James Pethokoukis

Politics and policy from inside Washington

Deferral Drama: Why Obama corporate tax reversal hints at a VAT

Oct 13, 2009 17:34 UTC

Many ideas that may have momentarily seemed like smart policy earlier this year — when rage at Wall Street and Corporate America hit a fevered pitch — didn’t survive a bit of calm reflection ((and intense business lobbying.). Like that 90 percent tax on executive bonuses. Or nationalizing the banks.

Both are certainly strong nominees for “worst idea of the year.” But they have a worthy challenger in the Obama administration’s previously announced intention to limit the ability of U.S. companies to defer the repatriation of overseas income. Probably seemed a terrific twofer at the time: a nice bit of populist political posturing (this is, after all, the “Benedict Arnold” tax break that Democrats love to harp on) that would also bring in some $200 billion over 10 ten years.

Total win-win, right?

So why then is the White House now apparently dumping the whole idea? Partly because of — you guessed it — intense business lobbying of both the administration and Congress. Technology CEOs who supported candidate Obama and congressional Democrats were, by all accounts, particularly persuasive.

They had an easy economic case to make, however. Not only would the tax plan hurt American corporate competitiveness (most other countries don’t tax their companies’ overseas profits), the changes would be a de facto $20 billion- a- year tax increase on business during a time of profound economic weakness. Bottom line: the tax changes were in no way incentives to add American jobs at a time when unemployment is climbing toward 10 percent. In this case, wealth and job creation trumped wealth redistribution and revenue raising.

Great decision by the Obama White House.

But while this was one instance where “more of the same” was better than the proposed change, the corporate tax status quo should not be preserved. For one thing, business income taxes are a lousy way to finance government. Studies show that somewhere between 45 percent and 75 percent of the corporate tax burden is shouldered by workers in the form of lower wages. And big taxes and tax subsidies encourage businesses to make decisions based on accounting benefits rather than for economic efficiency and productivity reasons.

Earlier this year, a group of centrist economists sponsored by the Tax Foundation put out a wish list of proposed corporate tax changes. Among them: lowering the corporate tax rate, broadening the tax base and permitting faster write-offs of business investment. Smart ideas all.

Or, they suggested, you could replace America’s sky-high 35 percent corporate income tax with a value-added tax of 5 to 6 percent. And that idea hints at the other reason why the White House may have scuttled their original tax plan. Obama supporters and fellow travelers have been launching trial balloons all over Washington promoting a VAT to deal with Uncle Sam’s huge budget deficits. And if that is the direction the White House wants to go, why spend the time and political capital on a corporate tax increase that may only be temporary?

So dumping the deferral limitation plan is both good economics and good politics, at least for now.

There’s your win win.


btw, TWH is denying that any of the CIT changes have been shelved.

http://www.nytimes.com/reuters/2009/10/1 3/us/politics/politics-us-obama-corporat e-taxation.html

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The Obama housing plan? Fail — at least so far

Oct 13, 2009 17:01 UTC

My Reuters colleagues give the tale of the tape:

Obama, grappling with the worst U.S. housing crisis since the Great Depression, pledged to help as many as 9 million families keep their homes by reworking their mortgages.

Eight months later, the plan is plagued by delays, red tape and, some critics say, a reluctance by banks to do their part. Just 17 percent of eligible borrowers have had their loans modified and monthly payments cut. Hardly any have been given a cut in the amount they owe on homes which are now worth less.

That means many successful applicants are left with loans that they still will not be able to afford in the long run. So instead of resolving the housing crisis that pushed the U.S. economy into recession, America may be prolonging it and, in the process, stunting the global recovery.

“Every single policy we’ve seen has merely kicked the problem down the road,” said Laurie Goodman, a veteran analyst at broker-dealer Amherst Securities Group LP, which specializes in residential mortgage-backed securities.

Me: Clearly at this point the best housing policy is an overall economic policy that boost growth and jobs — and let housing find its own level.

Obama, this is why America is not Europe

Oct 13, 2009 16:44 UTC

As usual, Joel Kotkin nails it:

In a rapidly aging society like Germany’s and those of other E.U. countries you can make a case for slow growth, limited work hours, early retirement and a strict regulatory regime. But for America, with its growing workforce and population, slow economic growth simply is not socially sustainable.

More broadly, we are talking about two different mindsets. As one writer puts it, Europeans “emphasize quality of life over accumulation” and “play over unrelenting toil.” In contrast, most Americans seem ill-disposed to relax their work ethic, which has been central to the national character from its earliest days.

Of course, the European approach is celebrated by some Americans, particularly those who already have achieved a high level of affluence. It plays very well in “little Europes” of America, cities like San Francisco, Portland and Boston, places with relatively few children and generally slow-growing populations.

Me: I wonder if eventually US political parties break down to a pro-growth, pro-family, pro-population party and a “sustainable,” growth, Euro-lite party.  Certainly, there are elements of the Democratic party which would fit into either.

The bull case on the dollar

Oct 13, 2009 11:30 UTC

Scott Grannis, the Calafia Pundit, plots a currency course that does’t turn America into a third-world economy:

Modestly good news, such as an early move by the Fed to raise interest rates even by a little bit, or news which shows the economy is likely to simply avoid a double-dip recession, or news which indicates just the tiniest rightward shift in fiscal policy, might be enough to push the dollar higher.

It’s hard to fight the tape on this, but I continue to believe that the long-run prospects for the dollar are favorable. I think the economy is doing better than most give it credit for, I think the Fed is going to move sooner than most expect, and I think that policies in Washington are going to turn out to be less awful than the market fears. I’m not saying that everything is going to turn rosy, merely that I don’t see things getting worse forever.

Me: Maybe, but this sounds like a 2011 story, not 2009 or 2010.


I disagree, 2011 may be the point the dollar begins to bottom out but not look to a bullish run – interest rates will be just high enough by then to continue unhindered to borrow the vast sums needed to repay the Chinese.

But I can see U/E coupled with underemployment maxxed at 20% through 2011. Greatest fear – rates have to be ratcheted soo high to get investors attention. No “U”, “V” or “W” – this will look like a nasty “L”.

The world has talked about the uncoupling for years, looks like that will include debt. The US will not appreciate the end result. We could barely take 6 months of $4/gal gas; can we stomach an astronomical interest repayment?

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