Next week’s economic reports presented by Fawad Razaqzada, Market Analyst, Forex.com....
Wanted: Adults to Tackle Budget Mess
07/01/2011 11:16 am EST
If we’re going to give companies another huge tax break, let’s make sure it really spurs hiring this time around, writes Moneyshow.com senior editor Igor Greenwald.
I have two sons, aged 12 and 9, who fail to get along now and then. They come to me like lawyers going to court, but I want them to hone their problem-solving skills, so I insist they work it out among themselves.
The only rules are that no bodily harm be involved, and that the premises should not require urgent renovation when they’re done. Sometimes these niceties are even observed, and then dad beams with parental pride.
I care about whose turn it is with the joystick only a little more than the nation cares about its cracked and peeling debt ceiling. And just like I expect that conflict resolution will not require an emergency-room visit, the public wants the phony budget crisis to go away without taxing its patience any more than it already has.
Our long-term fiscal problems are very real, which is why a president-appointed panel struggled past its deadline last year to come up with tough but workable long-term solutions.
These were almost immediately discarded by the rest of the political establishment. Republicans proved allergic to taxes, while Democrats resisted cuts in entitlements.
But even the entirely inadequate down payment on reform targeted in the current debt-ceiling talks requires some additional revenue and plenty of cuts...albeit years down the line. It also requires negotiating skills—and on this score I fear that my kids have the politicians beat hands down.
The week began with Republicans cutting off talks because Democrats insist on raising additional tax revenue. Then the GOP asked President Obama to intervene, presumably to get his party to back down.
Obama said he’d do no such thing, reminding the ultimatum givers that the ball was (and remains) in their court.
So now, a deal depends on both sides moving off hardened positions that they have claimed to be non-negotiable. Good luck. I think I speak for nearly 300 million Americans in begging everyone to skip progress reports until the half-baked deal inevitably gets done.
Instead, let’s educate ourselves on the very real budget problems we face, and the solutions that will need to be applied to them eventually (at this rate, no sooner than 2013.)
Newly retired Republican budget staffer Mike Lofgren had an eye-opening piece in last Sunday’s LA Times. He called out the Obama administration for fiscal mismanagement and dishonesty, of course, but placed most of the blame on the party he served in Congress for 28 years. His main points:
- The deficit is largely a byproduct of the Bush wars, Bush tax cuts, the Bush Medicare benefit, and our Homeland Security spending
- At 14.8% of GDP, federal tax revenues are at a 60-year low
- Republicans should stop baiting US creditors by threatening to default unless they get the cuts they’re looking for
After effectively sheltering some of its profits from US sales overseas—and streaming its foreign earnings to tax shelters in Switzerland and Bermuda—Cisco is now leading the charge to be allowed to bring that money back into the US almost tax-free, as a supposed prerequisite for hiring in its homeland.
Unsurprisingly (except perhaps to those who would cripple government) corporate income tax receipts now amount to just 1.3% of the gross domestic product, down from 7.2% in 1945.
Those who think the economy will take off once the dead hand of the state is lifted off its neck should take a good look around, and see how their long-ago victory is working out.
Instead, companies like Cisco (and Microsoft (MSFT), and Oracle (ORCL), and Google (GOOG)) are pushing for the right to bring their foreign earnings home at a tax rate of just 5.25%—minus the offsets for any taxes paid overseas, of course.
The cost to the Treasury for this is estimated at nearly $80 billion over ten years.
The benefit to the economy, based on a comprehensive academic study of the last such tax break (in 2004), would be minimal: most of the money repatriated the last time went into share buybacks and dividends, which may be nice for shareholders but do little to promote growth.
And, of course, the 2004 tax break encouraged more profit-shifting overseas in subsequent years.
Unfortunately, for those with a time horizon circumscribed by the next election, in the very short run such a tax break is all gravy, because repatriation (even at the heavily reduced tax rate) would temporarily boost overall federal revenue.
So there is already talk among the Democrats about earmarking some of that “extra” revenue for a “jobs bank.” It lets them ingratiate themselves with some of the high-tech giants pushing the tax break, while burnishing their pro-business credentials and claiming to promote employment.
They ignore the fact that the deficit today is partly a result of the tax avoidance encouraged by the last such giveaway.
If lawmakers really want to boost employment, they should insist that any foreign earnings repatriated at the reduced rate be segregated by the corporations in separate accounts, and used only to offset some of the costs of adding US workers over and above the current headcount.
Let the money go toward paying the employer payroll tax on net new hires, for example. Make the money really count.
Then raise the debt ceiling, and agree to put the recommendations of last year’s presidential commission to an up-or-down vote in Congress. That would be the adult way of handling things.
We need Washington’s adults to step forward.
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