Archives: 05/2009

Obama ‘Offshore’ Tax Plan Will Cost U.S. Companies Business and Jobs

The Obama administration is ready to follow through on campaign promises to crack down on U.S. companies that “ship jobs overseas.” The administration announced this weekend that it would seek to raise taxes on the so-called active earnings of U.S.-owned affiliates abroad. According to a front-page story in this morning’s Wall Street Journal:

Under current law, U.S. companies can defer taxes indefinitely on the many of the profits they say they have earned overseas until they “repatriate” that money back to the U.S. The administration seeks to sharply limit the tax deductions that companies taking advantage of deferral can take.

Of course, there is a perfectly good reason why we don’t tax what U.S. companies earn and keep abroad: those companies are already paying taxes in the countries where their affiliates are located, and at the same rates that apply to multinationals from other countries competing in the same markets.

As I pointed out in a Cato Free Trade Bulletin in January, locating affiliates in foreign markets is now the chief way that U.S. companies reach new customers outside the United States. If we sock them with the relatively high U.S. corporate rate, U.S. companies will be less able to compete against German and Japanese multinationals in the same markets who need only pay the (almost always) lower corporate rate assessed by the host country. And as I noted in January, any jobs created at affiliates abroad tend to promote more employment at the parent company back in the United States.

This demagogic grab for more revenue will only cripple the ability of U.S. companies to expand their sales in global markets, putting in jeopardy the U.S.-based jobs that support their foreign affiliates.

With ‘Cramdown’ Rejection, Is Senate Ready to Respect Marketplace Contracts Again?

After rejecting the proposed ‘cramdown’ changes to the bankruptcy code, the Senate may be slowly waking up to the need to respect contracts.  One cannot rebuild trust and confidence in our markets, while at the same type trying to destroy the trust that underlies contractual relations.  Were the cramdown legislation approved, the message to investors, or any market participants, would be that the enforceability and terms of your private agreements will be subject to the direction of the political winds.

Proponents of cramdown claimed that the bankruptcy code favored one’s vacation home or yacht over one’s primary residence, as the mortgages on these assets could be reduced to reflect their current value.  Such a claim is at best misleading, if not outright false.  One’s primary residence is already the most favored asset in bankruptcy – due to the very simple fact that one generally gets to keep their home, while one usually has to give up their boat or vacation home in order to satisfy one’s debts.  There simply is no ‘yacht-stead’ exemption.  In fact, under Chapter 13, primary residences whose equity values are greater than the homestead exemption are crammed-down, and the home is transferred to the lender.

Our economy will only turn around once families, investors, entrepreneurs and other market participants believe the rules of the game will be fair and certain, and not constantly subject to political manipulation.  Voluntary consensual agreements are one of the basic pillars of our society, and should be respected as such.  They should not be written solely as a means of taking from one groups of citizens and giving to another.

Feels Like Old Times

This morning, former U.S. Secretary of Education Margaret Spellings does exactly what I showed last week cannot reasonably be done: She looked at the latest NAEP scores and gave No Child Left Behind (as well as similar state reforms) credit for what have been, frankly, at-best marginal improvements. And check out the long-term trend lines; you’ll see that there were periods with increases just as good as those between 1999 and 2008 that predated NCLB and most state standards-and-testing reforms. You’ll also note a few liberties taken by the former Secretary, such as the assertion that we’ve just had ”nine straight years of increasing scores for elementary school students.” Yes, the scores have gone up, but we don’t know that they’ve gone up every year for nine years. We only know the trend has been up, but scores are only available for 1999, 2004, and 2008 – things could easily have fluctuated from year to year. And let’s not forget that NCLB was only enacted in 2002, took at least a year to meaningfully implement, and was pushed in large part because states weren’t reforming themselves. That alone makes it impossible to support Spellings’ rosy conclusions.

Of course, we’ve seen this sort of thing before. Thanks for the blast from the past, Secretary Spellings.

So Much for the Obama Administration’s Fiscal Free Lunch

So far the Obama administration has been enjoying the ultimate fiscal free lunch.  Massive borrowing, massive spending, lower taxes, and low interest rates.

Alas, all good things must come to an end.

Reports the New York Times:

The nation’s debt clock is ticking faster than ever — and Wall Street is getting worried.

As the Obama administration racks up an unprecedented spending bill for bank bailouts, Detroit rescues, health care overhauls and stimulus plans, the bond market is starting to push up the cost of trillions of dollars in borrowing for the government.

Last week, the yield on 10-year Treasury notes rose to its highest level since November, briefly touching 3.17 percent, a sign that investors are demanding larger returns on the masses of United States debt being issued to finance an economic recovery.

While that is still low by historical standards — it averaged about 5.7 percent in the late 1990s, as deficits turned to surpluses under President Bill Clinton — investors are starting to wonder whether the United States is headed for a new era of rising market interest rates as the government borrows, borrows and borrows some more.

Already, in the first six months of this fiscal year, the federal deficit is running at $956.8 billion, or nearly one seventh of gross domestic product — levels not seen since World War II, according to Wrightson ICAP, a research firm.

Debt held by the public is projected by the Congressional Budget Office to rise from 41 percent of gross domestic product in 2008 to 51 percent in 2009 and to a peak of around 54 percent in 2011 before declining again in the following years. For all of 2009, the administration probably needs to borrow about $2 trillion.

The rising tab has prompted warnings from the Treasury that the Congressionally mandated debt ceiling of $12.1 trillion will most likely be breached in the second half of this year.

Last week, the Treasury Borrowing Advisory Committee, a group of industry officials that advises the Treasury on its financing needs, warned about the consequences of higher deficits at a time when tax revenues were “collapsing” by 14 percent in the first half of the fiscal year.

“Given the outlook for the economy, the cost of restoring a smoothly functioning financial system and the pending entitlement obligations to retiring baby boomers,” a report from the committee said, “the fiscal outlook is one of rapidly increasing debt in the years ahead.”

While the real long-term interest rate will not rise immediately, the committee concluded, “such a fiscal path could force real rates notably higher at some point in the future.”

Alas, this is just the beginning.  Three quarters of the spending in the misnamed stimulus bill (it would more accurately be called the “Pork and Social Spending We’ve Been Waiting Years to Foist on the Unsuspecting Public Bill”) occurs next year and beyond, when most economists expect the economy to be growing again.  Moreover, much of the so-called stimulus outlays do nothing to actually stimulate the economy, being used for income transfers and the usual social programs.

However, we will be paying for these outlays for years.  Even as, the Congressional Budget Office warns, the GDP ultimately shrinks as federal expenditures and borrowing “crowd out” private investment.  Indeed, the CBO figures that incomes will suffer a permanent decline–even as taxes are climbing dramatically to pay off all of the debt accumulated by Uncle Sam.

And you don’t want to think about the total bill as Washington bails out (almost $13 trillion worth so far) everyone within reach, “stimulates” (the bill passed earlier this year ran $787 billion) everything within reach, and spends money (Congress approved a budget of $3.5 trillion for next year) within reach.  Indeed, according to CBO, the president’s budget envisions increasing the additional collective federal deficit between 2010 and 2019 from $4.4 trillion to $9.3 trillion.)  Then there will be more federal spending for wastral government entities, such as the Federal Housing Administration; failing banks, which are being closed at a record rate by the FDIC; pension pay-offs for bankrupt companies, administered by the Pension Benefit Guaranty Corporation; and covering the big tab being up run up by Social Security and Medicare, which currently sport unfunded liabilities of around $100 trillion.

Oh, to be an American taxpayer – and especially a young American taxpayer – who will be paying Uncle Sam’s endless bills for the rest of his or her life!

Kaiser vs. “Czar”

kaiser-billJust when you thought you’d seen everything, ol’ Kaiser Bill emerges from the Beyond to castigate the U.S. president:

Mr. President,

Gott im Himmel! Enough with the czars!

You’ve named 18 so far, according to something I read in Foreign Policy. That includes a border czar, a climate czar, an information technology czar and – I don’t think Thomas Jefferson grew enough hemp in his lifetime to dream up this one – the “faith-based czar.” Your car czar, Steve Rattner, was in the news last week, trying to keep Chrysler out of bankruptcy.

It took Russia 281 years to accumulate that many czars. Even with hemophilia, repeated assassinations and a level of inbreeding that would gag a Dalmatian breeder. You did it in less than 100 days.

And every one of them hurts. I think I speak for all passed-over Victorian despots when I say that.

[…]

…maybe it’s time for a new autocrat to get some air time. Time for something that will stand out even in a White House with a czar in every cubicle.

President Obama’s archduke of information technology announced today … Pricks up the ears, doesn’t it?

In Detroit, the president’s car sultan … Instant respect. Mainly because those who defy the car sultan might be killed by eunuch assassins.

Or might I humbly suggest the title of an enlightened ruler who – unlike the czars – actually worked well with parliament and the nobility (in your terms, that would be “Congress” and “Oprah”). Somebody whose record is nearly unblemished, except for one invasion of Belgium that everybody’s totally over now.

Today, President Obama congratulated his new climate kaiser

Goosebumps.

Yours in friendship, Wilhelm II

Quelling Overreaction Is Part of the Job

On Sunday’s Meet the Press, David Gregory pressed a trio of federal officials about how comments on swine flu like Vice President Biden’s have caused overreactions across the country, such as the diversion of a plane because a passenger had flu-like symptoms, the cancellation of a rap concert, and a variety of other dislocations in American life.

Acting director of the Centers for Disease Control Dr. Richard Besser said:

Well, y’know, everybody is going to deal with their concerns in different ways, and that’s the nature of people. What we can do is try and tell them what the risks are - what do we know - share information as we have it, and continue to hit the messages of those things that can be really effective.

Health and Human Services Secretary Kathleen Sebelius lamely used the fact that people are flooding emergency rooms as an opportunity to promote health care reform … So that panicked insured people would flood doctors’ offices?

If government officials are going to manage a situation like this - and doubts have been raised that they should - their obligation is not just to report, but to actually manage. Allowing a cacophony of government voices to drive erratic behavior by people across the land is harmful to the country for all the resources it wastes.

The Obama Administration should have a disciplined plan for handling situations like this. The administration’s disorganized response here is a signal of the truly awful reaction we could expect should something serious happen, like a terrorist attack. Terrorism, of course, works by inducing self-injurious overreaction on the part of the victim state, so overreaction must be avoided.

This incident reveals that the country is exceedingly vulnerable to terrorism because communications plans are evidently not in place.

(The administration’s plan for any terrorist attack should prioritize moving Vice President Biden to an undisclosed location. Not for his security or for continuity of government - so he won’t appear in the media!)

Government Finds New Targets to Regulate

I suppose it should be no surprise that once the Democrats got full control of the federal government, we’d see the feds taking control of every nook and cranny of society, from giving orders to credit card companies to firing automobile company CEOs to demanding a change in the way college football decides its national champion.

Except – wait a minute – it was actually a senior Republican member of the House, one of those right-wing Texans, who issued the most direct threat to the football officials summoned before the House Subcommittee on Commerce, Trade and Consumer Protection:

Rep. Joe Barton of Texas, who has introduced legislation that would prevent the NCAA from calling a game a national championship unless it’s the outcome of a playoff, bluntly warned Swofford: “If we don’t see some action in the next two months, on a voluntary switch to a playoff system, then you will see this bill move.”

The federal government is set to spend $3.5 trillion next year, with a deficit expected to hit the unbelievable level of 12 percent of GDP. The president is seeking to impose a “blueprint” for federal takeover of health care, energy, and education. He is acting as a super-CEO for the finance and automobile industries. The country is bogged down in two floundering wars.

And Joe Barton thinks the matter that deserves the attention of the Congress of the United States is how college football designates its “national champion.”

The best thing that can be said for this is that it’s probably actually safer to have Congress screwing around with amateur sports championships than with matters of war, spending, and central planning.