Archives: 02/2009

Obama Corporate Tax Nonsense

Last night, President Obama threw in his usual rhetoric about ”ending tax breaks for corporations that ship our jobs overseas.”

I suspect that the president has no idea what he is talking about. The United States already has probably the most burdensome tax rules on multinational corporations of any major country.

Peter Merrill, one of the nation’s top tax economists explained in Tax Notes on Monday:

The United States taxes corporate income on a worldwide basis, including dividends repatriated by foreign subsidiaries, and allows a limited credit for foreign taxes paid regarding those dividends. By contrast, most OECD countries (21 out of 30) have dividend exemption systems under which dividends from foreign subsidiaries are exempt.

In other words, only nine of 30 major industrial countries tax the foreign business profits of their corporations, and the United States does so probably the most aggressively of any.

U.S. corporations are moving investment and profits abroad, but it is because we have the world’s second highest corporate tax rate, not because of special loopholes as the president keeps implying.

It is pathetic that American policymakers sit on their hands avoiding the global tax revolution, while constantly taking cheap shots at corporations, especially when other countries are moving ahead with business tax reforms.

For example, today’s International Tax Review describes possible corporate tax cuts by the left-of-center Australian government:

Australia may have to cut its corporate tax rate in an effort to increase economic growth and attract greater foreign investment, said Ken Henry, secretary to the Treasury.

Henry also noted that a corporate tax cut would increase real wages. What is it about these benefits of corporate tax cuts that American policymakers don’t understand?

Keeping Michelle’s Promise

“Barack Obama will require you to work. He is going to demand that… . you push yourselves to be better. Barack will never allow you to go back to your lives as usual, uninvolved, uninformed.”
     -Michelle Obama, February 3rd, 2008.

“[D]ropping out of high school is no longer an option. It’s not just quitting on yourself, it’s quitting on your country - and this country needs and values the talents of every American.”
     -President Barack Obama, February 24th, 2009.

Topics:

Live at Cato: ‘Obama and Presidential Power: Change or Continuity?’

Cato Vice President Gene Healy is moderating a discussion, “Obama and Presidential Power: Change or Continuity?” which you can watch live online at 12:00 PM EST.

Featuring Louis Fisher from the Law Library of Congress and Jeffrey Rosen of The George Washington University School of Law, the panel will discuss the rise of presidential power, and whether Obama will oversee a more modest presidency that recognizes constitutional limitations or end up expanding the powers of the presidential office.

In case you miss it, a video of the discussion will be available online.

Topics:

Is Libertarianism a Sign of Mental Illness?

I don’t know whether this belongs in the comic-relief category or the future-threats category, but the Harvard Law School is having a conference to analyze the “free market mindset.” The basic premise of the conference seems to be that people who believe in limited government are psychologically troubled.

The conference schedule features presentations such as “How Thinking Like an Economist Undermines Community” and “Addicted to Incentives: How the Ideology of Self Interest Can Be Self-Fulfilling.” The most absurd presentation, though, may be the one entitled, “Colossal Failure: The Output Bias of Market Economies.” According to the description, the author argues that the market “delivers excessive levels of consumption.” Damn those entrepreneurs for creating so much wealth!

In the good old days of Soviet dictatorship, the regime classified dissidents as being mentally ill (after all, only a nutcase would fail to see the glories of communism).

Now that leftists at Harvard want to portray laissez-faire philosophy as being somewhat akin to a mental disorder, maybe the next step will be re-education camps for Cato staff? Maybe the next “stimulus” bill could include a few earmarks for such facilities? I’m keeping my fingers crossed that I get sent some place warm.

The Truth about Medical Bankruptcies

During his speech to Congress last night, President Obama declared that health care costs “causes a bankruptcy in America every thirty seconds.” His numbers are just a little bit off.

If what President Obama said were true, there would be approximately 1.05 million health care related bankruptcies in this country every year. However, in 2007 (the last full year for which there is data available, there were a total of only 815,000 non-business bankruptcies nationwide. Moreover, according to a study by Dr. Ning Zhu at UC-Davis, only 5 percent of bankruptcies are caused by medical bills. That suggests that in 2007 there were about 41,000 health care related bankruptcies. Too many, to be sure, but a far cry for 1.05 million.

Haven’t we learned from those weapons of mass destruction in Iraq that facts matter when a president says we absolutely have to do something now?

President’s Auto Gaffe No Laughing Matter

In his address last night, president Obama implied that an American invented the automobile (“The nation that invented the automobile cannot turn away from it”). It doesn’t matter that the president was unaware this is false. Politicians can’t be expected to know everything. What matters is that neither he nor anyone in his inner circle apparently thought it was important to fact check his first major speech to the nation. What other parts of his speech and policy platform are based on mistaken assumptions, we might well wonder?

Alas, some very important ones. In his campaign fact sheet on “21st century threats”, then-candidate Obama declared that

 When Sputnik was launched in 1957, President Eisenhower used the event as a call to arms for Americans to help secure our country and to increase the number of students studying math and science via the National Defense Education Act.

“That’s the kind of leadership we must show today,” he later told a crowd in Dayton, OH.

The trouble is, the National Defense Education Act was an expensive failure. The average mathematics performance of 11th graders fell in the eight years following passage of the law, according to “national norm” studies conducted by the College Board. They still hadn’t returned to pre-NDEA levels a decade later.

In last night’s speech, the president called for increased federal “investment” in public schools, on the apparent assumption that this will improve educational outcomes and with them our economy. History does not support this rosy view.

To have any hope of achieving the lofty goals he has set out for himself, our 44th president would do well to get his future proposals – and speeches – thoroughly fact-checked. While this may starve late-night comics of material, it will save both the president and the American people a lot of heartburn.

Crédit Mobilier as a Model for High-Speed Rail

“History reminds us that at every moment of economic upheaval and transformation, this nation has responded with bold action and big ideas,” President Obama told Congress on February 24. “In the midst of civil war, we laid railroad tracks from one coast to another that spurred commerce and industry.”

Obama, who wants to make the construction of a national high-speed rail network his “signature issue,” no doubt sees this as a model. It was a poor choice.

Aside from the simple factual issue that most of the first transcontinental railroad was built after, not during, the war, most of Obama’s audience would have forgotten that its construction caused for one of the first and biggest financial swindles of the nineteenth century. That scandal was the result of a simple fact: such a railroad made no economic sense in the late 1860s.

To entice someone to build it, the federal government offered subsidies in the form of land grants and loans of $16,000 to $48,000 per mile (depending on terrain) for the actual cost of construction. Politics, not economics, determined the route, so most of the land for hundreds of miles was worthless (and remained so for a century after the railroad was complete). The loans were valuable only to the contractors who built the rail line, as the railroad itself would have a difficult time generating enough business to ever repay them.

So the directors of the Union Pacific Railroad came up with a scheme to profit from construction. They created a separate company, called Crédit Mobilier (cleverly named after a similar scandal in France). Run by the same people who nominally owned the railroad, this company was given the contracts to build the line. To take full advantage of the government loans, they overcharged for construction up to the limit of the loans, earning enormous profits for the company directors.

To keep the scheme going, the company freely used shares to bribe members of Congress who must have been fully aware of the plot. After the rail line was complete, the Union Pacific conveniently went bankrupt, thus avoiding the need to repay the loans. (Supposedly, the reorganized company eventually repaid the loans, though probably not the interest.)

Two decades later, James J. Hill proved that the way to build a transcontinental railroad was in stages, not all at once, with the profits from each stage paying for construction of the next. Hill’s Great Northern Railway was the first transcontinental in North America to be built without subsidies and the only one (except the Southern Pacific) never to go bankrupt. It helped that, unlike the Union Pacific’s line, most of the GN’s route was across fertile farm or forest land.

So now Obama wants to build a new rail empire. Like the Union Pacific, this one will require huge subsidies. Like Crédit Mobilier, contractors will make huge contributions to Congressional campaigns to keep the money flowing. The rail lines will never cover their operating costs, much less capital costs, and so will either go bankrupt or be forever subsidized by taxpayers. And just as the economic benefits of the Union Pacific were invisible for several decades, the environmental benefits of high-speed rail will be negligible or negative.

One difference: while transcontinental railroads eventually did make economic sense, high-speed rail never will.