Studies this week Hutchins summary note that tax revenues rise as countries impose minimum corporate taxes, automation has been the main driver of wage inequality growth in recent years, and more.
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Multinational Enterprises (MNEs) can shift profits across national borders in order to lower their taxes. Aqib Aslam and Maria Coelho of the International Monetary Fund note that a minimum tax on domestically operating companies can help governments increase corporate tax revenues without seriously affecting business operations. By combining country and company-level data from 196 countries, 63 of which have minimum taxes, the authors estimate that imposing a minimum tax of 0.5% on corporate revenues increases a country’s tax revenues by 7% and a minimum tax of 1% on assets increases revenues by up to 33%. Despite the increase in tax revenues, the authors find no evidence that minimum taxes significantly influence the average investment or employment decisions of companies. The authors argue that while reforms to broaden the corporate tax base are preferable, introducing a minimum tax on direct, observable features (such as revenue or profits) can make tax avoidance more difficult and promote consistency among taxpayers.
Between 50 and 70% of the rise in wage inequality has been driven by automation, find Daron Acemoglu of MIT and Pascual Restrepo of Boston University. Using data from 1980 to 2018, the authors determine that Workers hardest hit by automation lost 12% of their total income, while income for groups not affected by rapid automation rose by 26%. Routine tasks performed by non-graduate workers (such as manufacturing and office work) have become disproportionately automated, which explains why non-graduate workers have had lower wage growth than college graduates in recent years. Despite the changes in the labor market, automation is only associated with an increase in total factor productivity (efficiency of capital and labor input) of 3.8%. The authors conclude that “automation can explain a significant part of the changes in wage structure and real wage declines in the data, while having a tiny impact on productivity growth”.
Using census data, University of Maryland’s John C. Haltiwanger notes that new business creation has skyrocketed from June 2020 after a decline in the early stages of the pandemic. Specifically, new business applications were 20% higher in 2020 than in 2019, their highest level since 2004, the earliest year for which data is available. The increase lasted at least until May 2021. In contrast, new business applications declined during the Great Recession of 2007-2009. One third of the new stores were in online and other non-retail stores. Haltiwanger notes that financial markets and intermediaries remained strong during the pandemic, a major difference between this and previous recessions. He suspects the pandemic has accelerated an earlier trend towards teleworking and online commerce.
Chart of the week: Federal legislation has increased personal income across the country pandemic
Source: Hutchins Center calculations based on Bureau of Economic Analysis data
“We need to get the economy through the pandemic and into a recovery phase that has now started. We really need to anchor recovery. We always talk about inflation anchors and we are not aware of it. But the recovery has to be firm, solid and sustainable. ” says Christine Lagarde, President of the European Central Bank.
“You only take crutches from a patient when the muscles have built up enough again so that the patient can walk on his own two legs. The same goes for the economy. We are at a tipping point where we are on this recovery path considering alternative options and firmly heading for a return to pre-COVID-19 levels … We have a lot of flexibility, but we are well on our way in terms of the economic outlook the right direction. “