Commentary

Speaking of Incompetence

This article originally appeared in the Washington Times on October 31, 2004.

Sen. Kerry’s last-minute campaign pitch claims that “over the last four years … wages of the average family have fallen $1,500.” Yet that figure does not refer to wages, or to four years, or to families, or to any average. Four serious errors in one sentence. The source of Kerry’s $1,500 was a pre-election paper from the Economic Policy Institute (EPI). Although it was called “Less Cash in their Pockets,” the $1,500 figure ignores the Bush tax cuts, which put a larger sum in family pockets.

The EPI report says, “Pre-tax incomes fell for three years in a row, leaving the typical household with $1,535 less income than in 2000, a drop of 3.4 percent.” The figure refers to pre-tax income and to three years rather than four. And the Kerry campaign’s misnamed “average family” actually refers to households (including singles) in the middle fifth of the income distribution, as though excluding the other 80 percent could be called typical.

Newsweek columnist Robert Samuelson explained why this matters: “The median household was once imagined as a family of Mom, Dad and two kids. But ‘typical’ no longer exists. There are more singles, childless couples and retirees. Smaller households tend to have lower incomes. They drag down the overall median. So do more poor immigrant households.”

By starting with the year 2000, Kerry implicitly blames the president for an industrial recession that began in August 2000 and the terrorist attack on Sept. 11. By ending with 2003, he excludes the president’s best year so far, 2004. Besides, income never leaps from a recession trough all the way back to the previous cyclical peak in just two years. In 1997, median household income was barely higher than it had been in 1989.

For married couples with children in the middle fifth of the income distribution ($66,904), the same EPI paper estimates that inflation-adjusted income fell $2,119 from 2000 to 2003 before taxes, but by only $83 after taxes. This “average family” received a $2,036 tax cut, even after adjusting for inflation and accounting for higher state and local taxes. Kerry obviously prefers to talk about a $1,500 decline in pre-tax “wages.”

Kerry has not just been hand-picking bogus statistics to make the president look bad, he has also been making bogus statements to make himself look bad. He claims, the president’s “own policies make it illegal to get low cost medicines from Canada.”

The Food and Drug Administration (FDA), not the president, decides which drugs are safe. Doesn’t Kerry know that? If elected, does he really imagine he could second-guess the FDA by executive edict? Does he imagine that the promised bargains would persist if tens of millions of Americans suddenly tried to buy a tightly limited supply of drugs from Canada?

Last month, Kerry said: “Today, the tax code actually does something that’s right. It actually gives tax breaks to companies that export American products. If they sell more products overseas and create jobs here at home, they pay lower taxes so they can grow and expand and hire more people. Sounds like a pretty good idea, right? But George W. Bush doesn’t think so.”

Actually, it was the World Trade Organization that didn’t think this was a good idea. Those special tax breaks for favored exporters were banned, and the WTO invited Europe to impose retaliatory tariffs that recently reached 15 percent on 1,600 U.S. exports, including such vital Midwestern products as machine tools. Kerry’s “good idea” has been crippling exports from Ohio, Wisconsin and Michigan. Doesn’t Kerry know this? If not, how does he dare use the word “incompetence” when talking about anybody else?

To fix that painful trade war, which has lately been injuring many U.S. manufacturers, the president recently signed a major new corporate tax law. It cuts the corporate tax from 35 percent to 32 percent on U.S. industry, broadly defined, and also provides a one-year tax holiday to repatriate earnings from foreign subsidiaries by paying a 5.25 percent U.S. tax (on top of the foreign tax). Stingy versions of those two changes had been sweeteners in Kerry’s otherwise poisonously anti-corporate tax scheme. But those two unoriginal proposals have now been trumped by actual law.

Doesn’t Kerry know the corporate tax law has changed? The new tax law has now made the only palatable features of the Kerry-Edwards plan instantly obsolete. Yet Kerry and Edwards carry on as if nothing has happened.

An Oct. 27 Kerry fact sheet boasts, “John Kerry will eliminate all the rules that allow companies to ‘defer’ paying taxes until they bring the profits back to the United States. John Kerry will use the savings to cut the corporate tax rate by 5 percent — providing a tax cut for 99 percent of taxpaying corporations.” The rules in question, enacted under President Kennedy, were designed to give U.S. firms a chance of competing in foreign markets. Most major economies, unlike the United States, don’t try levying taxes on profits earned in other countries.

If a French or German company sets up a branch in the unlikely tax haven of Sweden, they only pay Sweden’s 28 percent tax on profits. Under the Kerry-Edwards plan, a U.S. company in Sweden would pay that 28 percent plus another 5.25 percent to the U.S. Treasury regardless whether they reinvest that money in the local business (essential to any ongoing enterprise) or return it to the U.S. parent. Ironically, they call this “part of the overall Kerry-Edwards plan to regain America’s competitive edge.”

Such a huge increase in taxes on U.S. companies abroad would be a marvelous gift to French and German rivals. Many U.S. corporations now operating abroad would be compelled to recharter and move their headquarters to some country less hostile to international business. Others could be easily taken over by foreign firms, which face no such two-country taxes on one-country income. This may be the Kerry-Edwards secret plan to get France and Germany to like us more.

To distract attention from how destructive this tax plan really is, the Kerry-Edwards proposal would have trimmed the corporate tax rate from 35 percent to 33.25 percent. “Some may be surprised to hear a Democrat calling for lower corporate tax rates,” Kerry tells his audiences, evidently unaware that his opponent has already cut that tax to 32 percent. His promised corporate “tax cut” would now require a 4 percent tax increase. Doesn’t Kerry know that? If not, how does he dare use the word “incompetence” when talking about anybody else?

Alan Reynolds is a senior fellow with the Cato Institute and a nationally syndicated columnist.