Obama’s Big Tax Hike on U.S. Multinationals Means Fewer American Jobs and Reduced Competitiveness
The new budget from the White House contains all sorts of land mines for taxpayers, which is not surprising considering the President wants to extract another $1.3 trillion over the next ten years. While that’s a discouragingly big number, the details are even more frightening. Higher tax rates on investors and entrepreneurs will dampen incentives for productive behavior. Reinstating the death tax is both economically foolish and immoral. And higher taxes on companies almost surely is a recipe for fewer jobs and reduced competitiveness.
The White House is specifically going after companies that compete in foreign markets. Under current law, the “foreign-source” income of multinationals is subject to tax by the IRS even though it already is subject to all applicable tax where it is earned (just as the IRS taxes foreign companies on income they earn in America). But at least companies have the ability to sometimes delay when this double taxation occurs, thanks to a policy known as deferral. The White House thinks that this income should be taxed right away, though, claiming that “…deferring U.S. tax on the income from the investment may cause U.S. businesses to shift their investments and jobs overseas, harming our domestic economy.”
In reality, deferral protects American companies from being put at a competitive disadvantage when competing with companies from other nations. As I explained in this video, this policy protects American jobs. Coincidentally, the American Enterprise Institute just held a conference last month on deferral and related international tax issues. Featuring experts from all viewpoints, there was very little consensus. But almost every participant agreed that higher taxes on multinationals will lead to an exodus of companies, investment, and jobs from America. Obama’s proposal is good news for China, but bad news for America.
State of the Union Fact Check
Cato experts put some of President Obama’s core State of the Union claims to the test. Here’s what they found.
THE STIMULUS
Obama’s claim:
The plan that has made all of this possible, from the tax cuts to the jobs, is the Recovery Act. That’s right — the Recovery Act, also known as the Stimulus Bill. Economists on the left and the right say that this bill has helped saved jobs and avert disaster.
Back in reality: At the outset of the economic downturn, Cato ran an ad in the nation’s largest newspapers in which more than 300 economists (Nobel laureates among them) signed a statement saying a massive government spending package was among the worst available options. Since then, Cato economists have published dozens of op-eds in major news outlets poking holes in big-government solutions to both the financial system crisis and the flagging economy.
CUTTING TAXES
Obama’s claim:
Let me repeat: we cut taxes. We cut taxes for 95 percent of working families. We cut taxes for small businesses. We cut taxes for first-time homebuyers. We cut taxes for parents trying to care for their children. We cut taxes for 8 million Americans paying for college. As a result, millions of Americans had more to spend on gas, and food, and other necessities, all of which helped businesses keep more workers.
Back in reality: Cato Director of Tax Policy Studies Chris Edwards: “When the president says that he has ‘cut taxes’ for 95 percent of Americans, he fails to note that more than 40 percent of Americans pay no federal incomes taxes and the administration has simply increased subsidy checks to this group. Obama’s refundable tax credits are unearned subsidies, not tax cuts.”
Visit Cato’s Tax Policy Page for much more on this.
SPENDING FREEZE
Obama’s claim:
Starting in 2011, we are prepared to freeze government spending for three years.
Back in reality: Edwards: “The president’s proposed spending freeze covers just 13 percent of the total federal budget, and indeed doesn’t limit the fastest growing components such as Medicare.
“A better idea is to cap growth in the entire federal budget including entitlement programs, which was essentially the idea behind the 1980s bipartisan Gramm-Rudman-Hollings law. The freeze also doesn’t cover the massive spending under the stimulus bill, most of which hasn’t occurred yet. Now that the economy is returning to growth, the president should both freeze spending and rescind the remainder of the planned stimulus.”
Plus, here’s why these promised freezes have never worked in the past and a chart illustrating the fallacy of Obama’s spending claims.
JOB CREATION
Obama’s claim:
Because of the steps we took, there are about two million Americans working right now who would otherwise be unemployed. 200,000 work in construction and clean energy. 300,000 are teachers and other education workers. Tens of thousands are cops, firefighters, correctional officers, and first responders. And we are on track to add another one and a half million jobs to this total by the end of the year.
Back in reality: Cato Policy Analyst Tad Dehaven: “Actually, the U.S. economy has lost 2.7 million jobs since the stimulus passed and 3.4 million total since Obama was elected. How he attributes any jobs gains to the stimulus is the fuzziest of fuzzy math. ‘Nuff said.”
In Case This Needs Saying: It’s a Tax
Last week, President Obama unveiled a plan for something he called a ”Financial Crisis Responsibility Fee,” to be fleshed out in his forthcoming budget proposal. He will seek to have some set of financial services providers pay money to the government as comeuppance for the recent financial crisis and government involvement in trying to remedy it.
The naming of the “Financial Crisis Responsibility Fee” is a fairly conspicuous attempt to avoid calling it a tax. (My colleague David Boaz points out the sheer number of taxes the Obama administration and its allies are considering.) But it’s fairly clear that this thing is, indeed, a tax.
The galaxy of government revenues has a number of different planets—taxes, fees, penalties, and a few others. If they’re well constructed, fees are generally favored because the recipients of services or benefits pay their costs. Fees avoid redistribution of wealth (either toward or away from payers). But this doesn’t mean that you can name any payment to the government a ”fee” and produce fair and appropriate results.
When I worked on Capitol Hill, I was tasked with writing a bill to deny federal agencies the power to raise taxes, requiring them to be approved by Congress. (You’d think that only Congress should set or raise taxes, right? Sorry to disappoint.) The goal was not to draw fee-setting into the ambit of the bill.
After extensive reasearch into the dividing line between fees and taxes, which is not as simple as one might imagine, I produced the following definition, as found in the Taxpayer’s Defense Act (introduced in the House during the 105th Congress, and the House and Senate in the 106th Congress):
[T]he term “tax” means a non-penal, mandatory payment of money or its equivalent to the extent such payment does not compensate the Federal Government or other payee for a specific benefit conferred directly on the payer.
Parsing it briefly: A penalty is not a tax. A voluntary payment is not a tax. Both payments of money and tranfers of value not denominated in dollars can be taxes. A payment that compensates a benefit conferred is not a tax, but the part of a payment going above the benefit conferred is. Non-tax payments are for a specific benefit conferred directly on the payer, not benefits conferred on regulated entities generally or on the country as a whole. (Though this isn’t specified in the definition, being regulated isn’t a benefit.)
With even the New York Times referring to President Obama’s “Financial Crisis Responsibility Fee” as a “tax,” there doesn’t seem to be much chance of that the administration will get the “fee” label to stick. But, just in case, here’s confirmation: It’s a tax.
Vermont’s Education Spending
I happened to catch the January 7 State of the State speech by Gov. Jim Douglas of Vermont on C-SPAN. It was a sober and serious presentation that laid out the facts about higher taxes and excessive spending, which are problems in just about every state.
Douglas on excessive education staffing Vermont:
Since 1997, school staffing levels have increased by 23 percent, while our student population has decreased by 11.5 percent. The number of teacher’s aides has gone up 43 percent. The number of support staff has gone up 48 percent. For every four fewer students a new teacher, teacher’s aide or staff person was hired. There are 11 students for every teacher – the lowest ratio in the country – and a staggering five students for every adult in our schools. With personnel costs accounting for 80 percent of total school spending, it’s no wonder that our K-12 system is among the most expensive in the nation at $14,000 per student per year.
Current staffing and compensation levels cannot be maintained as the student count continues to decline. If we simply move from our current 11 to 1 student/teacher ratio to 13 to 1, we would still have one of the lowest ratios in the country, while saving as much as $100 million. If we want to make education costs sustainable, we must return balance to classrooms. I propose that over four years we bring our statewide student/teacher ratio to affordable levels.
Douglas on excessive education bureaucracy:
Our school governance structures are a vestige of the 19th century and, like our unsustainable personnel costs, must be reformed. We have 290 separate school districts –- one for every 312 students –- 63 different supervisory bodies and a State Board of Education. That’s a total of 354 different education governing bodies for a state with only 251 towns.
Douglas on education financing:
At the root of our education funding challenge is a system that’s substantially eroding local control. Each year the connection between your school budget vote and your property tax bill becomes more and more distant. . . our education funding regime has grown into an unmanageable maze of exemptions, deductions, prebates, rebates, cost-shifts and hidden funding sources. Overlapping rings of complexity keep all but a few experts from understanding the many moving pieces. This is not good tax policy, not good government, and, if you ask most Vermonters, not good for much of anything. It’s time to pull back the curtains and let the sun shine in on how education is funded. Transparency – Who is paying? What are we paying for? What are the results?
Douglas on excessive education regulations:
Currently, Vermont schools are prohibited by law from accessing out-of-state distance learning programs … If a school sought to provide a new Chinese program for this student, or even a group of students, they would have to hire a new teacher with the expertise – a costly step. Allowing students to access approved distance learning programs from around the country is a simple, affordable change we can make to improve quality.
Excessive staffing, complex bureaucracy, complex financing, and excessive regulation are problems in government education systems across the country. There is no better time than today, when states have large budget gaps, to tackle these chronic problems.
So kudos to Douglas. His speech was a contrast to that of Colorado’s Gov. Bill Ritter, who followed him on C-SPAN uttering the usual lofty but vacuous speech we expect of most politicians.
Growing Support for Smaller Government
A new Washington Post-ABC News poll finds that respondents favor “smaller government with fewer services” over “larger government with more services” by 58 to 38 percent. Reporter Dan Balz notes:
The poll also shows how much ground Obama has lost during his first year of trying to convince the public that more government is the answer to the country’s problems. By 58 percent to 38 percent, Americans said they prefer smaller government and fewer services to larger government with more services. Since he won the Democratic nomination in June 2008, the margin between those favoring smaller over larger government has moved in Post-ABC polls from five points to 20 points.
I’ve noted previously that
I’ve always thought the “smaller government” question is incomplete. It offers respondents a benefit of larger government — “more services” — but it doesn’t mention that the cost of “larger government with more services” is higher taxes. The question ought to give both the cost and the benefit for each option. A few years ago a Rasmussen poll did ask the question that way. The results were that 64 percent of voters said that they prefer smaller government with fewer services and lower taxes, while only 22 percent would rather see a more active government with more services and higher taxes. A similar poll around the same time, without the information on taxes, found a margin of 59 to 26 percent. So it’s reasonable to conclude that if you remind respondents that “more services” means higher taxes, the margin by which people prefer smaller government rises by about 9 points.
In fact, Rasmussen has continued to ask just that question, and found a month ago that voters preferred “smaller government with fewer services and lower taxes” by a margin of 66 to 22 percent. That’s a larger margin for the alternative wording than I had previously estimated. I know some people are skeptical of Rasmussen’s polling. (A Republican consulting firm recently found results very similar to the Rasmussen poll.) So I invite Gallup, Harris, the New York Times, the Washington Post, and other pollsters to ask this more balanced question and see what results they get.
Wednesday Links
- A real stimulus: To create jobs, repeal the corporate-income tax.
- As if times weren’t hard enough: The individual mandate on health insurance would impose high implicit taxes on low-wage workers. For more on this, read the new Cato study on burdens the health care legislation will place on the poor.
- Hot off the press: New issue of Regulation magazine looks at lessons from the financial crisis and property rights.
- Even though the government is running massive deficits, interest rates and inflation are low. So, what’s the problem?
- Podcast: “Bernanke’s Conceit” featuring Mark A. Calabria.
Reforming the Insane Tax Code
We’ve got an IRS Commissioner who doesn’t even do his own taxes, and is not embarrassed about it. We’ve got complex deductions that nobody understands, including the government, as the Maryland nurse with the MBA found out. We’ve got a Treasury Secretary and other high appointees who apparently cheated on their taxes. And we’ve got the Democrats hell-bent on greatly increasing the power and responsibilities of the overwhelmed IRS with their health care bill.
Now, more than ever, it’s time to scrap the current income tax and put in a flat tax. Or at least we could take a big jump in that direction with a “Simplified Tax,” as discussed in a new National Academies report. Get rid of all almost all deductions, exemptions, and credits and drop individual rates to 10 and 25 percent. While we’re at it, let’s drop the federal corporate rate to 25 percent or less.
For more on the two-rate tax idea, see my Options for Tax Reform and Rep. Paul Ryan’s American Roadmap.
How ObamaCare Would Keep the Poor Poor
Suppose you’re a family of four at or near the federal poverty level. Under current law, if you earn an additional dollar, you get to keep around 60-70 cents.
Under the House and Senate health care bills, however, you would get to keep maybe 38 cents. Or 26 cents. Or maybe just 18 cents.
The following graph (from my recent study, “Obama’s Prescription for Low-Wage Workers: High Implicit Taxes, Higher Premiums”) shows that under the House and Senate bills, the combination of (1) a mandate tax and (2) subsidies that disappear as income rises would impose implicit tax rates on poor families that reach as high as 82 percent over broad ranges of income.
This graph actually smooths out some rather bumpy implicit tax rates that spike as high as 174 percent.
In the 1980s and 1990s, the public saw that too-generous government subsidies can actually trap people in a cycle of poverty and dependence. President Obama and his congressional allies seem not to have learned that lesson.
Dear Poor People: Please Remain Poor. Sincerely, ObamaCare
In a new study titled, “Obama’s Prescription for Low-Wage Workers: High Implicit Taxes, Higher Premiums,” I show that the House and Senate health care bills would impose implicit tax rates on low-wage workers that exceed 100 percent. Here’s the executive summary:
House and Senate Democrats have produced health care legislation whose mandates, subsidies, tax penalties, and health insurance regulations would penalize work and reward Americans who refuse to purchase health insurance. As a result, the legislation could trap many Americans in low-wage jobs and cause even higher health-insurance premiums, government spending, and taxes than are envisioned in the legislation.
Those mandates and subsidies would impose effective marginal tax rates on low-wage workers that would average between 53 and 74 percent— and even reach as high as 82 percent—over broad ranges of earned income. By comparison, the wealthiest Americans would face tax rates no higher than 47.9 percent.
Over smaller ranges of earned income, the legislation would impose effective marginal tax rates that exceed 100 percent. Families of four would see effective marginal tax rates as high as 174 percent under the Senate bill and 159 percent under the House bill. Under the Senate bill, adults starting at $14,560 who earn an additional $560 would see their total income fall by $200 due to higher taxes and reduced subsidies. Under the House bill, families of four starting at $43,670 who earn an additional $1,100 would see their total income fall by $870.
In addition, middle-income workers could save as much as $8,000 per year by dropping coverage and purchasing health insurance only when sick. Indeed, the legislation effectively removes any penalty on such behavior by forcing insurers to sell health insurance to the uninsured at standard premiums when they fall ill. The legislation would thus encourage “adverse selection”—an unstable situation that would drive insurance premiums, government spending, and taxes even higher.
See also my Kaiser Health News oped, “Individual Mandate Would Impose High Implicit Taxes on Low-Wage Workers.”
And be sure to pre-register for our January 28 policy forum, “ObamaCare’s High Implicit Tax Rates for Low-Wage Workers,” where the Urban Institute’s Gene Steuerle and I will discuss these obnoxious implicit tax rates.
(Cross-posted at Politico‘s Health Care Arena.)
Obama Bank Tax Is Misguided
Perhaps I am a little confused, but didn’t the Obama Administration tell the American public only months ago that TARP was turning a profit? But now the same administration is proposing to assess a fee on banks to cover losses from the TARP. Maybe President Obama is coming around to the realization that the TARP has indeed been a loser for the taxpayer. He appears, however, to be missing the critical reason why: the bailouts of the auto companies and AIG, all non-banks. This is to say nothing of the bailout of Fannie Mae and Freddie Mac, whose losses will far exceed those from the TARP. Where is the plan to re-coup losses from Fannie and Freddie? Or a plan to re-coup our rescue of the autos?
If the effort is really about deficit reduction, then it completely misses the mark. Any serious deficit reduction plan has to start with Medicare and Social Security. Assessing bank fees is nothing more than a rounding error in terms of the deficit. Let’s put aside the politics and get serious about both fixing our financial system and bringing our fiscal house into order. The problem driving our deficits is not a lack of revenues, aside from effects of the recession, revenues have remained stable as a percent of GDP, the problem is runaway spending.
The bank tax would also miss what one has to guess is Obama’s target, the bank CEOs. Econ 101 tells us (maybe the President can ask Larry Summers for some tutoring) corporations do not bear the incidence of taxes, their consumers and shareholders do. So the real outcome of this proposed tax would be to increase consumer banking costs while reducing the value of bank equity, all at a time when banks are already under-capitalized.
Mainstream Media’s Trade Gap
In a post at the Enterprise Blog two days ago, economist Mark Perry deftly parodies a typical mainstream media account of trade protectionism by editing the story in redline to contrast its original presentation with its true significance. I recommend reading the whole thing, but here’s the first paragraph:
WASHINGTON POST (Reuters) – A U.S. trade panel gave final approval on Wednesday to duties taxes ranging from 10 to 16 percent on cost-conscious firms in the U.S. who purchase low-priced Chinese-made steel pipe rather than high-price domestic pipe, in the biggest U.S. trade case to date against China American companies (and their shareholders, employees, and customers) who shop globally for their inputs and find the best value in China.
Perry’s point—and I share his frustration—is that the mainstream media typically fail to convey even a sense of the costs of U.S. protectionism to U.S. interests even though Americans (and non-Americans living in the U.S.) bear the greatest burden of that protectionism. When the U.S. government imposes duties on Chinese steel, it is imposing taxes on U.S. consuming industries, their employees, their shareholders, and their customers.
Tuesday Links
- Cato Vice President Gene Healy grades President Obama. (Hint: He doesn’t give him a “B+”).
- Afghanistan: A war we cannot afford. “Democrats say raise taxes. Republicans say no worries. The best policy would be to scale back America’s international commitments.”
- Doug Bandow: The war in Afghanistan was justified at the beginning, but to escalate now is the “geopolitical equivalent of shutting the barn doors after the horses have fled.”
- How U.S. membership in the World Trade Organization enhances the liberty and prosperity of all Americans.
- Podcast: “TARP: A Congressional Failure” featuring John Samples.
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