Bluegrass Beacon — Kentucky to the ‘trade deficit’: You’re fired!

BluegrassBeaconLogoConsidering the Bluegrass State last year exported $30 billion worth of goods and services – more than 33 other states – Kentuckians should vigorously oppose anything remotely associated with a “war on trade.”

American Enterprise Institute scholar Mark Perry rated the share of Kentucky’s economy in 2015 linked to imports and exports fifth-highest in the nation, comprising 34 percent – or $66 billion – of the commonwealth’s $193 billion GDP.

Perhaps Kentucky Gov. Matt Bevin, who recently conducted a trade mission to Japan, could find a way to strike up a cordial conversation with his good friend President Donald Trump to put the commander-in-chief at ease about this whole “trade-deficit” matter.

Bevin could even share some wisdom from flyover country by passing on Indiana University Southeast economics professor D. Eric Schansberg’s reason for claiming the trade deficit remains “the most misunderstood concept in economics.”

Schansberg, Ph.D., says the discussion about international trade often focuses heavily on the downside – which tends to be more visible in terms of some individuals losing out in a global economy – while nearly completely missing out on its subtle but significantly important benefits for an entire state or nation.

“Trade is good for the aggregate if not always for the individual,” he says.

Schansberg, who’s also a Bluegrass Institute scholar, notes that “exports lead to imports” and warns that attempting to artificially narrow the so-called “trade deficit” could result in fewer dollars invested in America’s economy.

“Everybody talks about the difference in goods and services exported versus imports when what really matters is investment surplus,” Schansberg says.

Shallow-thinking protectionists rarely dig deep enough to reach this important component in making their own determinations about the success or failure of free-trade relationships.

Why, these shallow paddlers must wonder, would Bevin travel to Japan to tout the commonwealth as an attractive investment option instead of chastising that nation because last year it only spent $1.1 billion in direct purchases from Kentucky while we as a state imported $5.1 billion worth of Japanese products?

Consider the rest of this trading-partnership story.

Not only are imports critical to keeping Kentucky at – or near – the top in the automotive, aerospace and pharmaceutical industries, but Japanese-owned companies now operate more than 180 facilities in our commonwealth.

And while Kentucky is the fifth-largest importer of Japanese goods – Japan is the No. 1 international investor in the Bluegrass State, having created 44,400 full-time positions in those facilities.

“Investment surplus,” anyone?

An important teaching moment could occur if our governor explained to the president why Kentucky exporting nearly $30 billion while importing almost $40 billion is worthy of replicating rather than punishing, which would only bring us more harm, anyhow.

Schansberg notes the last time America had a trade surplus was not during an uptick but when the economy tanked during the late 1970s.

“It’s because investors were looking at our economy and they didn’t see it as a great investment,” he said.

All those current imports mean more choices and better prices for consumers and industry. It means foreign investors look at today’s Kentucky and America and they like – really like – what they see.

Frenchman Frédéric Bastiat, a 19th-century champion of free-market economics, proposed reversing “the principle of the balance of trade and calculate the national profit from foreign trade in terms of the excess of imports over exports.”

Bastiat called this “excess” the “real profit,” and challenged the contemporary protectionists of his day to produce evidence showing otherwise.

“Even if our imports are infinite and our exports nothing, I defy you to prove to me that we should be the poorer for it,” he said.

Jim Waters is president of the Bluegrass Institute for Public Policy Solutions, Kentucky’s free-market think tank. Read his weekly Bluegrass Beacon column at www.bipps.org. He can be reached at jwaters@freedomkentucky.com and @bipps on Twitter.

From the Bluegrass Institute Scholars – It’s Tax Day 2015: Flat tax policy eliminates ‘expensive loopholes,’ lower rates for most

SchansbergBy D. Eric Schansberg, Ph.D.

We pay taxes every day. But for many people, April 15 represents “Tax Day” – the day when our income tax forms are due.

Many people file their 1040s sooner, particularly when they’re receiving refunds. They have allowed the government to keep too much of their money all year. So why should they extend the interest-free loan to the government for a few more months?

In terms of taxes on income, payroll (FICA) taxes usually impose a far-larger burden on most wage earners. But we rarely think about that tax on income because it’s not nearly as obvious to us. The taxes are withheld each pay period before we see the money; we don’t file an income tax return for FICA; and we never get a refund or pay more at the end of the year for FICA.

Beyond the two federal income taxes, most workers deal with state and local income taxes. And of course, we pay all sorts of taxes with our after-tax income as we spend it on everything from donuts to pants, cars to houses, gasoline to telephones.

The Tax Foundation has tallied all of these taxes and calculated “Tax Freedom Day” for the average person in each state. If we had to pay all of our taxes first, when would we be free from taxation?

Of course, this number would vary tremendously by individual. It varies by state as well.

For example, Louisiana is the first state to “gain its freedom” on March 30, while Connecticut is the last state – on May 9. Indiana is in the middle of the pack with a Tax Freedom Day of April 16. Thanks to its low income and its light federal-tax burden, Kentucky is early in the pack with a Tax Freedom Day of April 8.

Some households reach Tax Freedom Day sooner because they have lower incomes. Our tax system is generally “progressive”, applying higher tax rates to those with higher incomes.

Other households reach Tax Freedom Day sooner because of income tax deductions.

All income is exposed to FICA taxes. But not all income is exposed to income taxes.

Some income is excused through “exemptions” (mostly related to household size) and a variety of “deductions.” Taxpayers are offered a “standard deduction,” but can benefit from “itemizing” their deductions (detailing the deductions allowed by law) if that amount is more than the “standard.”

For example, in 2014, the standard deduction for a married couple was $12,400. If a couple had itemized deductions of $13,400, their taxable income would be reduced by another $1,000. If they were in the 15 percent tax bracket, this would reduce their taxes by 15 percent of the $1,000, or $150. If their itemized deductions were only $12,000 (less than the “standard”), their taxable income and their taxes would be unchanged.

So, larger deductions and larger tax rates lead to a greater advantage.

Wealthier people face higher tax rates and tend to have larger deductions. Thus, they typically gain a lot more from deductions, reducing their taxable income more so and sheltering their income from higher tax rates.

It also follows that wealthier states have much more to gain from deductions. According to the Treasury Department’s budget for 2016, the five largest tax deductions are: 1) the subsidy for tax-free health insurance and health care; 2) retirement savings; 3) state and local taxes; 4) mortgage interest and 5) charitable contributions.

Subsidies for retirement savings and charitable contributions face little controversy, so let’s focus on the other three.

The subsidy for health insurance through the firm results in a loss of $225 billion in revenue for the federal government. (The subsidy is also responsible for most of our problems in health insurance and health care, but that’s another article.) This works out to about $2,900 from the average family of four. The state and local tax deduction leads to $81 billion (more than $1,000 per family). The mortgage interest deduction leads to $54 billion (about $700 per family).

These three subsidies comprise about 20 percent of all income-tax revenues. If we got rid of these loopholes, we could lower income tax rates substantially.

In the coming year, when you hear some politicians talk about a “flat tax,” this is what they’re discussing: getting rid of expensive loopholes that largely benefit the wealthy while lowering income tax rates for everyone.

Which system would you prefer?

D. Eric Schansberg, Ph.D., is professor of economics at Indiana University Southeast, a former Libertarian candidate for Congress and a member of the Bluegrass Institute Board of Scholars. Reach him at dschansb@ius.edu. He is the author of  “Turn Neither to the Right Nor to the Left,” a Christian’s guide to public policy.