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.

COMMENT

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

Posted by PeteKL | Report as abusive

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.

COMMENT

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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The next big political issue? The U.S. dollar

Oct 12, 2009 18:22 UTC

The state of the dollar probably hasn’t been a first-tier political issue in the United States since, say, the presidential election of 1896. Back then, it manifested as whether or not America would stay on the gold standard or switch to a bimetallic one. (The William Jennings Bryan “cross of gold” speech and all that.)

The aftershocks of the global financial crisis may now be propelling the dollar back to the political forefront. The greenback’s continuing slide makes it a handy metric that neatly encapsulates America’s current economic troubles and possible long-term decline. House Republicans for instance, have been using the weaker dollar as a weapon in their attacks on the Bernanke-led Federal Reserve.

For more evidence of the dollar’s return to political salience, look no further than the Facebook page of Sarah Palin. The 2008 GOP vice presidential nominee — and possible 2012 presidential candidate — has shown a knack for identifying hot-button political issues, such as the purported “death panels” she claims to have found in Democratic healthcare reform plans. In a recent Facebook posting, Palin expressed deep concern over the dollar’s “continued viability as an international reserve currency” in light of huge U.S. budget deficits.

She might be onto something here, politically and economically. A recent Rasmussen poll, for instance, found that 88 percent of Americans say the dollar should remain the dominant global currency. Now, the average voter may not fully understand the subtleties of international finance nor appreciate exactly how a dominant dollar has benefited the U.S economy. But they sure think a weaker dollar is a sign of a weaker America.

And that’s the political problem for the Obama administration. Its benign neglect of the dollar is another example of an economic policy — along with TARP and the $787 billion stimulus — that the White House thinks is helping the economy, but many Americans find wrongheaded.

In his New York Times column today, Paul Krugman makes the usual case for a weaker dollar: It helps U.S. exporters and is a necessary part of a global economic rebalancing. And there is some truth in that, particularly the idea that Rising Asia will result in a less-dominant dollar. Then again, a devalued currency hasn’t exactly been a proven path to prosperity. (Ask Jimmy Carter.)

But Krugman too easily dismisses the idea that the dollar’s decline could tumble out of control. Former Clinton economic officials such as Robert Rubin and Roger Altman have been making the case that investor concern about budget deficits could lead them to abandon the dollar. As Altman argued in a Financial Times op-ed piece today: “The dismal deficit outlook poses a huge longer-term threat. Indeed, it is just a matter of time before global financial markets reject this fiscal trajectory. That could lead to a punishing dollar crisis.”

Now many Democrats and liberals, like Krugman, don’t want to hear such talk, fearing a rerun of the Clinton era when the progressive policy agenda was sacrificed on the altar of budgetary rectitude.

But that is a tremendous political and economic gamble, one that may result in taunting Republican cries of “Who lost the dollar?”

COMMENT

Unfunded public employee pension benefits is the next big political issue.

Posted by EconRob | Report as abusive

A $150 billion a year financial Tobin tax? Really?

Oct 12, 2009 14:15 UTC

The idea of a Tobin tax, a tax on financial transactions, is gaing some mo’ in Congress (via WSJ):

With federal budget deficits soaring, policy makers and other advocates are eyeing the huge sums that could be raised as a way to cover the costs of new initiatives.

Labor unions, in particular the AFL-CIO, have proposed a financial-transactions tax as a way to defray costs of a health-care overhaul. Lawmakers have discussed a similar fee as a way to cover the cost of future financial oversight. Liberal advocates are pushing the tax to pay for new stimulus spending.

Taxing Wall Street’s financial transactions is back on the table. … The left-leaning Economic Policy Institute floated the idea of a national transaction tax that would raise $100 billion to $150 billion a year. The tax, at a rate of 0.1% to 0.25% of the value of the trade, would be levied on all financial transactions such as stock trades, but not on consumer transactions such as with credit cards.

As I wrote last month:

1)  Even a 0.10 percent tax would double the cost of US stock trading where the average commission cost is just under a dime. Welcome back to the pre-Internet early 1990s.

2) It would reduce market volumes and make the equity market less attractive. Kind of dumb thing to do in a time of constrained credit markets where it is tough to raise money.

3) That supposed $100 billion-$150 billion in revenue wouldn’t appear out of thin air. It would come from investment firms who would pass along costs to customers.

4) It would drive trading activity to less costly trading centers, such as the Toronto Stock Exchange (at least if we are talking about the US). Goodbye US jobs.

COMMENT

Some proponents say the purpose of the tax is to shrink the financial sector back to the size of the 1980′s. They admit it will cost investors a “bit” more just like in the 80′s. A researcher found that the average spread in 1986 was $0.53, so that alone will cost the average investor around 2% up front. I would hate to see 90% of financial activity leave the US as it did when Sweden had a transaction tax for only 6 years.

Posted by TripleTaxThePoor | Report as abusive

The story of the $1.4 trillion budget deficit for 2009

Oct 12, 2009 14:05 UTC

My pal Don Marron breaks it down:

A few days ago, CBO released its latest snapshot on the federal budget, documenting the remarkable challenges of fiscal 2009, which ended on September 30. The key phrase in the report is “in over 50 years” as in:

1) At $1.4 trillion, the budget deficit was 9.9% of gross domestic product, the largest, relative to the economy, in over 50 years.2) At $3.5 trillion, spending was almost 25% of GDP, the largest, relative to the economy, in over 50 years.

3) At $2.1 trillion, tax revenues were about 15% of GDP, the lowest, relative to the economy, in over 50 years. (I get the sense that this point is less well-known than the other two.)

101209marron

Study: Democratic healthcare reform could increase costs

Oct 12, 2009 13:56 UTC

America’s Health Insurance Plans, an insurance industry trade group, paid for this PricewaterhouseCoopers study that found Democratic healthcare reform would sharply raise the price of private healthcare insurance. The typical premium could rise by $4,000 by 2019. Here is the executive summary:

101209pwc1

Zandi: Unemployment headed to 10.5 percent

Oct 12, 2009 13:44 UTC

Moody’s Economy.com economist Mark Zandi likes the stimulus (via Fox News) but still thinks unemployment is headed higher. In his own words:

10.5 percent is a very reasonable expectation for the peak in unemployment, but I think it would be measurably higher if not for the stimulus package. The stimulus in my view is working. It’s just gotten overwhelmed by the magnitude of the economic crisis.

Which, of course, brings us to the idea of a second stimulus.  Marc Ambinder gives the rundown:

1) Extend the first-time home buyer credit

2) Create a new credit for companies who hire

3) Extend jobless benefits in every state, or just particularly distressed states, or every state but even more in particularly distressed states.

4) Give tax refunds to struggling companies

5) Institute a payroll tax holiday

6) Pass another stimulus but call it something like “State Rescue Plan” and send most of the money to state governments

How Obama can earn that Nobel Peace Prize

Oct 9, 2009 17:51 UTC

The Nobel Committee in Norway says it awarded President Barack Obama the 2009 Peace Prize for “his extraordinary efforts to strengthen international diplomacy and cooperation between peoples.” (Congratulations, Mr. President.) In particular, the committee noted Obama’s multilateral approach on the issues of climate chance and nuclear disarmament.

But where has the president been when it comes to using diplomacy and cooperation to promote global trade, which is essential to global peace and prosperity? Given the infamous role of protectionism in the Great Depression, it’s no surprise that open and expanded trade has been at the core of the post-World War Two economic order, particularly during the past two decades.

The Great Recession, though, has shattered that consensus. An analysis by economists Barry Eichengreen and Kevin O’Rourke has calculated that “world trade is falling much faster now than in 1929-30.” Paul Krugman says trade “has fallen through the floor in a way that it literally never has before, including in the Great Depression.” Global Trade Alert, a trade watchdog group with links to the World Bank, found at least 121 protectionist measures had been implemented by G-20 nations during the past year.

Just of late, the EU imposed anti-dumping duties on steel pipe from China, while Australia may impose ownership limits on foreign buyers of big companies. “So far, traditional trade protectionism has been a low-grade fever,” said World Bank President Robert Zoellick said in a recent speech. “But the temperature is rising.”

And actions by the Obama administration and Congress show that America is hardly immune. Indeed, they have been spreading the disease. Among the protectionist outbreaks: The “Buy American” provisions in the $787 billion stimulus package, the blocking of Mexican trucks from U.S highways, the G.M. and Ford bailouts, inaction on pending free-trade agreements with Colombia, Panama and South Korea, tariffs on Chinese tires.

An American administration that seems disinterested in free trade? “You can drop the word ‘seems,’” says Bruce Josten, head of governmental affairs for the U.S. Chamber of Commerce.

Looking for an explanation? Here’s one: Bad economics makes for convenient politics. Since the Obamacrats might not be able to deliver the top two items on Big Labor’s wish list — reopening the North American Free Trade Agreement and passing rules making it easier to organize workplaces — they’re giving union supporters just about everything else.

Obama’s political advisers may not understand the importance of free trade, but his economic ones do. Obama should listen to them and begin to lead. Give Congress the greenlight to pass the free-trade agreements with Colombia, Panama and South Korea. Commit to getting the Doha trade round concluded within a year. The centrist Democratic Leadership Council also suggests that Obama reconnect trade to national security by asking Congress for a broad long-term waiver of tariffs for low-income countries and large majority-Muslim-majority states. Instead of increasing boosting aid to Pakistan, for instance, why not eliminate $360 million a year in tariffs on its exports?.

If Obama did all that, not only would he actually be worthy of the Peace Prize, but probably the Nobel Prize for Economics as well.

COMMENT

The entire NOBEL PEACE PRIZE COMMITY should resign in shame they have given it to a tyrant,despot and communists liar OBAMA

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