes could be induced to adopt broadband in response to a 30 percent subsidy, the subsidy would cost $4.3 billion per year (equal to 20M x 30% x $60 per month x 12 months).

Telling Lifeline-enrolled families that already purchase a bundled voice and broadband service that they can apply their existing $9.25 per month subsidy to broadband rather than voice is not going to reduce the number of disconnected broadband households (nor would it make their lives any better). And Lifeline-enrolled families that didn’t have broadband because they purchase voice on a standalone basis would be forced to lose their voice subsidy if they applied the subsidy to broadband instead (making their lives only slightly better). Tapping the existing base of Lifeline funds just won’t make a big difference when it comes to shrinking the digital divide.

And therein lies the problem. The current base of revenues—interstate voice services—are under siege as consumers increasingly obtain voice service as a free add-on to a wireless broadband data package. To raise the funds to make a real dent in the number of disconnected homes and improve lives, the Lifeline revenue base likely would have to be expanded to include broadband services.

As unelected officials, the FCC Commissioners would be happy to oblige. Some activists are practically begging the FCC to tax broadband to preserve the Universal Service program. And the FCC is not bashful about taxing and spending: In 2014, the FCC expanded the E-Rate program by $1.6 billion to give schools and libraries greater access to broadband.

But for the same reason we would never finance a general R&D subsidy by taxing firms engaged in general R&D, it makes no sense to tax broadband in order to subsidize it. Indeed, for those 10 to 20 million non-adopting households that would come aboard in response to a modest subsidy, there are likely millions of price-sensitive broadband households that would leave the broadband market in response to a modest tax. Unlike interstate voice revenues, which are paid in part by businesses, fixed broadband revenues are overwhelmingly paid by residential consumers. Thus, bringing broadband into the revenue base would cause U.S. households to bear a larger burden of the universal service subsidy.

Even worse, as soon as the FCC imposes a federal universal service fee on broadband to meet the surging demand for broadband among low-income Americans, the states are free to get in on the action. By reclassifying broadband as a “telecommunications service” in its February Open Internet Order, the FCC activated a series of dormant state and local telecom-based fees that had never been extended to broadband; Internet service was previously designated as an “information service,” and thereby immunized from this form of state taxation.

Recognizing this risk, the FCC preempted states from moving forward with their own universal service fees for broadband until the FCC adopted fees at the federal level: “[W]e preempt any state from imposing any new state USF contributions on broadband—at least until the Commission rules on whether to provide for such contributions.” The combined universal service fees from the FCC and the states would perversely contribute to the digital divide by driving even more price-sensitive adopters out of the broadband market.

To avoid this spiral, we need to look elsewhere for the financing of a broadband subsidy. Were it designed by an economist, the subsidy would be financed through the general treasury so as to reduce any distortions in the broadband marketplace. And the source of the funds would be the elimination of existing subsidies for sugar, corn, coal, or oil—all of which generate negative externalities.

Raising taxes on broadband users in order to subsidize broadband makes no economic sense.

This is cross posted from Forbes.

The Washington Post: Three of Obama’s biggest fights are about to be decided

Posted on by The Progressive Policy Institute

PPI Chief Economic Strategist Michael Mandel was quoted in The Washington Post regarding the impact of the OECD’s BEPS rules on U.S. jobs and tax revenue:

An international tax agreement could draw companies out of the United States, writes the Progressive Policy Institute’s chief economic strategist, Michael Mandel. “You probably haven’t heard of the BEPS project — but you soon will. Short for Base Erosion and Profit Shifting, the BEPS Project… changes the international tax rules by forcing companies to pay corporate taxes according to the location of the economic activity and value creation generating their profits. … Remember that most European countries already have substantially lower corporate tax rates than the United States does. … Under the proposed BEPS rules, though, the only way for American companies to take advantage of these lower rates in a European country would be to prove to tax authorities that they are engaged in value creation in that country. And the simplest way to show the location of value creation is to move jobs to that country.” The New York Times.

Read the piece in its entirety at The Washington Post.

NEWSMAX: Mandel: Obama’s Support of Global Tax Reform Is Big Loser for US

Posted on by The Progressive Policy Institute

PPI Chief Economic Strategist Michael Mandel was quoted in NEWSMAX regarding the impact of the OECD’s BEPS rules on U.S. jobs and tax revenue:

The Obama administration backs the project to ensure that more corporate tax payments enter the government’s coffers. “But as the project heads for its end-of-year deadline … nobody in Washington is paying attention to a simple fact: the United States lost, and lost big,” Mandel writes in the New York Times.

“BEPS rules will likely not generate more tax revenues for the United States. Instead, they will encourage American companies to quickly move high-paying jobs, such as those of research scientists and software developers, to Europe to take advantage of lower tax rates.”

Without quick corporate tax reform by Congress, BEPS could “turn into an enormous job-and-revenue grab by Europe, and an enormous loss of jobs and revenues by the United States,” Mandel argues.

Read the piece in its entirety at NEWSMAX. 

The BEPS Effect: New International Tax Rules Could Kill US Jobs

Posted on by The Progressive Policy Institute

Tax avoidance by multinationals, and the creative use of loopholes, has long been part of the international tax system. Governments have usually responded with targeted measures to close those loopholes. But after the Great Recession, many national governments faced extraordinarily tight budgets and huge debt burdens. It was therefore especially galling for politicians in the United States and Europe to see large profitable multinationals such as Google, Apple, and Starbucks apparently paying less than their “fair” share of taxes.

In response, in 2013 the finance ministers of the world’s largest countries—the group known as the G20—and the OECD initiated a sweeping reassessment of the global tax system known as the “Base Erosion and Profit Shifting” (BEPS) Project. The OECD tax experts at the BEPS Project, based in Paris, were told to develop a set of principles to “ensure that profits are taxed where economic activities generating the profits are performed and where value is created.”What’s more, they were also told to finish their work on an accelerated schedule, by the end of 2015.

It is now the middle of 2015, and the broad outlines of the new BEPS principles are becoming clear. This paper examines these new principles, as laid out by the BEPS project, and analyzes their likely impact on tax revenues and jobs. We find that unless Congress and the Obama Administration act quickly to reform the U.S. corporate tax system, the BEPS principles give multinationals a very strong incentive to move high-paying creative and research jobs from the United States to Europe.

Download “2015.06-Mandel_The-BEPS-Effect_New-International-Tax-Rules-Could-Kill-US-Jobs”

The Blame Game: Multinational Taxation in an Era of Knowledge

Posted on by The Progressive Policy Institute

U.S.-based companies such as Google, McDonalds, Starbucks, Apple, and Mi-crosoft are being attacked by European politicians for not paying their fair share of taxes. For example, in March 2014 Google was hit by a French tax assessment of perhaps as much as a billion euros according to press reports at the time. In November 2014, U.K. lawmakers accused Google, Amazon, and Starbucks of us-ing convoluted accounting methods to reduce their tax liabilities.

Indeed, the feeling that U.S. multinationals—especially digital giants—are ‘getting away with something’ has fueled a concerted effort by developed countries to re-write the global tax system. This so-called BEPS project (for Base Erosion and Profit Shifting), organized by the OECD, is in the process of issuing a series of guidelines for how countries can revamp their tax codes to best capture “stateless income.”

However, these accusations of tax avoidance are, in reality, not as clear-cut as they seem. Certainly some companies are taking advantage of legal but blatant loopholes that make no economic sense. Eliminating such loopholes is an im-portant part of the BEPS project that we support.

Download “2015.05-Mandel-Weinstein-OByrne_The-Blame-Game-Multinational-Taxation-in-an-Era-of-Knowledge”

Creating New Pathways into Middle Class Jobs

Posted on by The Progressive Policy Institute

Many policy ideas on how to reduce income inequality and improve the upward mobility of low-income Americans are gaining popularity, on both sides of the political aisle. As usual, Republicans suggest that tax cuts heavily tilted towards the rich can address these problems, though many of their proposals would actually worsen inequality and mobility. Populist Democrats’ proposals include minimum wage increases, gender pay equity and the like—which deserve support but would have very modest effects on overall inequality and mobility into the middle class. If we want to have large impacts on these problems, and create systemic rather than mostly symbolic effects, there is only one place to go: postsecondary education or other skills by low-income workers, and whether they get the kinds of jobs that reward these skills in the job market.

Most job training in the United States now occurs in community and for-profit colleges, as well as the lower-tier of four-year colleges. We send many young people to college, even among the disadvantaged, but completion rates are very low and earnings are uneven for graduates. The public colleges that the poor attend lack not only resources but also incentives to respond to the job market. Approaches like sectoral training and career pathways, which combine classroom and work experience, show promise but need to be scaled, while employers need greater incentives to create middle-paying jobs.

This report proposes a three-part strategy for equipping more Americans with new tools for economic mobility and success: 1) A “Race to the Top” program in higher education, where the federal government would help states provide more resources to their community (and perhaps four-year) colleges but also require them to provide incentives and accountability for the colleges based on their student completion rates and earnings of graduates; 2) Expanding high-quality career and technical education along with work-based learning models like apprenticeship; and, 3) Giving employers incentives to create more good jobs.

 

Download “2015.05-Holzer_Creating-New-Pathways-into-Middle-Class-Jobs”

PPI Returns from 2015 Digital Trade Mission to Europe

Posted on by The Progressive Policy Institute

Dear Friend,

We’re just back from Europe, where last week PPI led a bipartisan delegation of Congressional staff on a four-day swing through three capitals: London, Brussels and Berlin. Our goal was twofold: 1) to learn more about the European Union’s ambitious plan to create a “digital single market” and, 2) to press PPI’s case for moving digital trade from the periphery to the center of the transatlantic agenda.

Why is this so important? Consider these facts:

  • The free movement of data raises the productivity of businesses and reduces trade costs, creating jobs and growth on both sides of the Atlantic.
  • US/EU cross-border data flows are by far the highest in the world, 50 percent more than between the United States and Asia.
  • America runs a large trade surplus in services, of which 61 percent are delivered digitally.
  • The Internet is becoming a powerful export platform for small enterprises, connecting them to global customers at low cost.

As PPI has documented in a series of groundbreaking reports, digital innovation and commerce are increasingly driving economic investment and growth in America and Europe. We believe the transatlantic partners share a common interest in ensuring that digital trade enjoys the same legal protections as trade in physical goods and services. Instead of joining forces to extend free trade principles to digital commerce, however, Europe and America are embroiled in a raft of disputes that threaten to erect barriers to cross-border data flows.   

Such disputes, for example, involve calls for data localization, for national or European clouds, for taxing data flows and for imposing stringent privacy or data protection rules on businesses. Right now, the European Court of Justice is considering a challenge to the “safe harbor” rules that have allowed US tech companies to operate in Europe. In addition, new tensions have arisen around issues of copyright protection, “platform competition,” tax avoidance and many core provisions of the proposed Transatlantic Trade and Investment Partnership (T-TIP).

As you probably know, PPI has long been a catalyst for transatlantic dialogue, going back to the Clinton-Blair “Third Way” conversations we helped to launch in the 1990s. Over the last four years, our work in Europe  has focused on reviving transatlantic economic cooperation, with a particular emphasis on the rise of data-driven innovation and growth. At a time when authoritarian countries seek to limit the free flow of information, we think it’s crucial that the Western democracies work together to prevent the balkanization of the Internet and defend free digital trade.

That’s why we organized this second “Digital Trade Study Group”—a bipartisan group of 12 senior House and Senate staffers, whose bosses have oversight of issues related to trade, digital commerce, copyright, intellectual property, privacy, cyber security, and communications and technology. (We took the first such group to Europe in April 2014). Last week’s trip featured a productive round of high-level talks with prominent political, business, policy and media leaders.

Here are the highlights: 

  • In London, our traveling party met with Daniel Korski, Special Advisor to Prime Minister David Cameron, and Guy Levin, formerly special advisor to Chancellor of the Exchequer George Osborne, to discuss UK technology policy. As Michael Mandel, PPI’s chief economic strategist, has documented, London has emerged as one of the world’s premier centers for tech entrepreneurship.
  • Vanessa Houlder, who covers economics for the Financial Times, briefed our group on the Cameron government’s controversial new “diverted profits tax.” Aimed ostensibly at discouraging tax avoidance, it slaps a 25 percent tax on the local profits of U.S. and other foreign companies operating in the UK, and has been dubbed the “Google tax” by detractors. 
  • Also in London, PPI released a new policy brief by Mandel, Taxing Intangibles: The Law of Unintended Consequences. It notes that digitized information differs from physical goods and services in that it can be duplicated at negligible cost and used by different consumers at once. As such, Mandel argues, it makes little sense to tax this intangible knowledge as one would a car or the provision of a unique service. In fact, new proposals for taxing intangibles will undermine global growth and thus be self-defeating, the report argues.
  • In Brussels, two officials of the European Commission’s DG Connect unit, Eric Peters, Deputy Head of the Single Market Unit and Tamas Kenessey, Legal Officer, briefed the group. The Digital Single Market, they stressed, is the EU’s top priority. It would enable tech companies that start in one of the Union’s 28 countries to grow to continental scale, and speed the onset of what we call the “Internet of Things.”
  • Over dinner, the Digital Trade Study Group heard from Ken Propp, Legal Counsel with the US Mission to the EU, and Paul Hofheinz, President of the Lisbon Council, PPI’s think tank partner in Brussels. The discussion centered on the headwinds T-TIP has encountered and political differences within the EU on digital policy.
  • Then it was on to Berlin, for lunch with two leading Green Party officials, Konstantin von Notz, a Member of the German Bundestag, and Dieter Janacek, the party’s spokesman on economic issues. The Greens are strong backers of Europe’s Data Protection Regulation, which our speakers noted reflects Germany’s unhappy experience with secret police agencies of the past. Joining us for dinner was Torsten Riecke, an international correspondent for Handelsblatt, who gave our group an insider’s perspective of German domestic politics, as well as its increasingly central role in European politics. The next morning, we drilled deeper into German concerns about data protection and privacy with Marcus Loning of the Stiftung Neue Verantwortung and former Free Democratic Party Member of the German Bundestag.
  • Our group received an insightful briefing on Industrie 4.0—Germany’s equivalent of the “Internet of Things.” As explained by Boris Petschulat, Deputy Director General at the German Federal Ministry for Economic Affairs & Energy, Industrie 4.0 seeks to digitize production without disrupting its finely honed industrial export machine. 
  • We paid a visit to the Federal Association of German Newspaper and Magazine Publishers, which has been battling tech companies, especially Google, over copyrightand content issues. A lively debate ensued with Managing Director Christoph Fiedler and Christoph Keese, Vice President of the Axel Springer publishing empire. For more on this important subject, check out another just-released policy brief by Mandel, Copyright in the Digital Age: Key Economic Issues.
  • Thomas Jarzombek, a member of the German Bundestag, who sits on the committee responsible for the digital agenda, elaborated on the German government’s efforts to build a digital infrastructure and nurture a more entrepreneurial, start-up culture.
  • We finished our mission at the US Embassy in Berlin, where Ambassador John Emerson, a longtime PPI friend, offered a wide-ranging and insightful perspective on US-German relations.

PPI’s Digital Trade Study Group excursions to Europe serve two important purposes. First, they enable key Congressional staff from both parties to get a better understanding of European views on innovation policy, T-TIP, digital trade, privacy, copyright and other interests of mutual concern and transmit that knowledge to Members of Congress.  Second, they underscore to our European friends the importance Congress attaches to transatlantic commerce in general and to data trade specifically.

This year’s mission advanced both of these goals. And it added important new dimensions to the extensive network of European political leaders, industry professionals, and policy analysts that PPI has built over the years. As always, I welcome any feedback you may have. 

Sincerely,

Will Marshall
PPI President

Should the US consider a patent box?

Posted on by The Progressive Policy Institute

Who will write the new rules of the global tax system? Right now risk-averse bureaucrats at the OECD’s Paris headquarters are busily constructing a new set of tax principles–known as the ‘BEPS project’–that could accidentally squash global growth, as we warned in our recently released policy brief, “Taxing Intangibles: The Law of Unintended Consequences.”*

Instead, the rulebook for 21st century global tax policy must be written by those policymakers, in the US and elsewhere,  who understand the importance of risk-taking and investment in innovation.  This imperative drives the United States to consider concepts such as the “patent box,” a tax instrument that discourages tax avoidance by large corporations while encouraging the creation of growth-enhancing knowledge.

The “patent box”—or as it is sometimes called, the  “IP box” or “innovation box”—is already in use by countries such as the United Kingdom and the Netherlands. It gets its name from the idea that companies invest in research and development that leads to patents.  These patents are metaphorically put into the patent box, where they are taxed at a lower rate. Sometimes the preferential rates are broadened to other types of intangible investments, which is why it sometimes goes by a different name.

The underlying economic insight behind the ‘patent box’ is the indisputable fact that global growth is increasingly driven by knowledge, in the form of patents, copyrights, data, and other intangibles.  Unfortunately, the rising importance of intangibles means current tax rules are simultaneously too strong in some aspects and too weak.  On the one hand, statutory tax rates on intangibles is almost certainly too high. Remember that the investment in knowledge by one company or country spills over to other companies and countries, creating a positive externality for the whole global economy.  As a result, many economists agree that intangibles should be taxed at a lower rate to acknowledge their benefits.

On the other hand, under the current rules, the same virtues of intangibles that enable global growth also enable knowledge companies to easily transfer nominal ownership of intangibles to subsidiaries in low-tax countries. The combination of high statutory tax rates and easy transfers means that corporations have both an incentive and the means to legally and dramatically cut their taxes.

This state of affairs cannot persist.  Faced with political and fiscal pressure, governments will take aggressive steps to bring in more tax revenues.  Indeed, the BEPS project is advocating that governments  give up long-held notions of tax sovereignty to “capture” the income from intangibles, even if these measures end up hurting global growth.  Unfortunately, as we showed in our paper, the tax approach advocated by the BEPS project is ultimately self-defeating, requiring enforcement of a tortuous set of transfer pricing rules every time an intangible crosses national borders—an approach that only a bureaucrat could love.

For US policymakers looking to spur growth, one better solution to this dilemma—though not the only one—is the patent or innovation box. In simple terms, the patent box offers corporations much lower tax rates on income from investment in intangibles such as R&D.  In return, this lower tax rate is only available to intangible investments made in that country—what tax experts call a ‘nexus.’

A patent box offers corporations both a carrot and a stick.  The carrot is the lower tax rate on the income from domestic investments in intangibles made in the United States. The stick is that this lower rate would not be available to companies that moved nominal ownership of intangibles to other countries, thus reducing the avenues for legal tax avoidance.

Many countries in Europe have already adopted varieties of the patent box approach, including the United Kingdom.  However, the patent box in the UK and elsewhere has come under pressure from supporters of the BEPS approach, who believe that such “preferential regimes” should be eliminated or greatly restricted.

By contrast, we believe that the patent box should be seriously explored in the United States as a means of encouraging growth while discouraging corporate tax avoidance.  It may not be the ultimate solution, but it’s one step in the right direction.

*BEPS stands for Base Erosion and Profit-Shifting. It’s a major OECD project for reworking the global tax system for the digital age. The BEPS project has many good points, in terms of reducing the opportunities for tax avoidance, but it may have a negative impact on global growth.

Copyright in the Digital Age: Key Economic Issues

Posted on by The Progressive Policy Institute

The bounds of traditional copyright are being stretched and broken by technological change. The ease of digital copying, combined with new forms of creativity and production, including 3D printing, is transforming the copyright landscape at an accelerated pace.

Creators, companies, and governments need to think clearly about which goal or goals of copyright is the most important to them, and move towards a system that supports those goals. Speaking in the broadest terms, copyright establishes the right of an author or creator to control and benefit from his or her artistic endeavor. Yet what is society trying to achieve by granting such a right?

There is no better time to consider this fundamental question. The European Commission, under President Jean-Claude Juncker, has put a high priority on creating a Digital Single Market, which among other things would replace national copyright systems with a single EU system. Meanwhile, over the next several months, the European Parliament will be considering a draft report that offers up its own version of an EU-wide copyright system.

Simultaneously, American and European T-TIP negotiators are talking about how to harmonize intellectual property protection across the Atlantic, which could affect copyright as well. And national governments in Germany and Spain extended their copyright systems in recent years for the explicit—and ultimately unsuccessful—purpose of charging Google News and other sites a fee for running snippets of stories from national newspapers.

Download “2015.04-Mandel_Copyright-in-the-Digital-Age_Key-Economic-Issues.pdf”

Washington Post: Setting the record straight on a net neutrality fact check

Posted on by The Progressive Policy Institute

The Washington Post today set the record straight regarding a fact check it made in January involving a PPI policy report. Since the fact check was published, it has been widely misused by net neutrality proponents to discredit the report, which found that reclassification of the Internet as a public utility under Title II would pass millions of dollars in taxes and fees on to consumers.

The Fact Checker awarded Three Pinocchios to widely-cited claims that the FCC reclassification would cost $15 billion a year in new taxes and fees. The figure originated from a December 2014 report by the left-leaning Progressive Policy Institute, which calculated the worst-case scenario of all possible local and state telecommunications fees and taxes that could be levied on Internet services. After the report was published, Congress renewed the Internet Tax Freedom Act (ITFA), which prohibits state and local governments from levying new taxes on Internet access. So researchers published an update with state and local telecom fees, and modified the figure to $11 billion. It was noted in a footnote of a follow-up an article and was not readily available to average readers not following the debate.

Since the fact check published, some net neutrality proponents misquoted it on social media, either attributing the Pinocchios to PPI or to the $11 billion figure. 

Read the article in its entirety at the Washington Post.