Topic: Government and Politics

Obama the Question Mark Man

I picked up my local beer magazine, On Tap, and was surprised to see a front page story on Matthew Lesko, the government subsidies guy who famously wears a question mark jacket. The question marks indicate that all you folks out there can get on board the federal gravy train, and Lesko can show you how.

As president-elect Barack Obama is trying to fill out his cabinet posts, I realized that Lesko would be perfect. I’m thinking maybe secretary of commerce because Lesko’s approach to commerce is to get everybody hooked on federal handouts. That’s exactly the same as Obama!

Obama has refundable tax credits for everyonehe’s got goodies for federal unions, and he’s got subsidies for health care, toddlers and college students, homeowners, prescription drug users, energy companies, and on and on.

Once President Obama gets all those new subsidy programs through Congress, Lesko would be the perfect salesman to travel the country and pump up excitement over a new era of subsidy-fueled prosperity.

Mr. Lesko, all your years of hard work making late-night TV commercials may pay off big time! All the Obama administration would have to do is change www.lesko.com to www.lesko.gov and Americans could start cashing in.

Let’s face it: Lesko’s message captures today’s new spirit perfectly. Working hard for a paycheck is for chumps. Today, everybody can become a member of the Government Money Club and experience Hope and Change under the new administration.

Dynastic Politics in Alaska

A year ago it looked like we might replace the son of a president in the White House with the wife of a president, while some Republicans grumbled that it was too bad the president’s brother couldn’t succeed him. I wrote then that Americans fought a rebellion to replace a monarchy with a republic, “in which men (and later women) would be chosen to lead the republic on the basis of their own accomplishments, not their family ties.” But

In a country formed in rebellion against dynastic government, some 18 members of the US Senate in 2005 had gained office at least in part through family ties, along with dozens of House members.

And the trend continues. Now Alaska, the Last Frontier, the state of rugged individualism, is going to be represented in the U.S. Senate by the daughter of a former governor and senator and the son of a former congressman. In a bit of a War of the Roses twist, Sen. Mark Begich’s father won his first congressional election by defeating Sen. Lisa Murkowski’s father.

Peekaboo, I See a Challenge to Sarbanes-Oxley in the Supreme Court

An intriguing case that alleges a high-profile violation of the president’s exclusive power to appoint and remove government officials is winding its way through the courts.  Free Enterprise Fund v. Public Company Accounting Oversight Board challenges the constitutionality of a key part of the Sarbanes-Oxley Act.

Congress passed Sarbox, as the law is called, in the wake of the Enron and WorldCom scandals to protect investors from shoddy accounting practices perceived as being rife in publicly traded companies.  (We now know that Sarbox’s regulatory burden costs the economy much more than the fraud it prevents and detects, but never mind.)  Among other things, the law created the Public Company Accounting Oversight Board – PCAOB, pronounced “peak-a-boo” – a private board exercising government power. Its members are appointed by the SEC, which has limited removal power.  In short, the president has neither any appointment nor removal power, in seeming violation of Article II, section 2 of the Constitution.

On Monday, the D.C. Circuit, now consisting of nine members after Judge Raymond Randolph took senior status as of November 1, split 5-4 in denying en banc review of a panel decision in the government’s favor.  Judges Janice Rogers Brown, Merrick B. Garland, Karen LeCraft Henderson, Judith W. Rogers, and David S. Tatel voted against rehearing while Chief Judge David B. Sentelle and Judges Douglas H. Ginsburg, Thomas B. Griffith and Brett M. Kavanaugh supported it.  Interestingly, the three Clinton appointees and one George H. W. Bush appointee voted in the majority, while both Reagan and two of the three George W. Bush appointees dissented.  The other George W. Bush appointee, Judge Brown, who is considered to be the most libertarian (she gave the B. Kenneth Simon Lecture at Cato’s 2007 Constitution Day conference) but also the most inscrutable, turned out to be the wild card.  (But she won’t be the swing vote for long because President Obama will have two vacancies to fill on the court.)

Lawyers for the Free Enterprise Fund, who include our friends at the Competitive Enterprise Institute, had earlier indicated that if they failed to get en banc review, they would seek certiorari in the Supreme Court. The narrow split in the D.C. Circuit probably enhances the chance that the justices would agree to hear the case, except that the Court this year has shown a reluctance to take on especially newsworthy (i.e., both controversial and significant) constitutional cases.

What Is an American Car?

Before “loaning” billions more in taxpayer money to some very bad credit risks, simply because they are old American brands associated with Detroit, we might ask what distinguishes these companies from others.

The not-so-big three are certainly are no less global than, say, Honda.  General Motors gets 44% of its revenue from other countries and Ford gets 53%, according to Forbes (April 21).  A German company, Daimler-Benz, still owns a fifth of Chrysler, and a group of affluent private investors owns the rest.

An “American” brand tells you little about where all the parts in a car are made.  I was once at a dinner with Lee Iaccoca where I teased him about my Dodge Stealth, made in Japan by Mitsubishi.  Similarly, today’s Chevy Aveo is imported from Daewoo in South Korea.  Yet Hyundai has a plant in Alabama.

Cars.com found only four cars and six light trucks with a domestic content (meaning US or Canadian) above 75%.  That list includes the Toyota Tundra and Sienna and the Honda Odyssey.  Other Honda’s have a 60-70% domestic content, barely missing the cut.

The “Detroit” metaphor for primarily domestic vehicles is also inappropriate.  Among the remaining seven vehicles with a very high domestic content, three are made outside Michigan —the Chevy Malibu from Kansas and Cobalt from Ohio, and the Ford Explorer from Kentucky.  Ford’s F-150 truck might be made in Michigan or Missouri, the Chevy Silverado in Michigan or Indiana.

The only strictly “Detroit” cars with high domestic content are the Pontiac G6 from Orion MI and the Chrysler Sebring from Sterling Heights MI.  Consumer Reports says, “The G6 isn’t a very good car” and “The Sebring is one of the least competitive family sedans on the market.”   Yet these are the only Detroit-made sedans with a high domestic content.  Does anyone really think taxpayer subsidies can save cars like that?  And why should the federal government offer special deals for uncompetitive cars made in Michigan, thus tilting the playing field against better cars made in, say,  Ohio, Tennessee or South Carolina?

As a Chicago Fed study documents, “the auto industry is increasingly characterized by international carmakers, as well as by parts suppliers that operate in multiple countries. Against a background of global supply chains, it has become quite difficult to identify and label products such as autos by nationality. Overall, the processes of globalization of markets and supply chains have served to noticeably lower prices of new cars for American consumers and businesses. On a quality-adjusted basis, for example, new vehicle prices have been falling at an average annual rate of 0.5% over the current decade. Importantly, higher quality and gains in longevity are among the improvements in today’s vehicles.”

Lord, Make Me Chaste, But Not Yet

From a WSJ blog:

Former Treasury Secretary Robert Rubin, speaking at the same event, also pushed fiscal stimulus while stressing the importance of signaling concerns about the deficit. “The single most important thing we can do right now is a very large fiscal stimulus married with a commitment, once the economy is healthy again, to put in place a multi-year program to get back to a sound fiscal position,” he said.

Reply to Robert Gordon & James Kvaal’s WSJ letter

In a letter to the Wall Street Journal (Nov. 5), Robert Gordon and James Kvaal responded to my critique of their estimate that McCain’s tax plan would cut big oil’s taxes by $3.8 billion. They claim that “corporations as profitable as ExxonMobil pay a 35% rate on more than 99% of their profits.” Yet they also say, “Our code is riddled with special interest deductions, credits and exemptions that shield corporate profits from tax.” Well, which is it?

If big oil companies actually “pay a 35% rate on more than 99% of their profits,” then Gordon and Kvaal might be justified in ignoring McCain’s bold plan to end the oil companies’ “deductions, credits and exemptions.”

As the Committee for a Responsible Federal Budget noted, “Senator McCain … would repeal special expensing rules for oil and gas companies, eliminate the foreign tax credit for oil companies, disallow expensing of exploration and development costs, encourage an increase in royalty rates for drilling on public land, subject working interests in oil and gas to the passive loss rules, eliminate 15 percent tax credit for enhanced oil recovery costs for tertiary wells, and eliminate special depreciable lifetimes for certain assets used by oil companies.”

CFARB estimated that McCain’s plan to tighten up deductions and credits would raise oil company taxes by $6 billion in 2013. That would certainly be offset to some extent, of course, by lower tax rates—30% in 2010-11 and 28% in 2012-2013 (Gordon and Kvaal wrongly assumed the rate would drop to 25% in 2009).

If big oil really pays 35% tax on virtually all their profits, however, then such loophole-closing would simply be a waste of time.

If big oil does not surrender 35% of profits to the IRS, however, then Gordon and Kvaal’s estimates (which assume that statutory tax rates are the same as effective tax rates) are worthless.

Their estimates are based on earnings reported to the SEC — earnings as defined by Financial Accounting Standard Board (FASB) accounting rules, not by IRS reporting rules. Gordon and Kvaal acknowledge that “The figures reported on tax returns … may differ because corporations employ different methodologies for calculating income for accounting and tax purposes.”

If any corporation reported SEC/FASB earnings to the IRS, they would be in very big trouble with the IRS. If they reported IRS earnings to the SEC, they would be in very big trouble with the SEC.

FASB, for example, insists that the “fair value” of nonqualified stock options be estimated when the options are granted, regardless of their ultimate worth. The IRS, by contrast, is not about to let firms deduct the estimated cost of anything. The IRS insists that companies deduct the labor cost of stock options only if and when they exercised and therefore taxed as individual income.

Using a matched sample of financial statements with tax returns, George Plesko of the University of Connecticut business school found that “financial reporting information does not allow a user to infer important information about a firm’s tax attributes.”

Ignoring Plesko’s well-known point, Gordon and Kvaal report that ExxonMobil paid $4.3 billion in federal income tax in 2007, which they assume was 35% of their domestic profits as shown on SEC financial reports.

Their estimates then “present each corporation’s estimated savings from reducing the corporate tax from 35 percent to 25 percent.”

Since a 25% tax rate is 28.57% smaller than a 35% tax rate, they figured that ExxonMobil would have saved 28.57% of $4.3 billion, or $1.2 billion. They repeated such naïve arithmetic for the entire Fortune 200.

ExxonMobil’s accounting profits were almost $41. billion, worldwide, but 68% of their revenue came from overseas according to Forbes (Apr 21). If profits are roughly proportionate to gross revenue, then U.S. earnings would have been $13 billion (32% of the total), and a tax of $4.3 billion happens to be 33% of $13 billion.

At first glance, that might appear consistent with Gordon and Kvaal’s claim that companies as profitable as ExxonMobil really do pay 35% of profits to Uncle Sam. But that would contradict their other claim that “deductions, credits and exemptions … shield corporate profits from tax.”

If we repeat that same exercise for the least international oil companies on the Gordon-Kvaal list, it looks as if Valero paid 40% of domestic profits in federal tax and Conoco Phillips paid 47.6%. As economist and accountants understand, the reason accounting earnings generate such unbelievably high tax rates is that it is just not possible to infer effective corporate tax rates from accounting earnings as Gordon and Kvaal attempted to do.

As I wrote, “That is not economics; it is not even competent bookkeeping.”

Messrs. Gordon and Kvaal thought I was criticizing them for being lawyers rather than economists or competent bookkeepers. On the contrary, I was criticizing President-elect Obama for using estimates from John Podesta’s Center for American Progress Action Fund —a 501c4 political lobby with a rather obvious bias. Unlike any think tank, such political action funds are free to engage in lobbying and campaign activity. Indeed, Gordon and Kvaal boast that “our results have been featured in millions of dollars worth of advertising.” Well, that certainly adds credibility doesn’t it?