Tag Archives: political economy

Obama’s Tax Plan

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Wednesday morning, Fox News predicted a wonderful new tax plan from the administration:

…long-awaited corporate tax reform plan on Wednesday, lowering the top income-tax rate for corporations to 28 percent from 35 percent while eliminating deductions.

Corporations with overseas operations would also face a minimum tax on their foreign earnings, new tax benefits would be given to incentivize U.S. manufacturers while taxes on oil and gas companies would reportedly see their taxes go up while losing many large deductions and subsidies.

Now we can see what President Obama actually is proposing.  Although he offers to lower the top corporate rate from 35% to 28%—and that’s the headline—the proposal represents a net tax increase.

Moreover, he wants to make permanent his tax credits and other subsidies for his favored “green” energy products; although in a cynical offering to conservatives, the proposed Obamatax also contains the Santorum manufacturer’s tax subsidy.  Obama never seems to understand that if a product, company, or industry can’t compete on a level playing ground—in an actual free market—that product, company, or industry isn’t ready for market at all.

Along these lines of special treatments according to whether Obama approves or disapproves of an industry, the Obamatax would eliminate oil and gas tax preferences (while maintaining those “green” subsidies).  This, though, will drive up gasoline prices and home (and business) heating costs—and those manufacturers’ energy costs—to the detriment of our struggling economy and of the Americans trying to get by in it.  Despite this, the subsidies should, indeed, be gotten rid of, but the “green” subsidies should be eliminated, too.  With a truly level playing field, the effects will spike and ripple quickly, and costs ultimately will stabilize at lower levels from the overall simplification and the lack of “green” costs being absorbed by the oil and gas—and all other—industries and energy consumers.

The Obamatax applies a tax to business’ overseas profits, a first in American history—and a dramatic increase in the taxes owed by American businesses.  The administration justifies this with claims like:

If foreign earnings of U.S. multinational corporations are not taxed at all, these firms would have even greater incentives to locate operations abroad or use accounting mechanisms to shift profits out of the United States[.]

On the other hand, Intel, just to take one example, earns 85% of its revenue from its overseas computer chip and other manufacturing facilities—facilities that are devastatingly expensive to build or operate here.  Now Intel’s overseas profits will be taxed.  Since Intel makes its money overseas, though, why would it want to remain a US-headquartered corporation under the Obamatax regime?

There’s also the small matter of who gets this tax “cut.”  It isn’t the sole proprietorships, partnerships, Subchapter S, and so on firms whose profits are passed on to the business’ owners, who then pay ordinary income taxes on that passed through income.  Obama’s own IRS data indicate that over half of American business income is earned by these “noncorporate” companies.  But that needn’t concern an administration bent on raising taxes any way it can get away with.

True to form (this form is not unique to the present administration), the Obamatax dictates to businesses what their policies and paradigms must be.  It intends to eliminate “last in first out” accounting, disallow the use of life-insurance policies as a tax shelter, tax carried interest as ordinary income, and eliminate depreciation for corporate aircraft (this last is chump change, but it’s an important bone for the President’s base).  Even more intrusively, though, the Obamatax interferes with debt financing decisions by reducing the deductibility of interest on business’ borrowings.

There’s the underlying mindset, too.  The Obamatax justifies the “minimum tax on foreign earnings” by saying it would

discourage a global race to the bottom in tax rates.

as if low taxes, or having the lowest taxes globally, is somehow bad.  As if it’s really the government’s money, and they’ll magnanimously let our companies have what government deems appropriate.

In touting this tax change (it’s hardly a reform), Secretary Geithner said that the overhaul should be fiscally responsible (the Obama definition of “responsible,” of course) and,

A key test of any reform should be whether the net impact of the changes improves the incentives for investing in the United States.

If he really meant that, why is this the proposal?  Answer: he really does believe it; the proposal’s structure simply displays, again, the administration’s breathtaking lack of understanding of economics.

Obama is masquerading this as a tax cut, but it’s plainly another of his tax increases, and it’s commensurately hard on our already weakened economy.  It’s a good idea to lower the tax rate, and it’s a good idea to eliminate (though reductions are a good start) tax credits, loopholes, subsidies, and the like.  But these must be across the board—no company or industry should be getting special government treatment, good or bad.

Another Lesson from the European Model

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Here’s the present situation in Greece—it really is this apocalyptic.  Children are street-begging for food, and adults are dumpster-diving for food as soup kitchens close their doors on people because the kitchens have run out.  Professional talent is leaving the country for foreign work, and others are squirreling their money away in foreign bank accounts.  Medecins Sans Frontieres is reporting a return of malaria—and so the exposure of Europe generally to this once-eradicated disease.

University of Athens economist, Panagiotis Petrakis, describes other aspects of the economic failure:

…standard of living down, by as much as 30 per cent; bank deposits that have not been spirited out of the country are dwindling; almost 70,000 businesses folded in 2010 and bankruptcy is stalking more than 53,000 of the remaining 300,000; unemployment, 25 per cent – but youth joblessness is 47 per cent and rising; a quarter of the population living in poverty; homelessness, up 25 per cent, with well-educated youngsters accounting for much of the rise.  Petty crime, doubled.

Greece—and Portugal, Spain, and Italy; although Greece is the farthest down the path—is demonstrating the results of a welfare state running out of other people’s money.  The stimulus money is fully expended, and there are no positive results; only failure: competitiveness has disappeared into an overwhelming national debt, and with the loss of prosperity from that competitive fire, any ability to heal the economy—to repay that debt—is sorely constrained.  Corruption—crony capitalism—is becoming rampant.

Greece, like Detroit, and the US, like Greece, are gravely wounded by the policies of welfarism, however disguised by pretty words of “everyone gets a fair shot.”  Yet our own political elite still want to double down on their failed spending, taxing, borrowing—wealth redistribution—policies by imposing yet higher taxes, increasing spending even more, and expanding our debt explosively beyond its current already unsustainable levels.

Though Europe’s economies are dying, the collective mind of its political elite is still gripped patterns of thought and modes of analysis that were hatched in another era.  And so it is here, where Progressive policies, born in the failed New Deal, continue to hold sway and continue to fail today.

h/t to Belmont Club

Oil and the Economy

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Here are some numbers on the impact of oil in our economy—and so why the government’s oil policy is important to our economic future.  These data have been collected for a Fox News article on a related subject.

Our economy grew at an anemic 1.7% for 2011.  This performance is especially poor in context: that rate did not come at the end of an extended period of prosperity, but at the beginning of a “recovery” from an especially deep recession—a time when growth normally is much stronger, in the 5%-8% range.

Global oil demand is expected to increase by 1.5% (to 89.25 million barrels a day) in 2012, and against this backdrop, the price of North Sea oil (comparable to Middle east oil, but which supply is more stable) is up 11% over last year, to $119 per barrel, while oil produced in Texas is up 19% to $103 per barrel.  This is apart from Iranian shenanigans.

This has driven gasoline prices, nationally, to $3.53 a gallon, up a quarter of a dollar just since the start of 2012, and it could well go $4.25 by April—just in time for the summer driving season, such as it will be.  That’s also up nearly $1.65 per gallon since the 2009 beginning of the present administration.

And the money (sorry) datum: each 25-cent jump in the price of gasoline over the course of a year represents an annual total of $35 billion that’s spent on gasoline and so is not available for use in other parts of the economy. Those $35 billion equate, roughly, to a bit over a third of the cost of the just-passed payroll tax cut.  Thus, in President Obama’s three years, we’ve already had to spend that payroll cut on gasoline.  Indeed, just last year, we spent 8.4% of our household income on gasoline alone—double the per centage of 10 years ago.

Karl Rove, former senior advisor to President Bush the Younger, notes that

One out of every six Americans is unemployed, working part-time, looking for full-time work or so discouraged they’ve dropped out of the workforce altogether.

As the saying goes, work is somewhere else, and you get there in a car.

The government’s oil policy?  President Obama, through his campaign spokesman Robert Gibbs, insists

Our domestic oil production is at an eight-year high, and our use of foreign oil is at a 16-year low.  So we’re making progress.

Others, though, don’t see the increase, or the progress.  John Hofmeister, former CEO of Shell Oil and founder of Citizens for Affordable Energy, points out that national oil production today is 7 million barrels per day—down from 10 million a few short years ago.  Furthermore, Obama has killed the Keystone XL pipeline that, aside from the tens of thousands of jobs the pipeline’s construction would have represented, also would have brought nearly 625,000 barrels per day from Canada into the US.  The current oil policy’s negative impact on oil production only worsen our economy.

The President’s Jobs Performance

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Much has been made of the recent fall in the headline unemployment rate.  Among others, I’ve written about some of the data this publicly bandied-about number conceals.

Here’s another look at the employment picture, with a h/t to Power Line.  The figure was prepared by the Republican Study Committee, and it depicts the percentage of Americans actually in the labor force from January 2005 through January 2012. The RSC also points out that [emphasis theirs] 36.3% of working-age Americans do not have a job and are not even looking.

A Look at our National Debt

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The Congressional Budget Office pipes up.  Here’re some highlights from its January 31 annual Budget and Economic Outlook.

The current-law baseline which the CBO uses is a set of budget projections based on existing law as enacted, including sunsets and expirations.  These assumptions thus accept, for instance, that all temporary tax provisions, including those originally enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003—the Bush tax cuts—will expire as scheduled and that the alternative minimum tax (AMT) will not be indexed for inflation past 2011.  Further, under these baseline assumptions, about $1 trillion of spending cuts that mandated under the Budget Control Act of 2011 following the failure of Congress’ supercommittee will begin as scheduled in January 2013.

What flows from this baseline?  The budget deficit falls from the current year’s nearly $1.1 trillion, or 7.0 percent of GDP, to 1.5 percent of GDP in fiscal 2015—primarily due to an optimistic 25 percent increase in total federal revenues during that period.  The CBO cautions, though, that the deficit will resume its expansion post-2015 due to mandatory spending on programs such as Social Security, Medicare, and Medicaid and increasing interest payments on the still expanding federal debt.

The CBO also offered estimates based on an alternate scenario and its assumptions.  In its “alternative fiscal scenario,” the CBO assumes that the expiring Bush tax cuts are extended (excluding the current 2% payroll tax holiday); the AMT is indexed for inflation post-2011; Medicare physician payments are held constant at current levels (rather than falling nearly 30 percent in March 2012); and the spending cuts required under the Budget Control Act do occur.

Using these assumptions, the CBO concludes that annual budget deficits will remain elevated at about 5.4% of GDP over the next 10 years, and the ratio of publicly held debt to GDP will rise from its current elevated level of nearly 72% in fiscal 2012 to over 94% in fiscal 2022.

There are other aspects to this.  The CBO estimates that with the Bush tax cut expiry, economic growth—GDP growth—will be a meager 1.1% until recovery can begin in the out-years.  On the other hand, were these alternate assumptions enacted, GDP growth would be 0.3 to 2.9 per centage points greater than under current law.  Later in the decade, though, higher levels of government borrowing would crowd out private investment, drive up interest rates, and hold back economic growth.

Notice what’s not being assumed in the alternative scenario: real cuts in spending.  The assumptions don’t even include the effects of the fictional cuts of “reduced increases” in future spending.  What is it that drives that “higher level of government borrowing?”  It’s not not enough revenue for the government.  It’s too much spending by the government.

When, and only when, government spending is reduced to sane levels can we begin to pay down our burgeoning national debt.  Only by leaving our money in our hands and not having it taken away from us by ever-increasing taxes and by ever-increasing debt payments can our private investments increase, our job creation increase, our prosperity begin to recover.

h/t: Deloitte