Tag: tax

Obama’s Broken Toaster

APTOPIX ObamaRecently on Leno, President Obama compared some financial products to an exploding toaster. His words:

When you buy a toaster, if it explodes in your face there’s a law that says your toasters need to be safe. But when you get a credit card, or you get a mortgage, there’s no law on the books that says if that explodes in your face financially, somehow you’re going to be protected.

So this is – the need for getting back to some common sense regulations – there’s nothing wrong with innovation in the financial markets. We want people to be successful; we want people to be able to make a profit. Banks are critical to our economy and we want credit to flow again. But we just want to make sure that there’s enough regulatory common sense in place that ordinary Americans aren’t taken advantage of, and taxpayers, after the fact, aren’t taken advantage of.

While I think we would all like to get to “common sense” regulation – arriving at such is unlikely if one’s understanding of the very problem is flawed, as seems to be the president’s.

Unlike broken toasters, mortgages and credit cards do not fail to pay themselves – borrowers fail to pay, almost always for a reason that has little to do with the characteristics of the loan itself. There is a wealth of empirical data documenting the causes of bankruptcy, mortgage and credit card default – much of which has been assembled by those on the left (take a look at any of Professor Elizabeth Warren’s work on bankruptcy). The fact is that the number one cause of all of these events is job loss. If the president has a plan for a mortgage that protects you from losing your job, I would love to see how that’s going to work. After job loss, comes unexpected health bills and divorce.

My hope had been that Obama’s talk about broken toasters was just a little pandering and could be safely ignored. However, judging from the structure of his foreclosure relief plan, he appears to believe that if we just lower the borrower’s rate, all would be saved. The sad truth is that his foreclosure plan does nothing for those really in need – who have lost their job for instance – they are simply out of luck. But then helping people who have lost their job would undermine the argument that it is all the fault of the product.

AEI Tax Forum

Chris Edwards, Photo by Peter Holden for AEI   Photo by Peter Holden Photography for AEI

I was a panelist at an American Enterprise Institute forum today discussing the proliferation of federal tax credits, particularly for low-income families.

AEI scholars Kevin Hassett, Larry Lindsey, and Aparna Mathur have a draft paper that looks at the idea of consolidating current individual credits into one supercredit. The idea would be to simplify the system and reduce the economic distortions created by these credits, which are valued at about $170 billion in 2009.

My observations included:

  • Obama’s Make Work Pay credit is valued at about $60 billion per year, much of which is “refundable.” (That means it is partly a spending increase not a tax cut). Coincidentally, Obama’s proposed tax hikes for higher-income individuals are also about $60 billion per year. So Obama is damaging the economy with “Make Work Not Pay” tax increases at the top in order to fund dubious work incentives at the bottom. It makes no economic sense.
  •  The AEI scholars provide interesting calculations about how we could make the $170 billion of redistribution in these credits simpler. That’s fine as far as it goes, but I’d like to end the redistribution altogether. Let’s provide a large basic exemption in the tax code for folks at the bottom, but we don’t need any complex credits. Instead, let’s repeal federal policies that damage the budgets of struggling families at the bottom, such as import barriers that raise the price of clothing and federal milk cartels that raise the price of  dairy products.
  • Here’s my compromise redistribution plan. Let’s chop the $170 billion in tax credits in half and use the extra funds to cut the corporate income tax rate. With a purely static calculation, that would allow cutting the corporate rate  from 35% to 25%. Assuming some behaviorial feedbacks, the $85 billion in credit savings would easily allow us to reduce the corporate rate to 20% or so.
  • What do corporate taxes have to do with the workers who currently get all these tax credits? As Hassett and Mathur explained in a 2006 paper, corporate tax cuts would increase investment, improve productivity, and that in turn would raise wages of average American workers. We don’t need President Obama’s fancy new Make Work Pay credits. Instead, we need to cut the corporate tax rate to make the economy boom and raise worker’s wages and incomes in the private marketplace.

The President’s Misguided Tax Hike on U.S. Companies Competing in World Markets

Bashing big business about “shipping job offshore” may be good politics, but the real-world evidence shows that Obama’s tax hike on American multinationals is spectacularly misguided. I would say it is so bad that it leaves me speechless, but I did manage to pontificate for almost nine minutes in this new video:

One of my goals is to make sure viewers actually understand an issue after watching, so the goal is education rather than just providing soundbites against a particular proposal. As always, feedback is appreciated.

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.

Bipartisan Support for Choice Grows Every Year

When the Florida Legislature passed its education tax credit program in 2001, only one Democrat supported the measure.

Last year, the legislature expanded the program with votes from one third of statehouse Democrats, half the black caucus and the entire Hispanic caucus.

Last week, nearly half of House Democrats —47 percent—voted to significantly expand the revenue base for the state’s business donation tax credit program. House Republicans voted 100 percent in favor.

And yesterday, nearly a third of Senate Democrats—31 percent—voted to expand the tax credit program. And 92 percent of their Republican colleagues voted for the bill.

In all, 43 percent of state Democratic legislators voted in favor of education tax credits. Governor Crist is expected to sign the bill shortly.

They are not alone.

In 2006, Democratic governors in Arizona, Iowa and Pennsylvania signed new or expanded tax-credit initiatives. That same year, a Democrat-controlled legislature in Rhode Island passed a donation tax credit. A Democratic governor and legislature in Iowa raised their tax credit dollar cap by 50 percent in 2007.

Partisanship on choice is fading away because many politicians have come to realize that school choice saves money and children. The truth is beginning to spread; school choice is the most proven and effective systemic reform available.

The future of education reform is looking bright in the Sunshine State and across the nation.

The Politics of Budget-Cutting

helicopterIn Washington, the symbolic almost always trumps the substantive.  Thus, legislators complain, for good reason, about pork and earmarks, which ran about $35 billion at their maximum, and ignore entitlements, which entail some $100 trillion in unfunded liabilities.

So it is with President Obama.  He continues the endless bailouts, which cumulatively now run around $13 trillion.  He proposed a $3.6 trillion budget and will leave us with a $1.4 trillion deficit next year–and nearly $5 trillion in additional debt on top of the massive deficits already projected over the coming decade.  But he asked his Cabinet officers to chop $100 million in administrative expenses.

And he says he doesn’t need a new helicopter.  Fiscal responsibility in action.

Alas, the helicopter, while costing billions, isn’t an easy budget target.

Reports the New York Times:

At a Washington conference on fiscal responsibility in February, President Obama tried to set the tone by saying he did not need the new costly presidential helicopters that had been ordered by the Bush administration.

“The helicopter I have now seems perfectly adequate to me,” he said to laughter. On a more serious note, he added, “I think it is an example of the procurement process gone amok. And we’re going to have to fix it.”

But the president is learning that in the world of defense contracting, frugality can be expensive. Some lawmakers and military experts warn that his effort to avoid wasting billions of dollars could end up doing just that.

The administration’s plan to halt the $13 billion helicopter program, announced this month, will leave the government with little to show for the $3.2 billion it has spent since the Bush administration set out to create a futuristic craft that could fend off terrorist attacks and resist the electromagnetic effects of a nuclear blast.

Critics say the Pentagon would also spend at least $200 million in termination fees and perhaps hundreds of millions to extend the life of today’s aging fleet. As a result, several influential lawmakers and defense analysts are now calling for a compromise that would salvage a simpler version of the helicopter that is already being tested.

They say it could be a more palatable alternative in tough economic times than seeking new bids for a more advanced craft, which has proved difficult to develop.

No wonder Washington is known as a place where everything about government is permanent.  Once you start spending money on a program, it becomes extremely hard to stop.  Part of that is the political dynamic of interest groups, the problem so well dissected by the Public Choice economists.  And part of it is legal and procedural.  Contracts are let, cancellation fees are due.  It’s bad to waste money on a gold-plated helicopter.  It seems even worse to waste money developing a gold-plated helicopter, and then getting nothing at all by canceling it.

There is, however, an amazingly simple solution, of which Congress and the president apparently are not aware.

Don’t spend the money in the first place.  Eschew new programs.  Say no to special interests.  Let taxpayers keep more of their own money.

This approach would seem to make sense at any time.  But especially today, with the federal government facing a deficit approaching $2 trillion in 2009.

Didn’t Nancy Reagan lecture us to “just say no”?  We should invite her back for a return tour of Washington, only she should talk about federal spending this time.

First 100 Days: More of the Same

President Obama campaigned on a promise of change. But the first 100 days of his administration have seen a continuation of the Bush administration’s irresponsible fiscal policies: more bailouts, higher spending, and mounting debt.

The president has already signed a tax hike that disproportionately hurts lower-income people, and is seeking additional tax increases to fund a transition to a more centrally-planned, European-styled economy.

Just as previous administrations have done, the president is using the current economic ‘crisis’ to justify further government encroachment upon the private sector. In doing so, dangerous precedents are being set that could have negative repercussions for future economic growth and individual liberty.