Warren’s corporate tax ‘solution’ is fundamentally flawed – Michelle Hanlon and Jeff Hoopes

MIT Sloan Professor Michelle Hanlon

MIT Sloan Professor Michelle Hanlon

From The Hill

Sen. Elizabeth Warren (D-Mass.) recently proposed a tax on financial accounting income, which she calls her “Real Corporate Profits Tax.” This is a bad idea that will create many problems.

Warren is correct that public companies in the U.S. calculate income under (at least) two different sets of rules.

First, there are Generally Accepted Accounting Principles (GAAP) written by the Financial Accounting Standards Board (FASB). These rules are meant to reflect the economic performance of the business so that shareholders, among others, can evaluate the firm and its management.

Second, corporations calculate profits according to the Internal Revenue Code, created by Congress, to determine taxable income. The Internal Revenue Code is meant to raise revenue for the government, and in some cases, to change the ways companies behave — encouraging investment and research and development (R&D), for example.

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Public companies are about to be flooded with cash, how will they spend it? – Robert Pozen and Robert Steel

MIT Sloan Senior Lecturer Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

From Fortune

U.S. companies will soon experience a tsunami of free cash flow. Because of the new Trump-GOP tax plan—the Tax Cuts and Jobs Act—we estimate American companies will have over $2.6 trillion of additional cash over the next five years. This will come from three sources: repatriated overseas cash, future foreign earnings, and lower corporate taxes on domestic profits. The critical question is: What will companies do with this inpouring of cash?

For years, many CEOs of public companies have complained of pressure by analysts and activists to focus on short-term profits rather than long-term growth. Now each CEO has a great chance to put their money where their mouth is.

CEOs have two main alternatives for this incremental cash flow; they can boost short-term returns to shareholders through higher dividends and share repurchases, or they can augment long-term growth by investing in plants, people, research, and technology acquisitions.

For the sake of their credibility and the American economy, we urge CEOs to invest in long-term growth, and not in share buybacks as they did in 2004.

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Another argument for carbon tax: how car buyers behave – Christopher Knittel

MIT Sloan Professor Christopher Knittel

From The Sacramento Bee

Do you rationalize splurging on your daily latte by bringing your lunch to work? Every day we make decisions like this that impact our diet and pocketbook. These same trade-offs also affect the types of cars we drive, which impacts the effectiveness of fuel-efficiency policies.

In a recent study based on five years of data from the California Department of Motor Vehicles, James Archsmith and David Rapson of University of California, Davis, Ken Gillingham of Yale University and I found that in two-car households, increasing the fuel economy of the first car encourages owners to demand less fuel economy in their second car. In other words, if you buy a Toyota Prius, you may be more likely to replace your second car with an SUV.

When households increase the fuel economy of their first car by 10 percent, they will reduce the fuel efficiency of the second vehicle by 5 percent, our analysis found. The result is that half the fuel economy gained from improving the first car is eaten away by a less fuel-efficient second car.

But that is only part of the story. It turns out that owners also ended up driving more total miles, which cuts fuel savings another 10 percentage points. In the end, 60 percent of the benefits of increasing the fuel economy of the first car disappear when the second car is replaced with a less efficient vehicle. Read More »