Services and global trade

Michael Cox, an econ prof at SMU's b-school, has a stimulating NYT op-ed today on the role of services in global trade. All too many discussions of our trade deficit focus on goods (including the President's call to "export more of our goods" in his State of the Union speech), where we do indeed run quite a deficit. However, the US runs a substantial trade surplus on traded services, especially travel, education, media, consulting, and finance. Cox argues that these are the sectors where the US is likely to have the greatest success in opening up new export opportunities.

Tax policy in a service economy

Services now account for over three-fourths of GDP, and the percentage keeps rising. This has dire consequences for states that depend on sales taxes for revenue. The North Carolina General Assembly struggled with this issue last year and was not able to come up with a resolution. States face a simple choice: broaden the tax base to include services and charge a lower, less distortionary rate or continue to raise the tax rate on an ever shrinking base. Yesterday's WSJ reports how various states are addressing this issue. Of course all taxes have some distortionary effects, but lower rates and broader bases are generally regarded as pluses.

Think Hollywood is having a tough year?

This has not been the greatest year for Hollywood; only one summer flick ("Transformers II" of all things) has cracked the $300 million mark that customarily signals blockbuster hit status. The Economist reports that business is much worse in the underground film industry in northern LA, where they make films with titles that cannot appear in a family-friendly PG rated blog. As an economist, I merely will take note that actors' salaries have fallen because fewer such films are being made. This appears to be a consequence of a sharp leftward shift of the demand curve (brought about by the recession and competition from substitutes available at a lower price, i.e., free).

As for me, I have only seen one movie in a theatre this summer ("Julie and Julia," which pulled a mere $80 mil probably because it had no explosions or chase scenes), but plan to catch "Up" and "Star Trek" when they come out on DVD through Netflix this fall. Movies we enjoyed this summer: all 13 episodes of "I Cl-Cl-Claudius" and "Rififi."

NC to start taxing services?

The General Assembly is seriously considering expanding the sales tax to include services, according to the Raleigh News and Observer. From a purely conceptual point of view, this idea makes a certain amount of economic sense. By levying the tax solely on goods, consumers have a government-created incentive to substitute services for goods. Also, services represent a large and growing share of GDP, making it harder and harder for the state to generate a given revenue target from taxes on goods alone.

Some legislators are concerned that the new tax will cover some, but not all, services. Apparently the drafters of the legislation think movie tickets and hair cuts are fair game, but not legal and accounting services. I am having a hard time in seeing the logic here:

Sen. Dan Clodfelter, co-chairman of the Senate committee that deals with taxes, said white-collar professional services were excluded because most of their costs are tied up in health care and real estate, and the higher taxes would raise those industries' costs substantially.

I presume Sen. Clodfelter checked out deadweight loss calculations before he made that statement!