Capital Commerce

Barack Obama: His Economic Blind Spot

By James Pethokoukis

Posted: November 28, 2008

Barack Obama has said he'll do "whatever it takes" to boost the economy. But I think what Obama really means is that he'll do "pretty much whatever it takes." Could you imagine him, for instance, pushing this economic recovery plan formulated by Nobel Prize-winning economist Robert Mundell, revealed in a must-read post on Larry Kudlow's must-read blog.

As Kudlow describes it, Mundell would "like to see a complete corporate tax holiday for one year. He then favors corporate tax reform that would drop the current top rate from 35 percent to 15 or 20 percent. He believes this would generate badly needed business investment and job-creation to fight recession." (Mundell would also like a stable dollar.)

But given that Obama even seems to be waffling on not raising income and investment taxes until the Bush tax cuts expire at the end of 2010, a big corporate tax cut seems unlikely. Also, a new blog post by Robert Reich neatly sums up liberal thinking on tax cuts and probably provides a window into Obama's world view: "Conservative supply-siders, meanwhile, will call for income-tax cuts rather than government spending, claiming that people with more money in their pockets will get the economy moving again more readily than can government. They're wrong, too. Income-tax cuts go mainly to upper-income people, and they tend to save rather than spend."

No, the reason you would want to cut taxes, be it on labor, corporations or investment, is to create long-term incentives for growth (savings and investment) and create confidence among individuals and companies. I think that is how you should grade any economic idea right now: Does it build confidence?  A lack of confidence is what's killing the economy right now ...

Payroll Taxes Make a Mockery of Progressive Taxation

Robert of NE, have you noticed how US companies have passed on the massively reduced costs of production by using $1 a day slave laborers in China, Bangladesh, Honduras, etc.? Have you noticed that the Ralph Lauren shirt you're wearing that was made in the third world for a production cost of no more than $1.75 cost you $145? Companies do not charge based on production costs unless they are selling steel or commodities or something. Companies sell based on what the market will bear. What the market will bear in the United States has to do with a complex of factors including how much total credit card credit lines "consumers" have, whether they have some home equity left, or can at least get a fraudulent appraisal saying they do so that they can get a HELOC or 2nd mortgage to refinance their credit card debt (and get a tax write off on that great Coach bag that cost $12 to produce and for which the wise consumer paid $350 and has financed it at 16% over two years to get frequent flier miles!).

It's not a question of companies being evil. It's a question of where the tax money is going to come from. It's got to come from somewhere -- although maybe not as Mr. Bernanke formally announced his new campaign has begun to simply print money by purchasing mortgage bonds and securitized car loans and credit card loans as well as Treasury debt.

Right now the payroll tax which takes 6% each from employer and employee up to about $100,000 and zero after that makes it so that people making $150,000 a year and less pay a higher percentage of income in taxes than people making a lot more. But this is social security which is a retirement fund, so it's not the same, right? Wrong, there isn't money in the Social Security Trust Fund. The Feds took almost $3 trillion from there and replaced it with IOUs that they will presumably repay by taxing the same person again to pay back the squandered money that was already taken from him.

The tax situation is much more complex than many "Duh, why tax corporations when they make jobs and make things and provide us with shopping malls, etc." people think. The public thinks taxes redistribute money from the rich to the poor, but nothing could be further from the truth. In reality, it appears that taxes redistribute wealth from politically unconnected groups to politically connected ones.

Sean of CA @ Dec 08, 2008 06:01:43 AM

Dead on Arrival

This proposal reminds me of the scene in "Blazing Saddles" when a new black sheriff rides into town and is confronted by angry townspeople, who were expecting a white man. He unholsters his revolver, puts it to his head, and says

"Anybody make a move, the n----- get it!"

Even if it was good economics, which it isn't, the passage of such a bill is about as likely as a snowball's safe passage through the hottest corner of the fires of hell.

mp of IL @ Dec 07, 2008 04:07:45 AM

Long-term Incentives are Crucial

DG in IL,

Thanks for clearing up the misdirection.

Jack in MN,

1. Measuring the success or failure of the economic policy of the past 25 years based solely on the amount of debt accumulated is a joke. It is a negative, to be sure, but hardly proof of economic disaster. (Good catch on the 2003 start date for Reaganomics; I meant 1983, which is when the Reagan tax cuts took effect. Anything before that is pre-Reganomics.)

2. Lowering corporate taxes would increase ROI and prompt increased risk taking on the margin. Corporations are not going to alter their current, risk-averse behavior and expand their operations based on a manufactured inflation of the Demand Curve by the government. Consumers could beat down their doors all day long with government money, but that doesn't mean they'd hire even one more worker, and that's what it's all about in the end for nearly every American - employment. A healthy economy is dependent on vibrant, risk-taking corporations.

3. Ireland has experienced an economic renaissance, primarily because of their capital friendly tax policies. Tax rates matter.

Interestingly, as Pethokoukis points out, one of Obama's economic advisors, Christina Romer, is highly conscious of the effects that tax policy have on output. James refers to Obama's economic blind spot but misses the tax cutter in our next president's midst. He neeeds to read his own blog...

Dean of MN @ Dec 01, 2008 01:39:51 AM

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Capital Commerce

Capital Commerce

U.S. News business reporter Matthew Bandyk examines the issues, people, and debates that shape the nexus of political and economic life in the nation's capital.

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