Ronald Reagan was born 99 years ago. To remember what made him special, here are a couple of videos.
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Ronald Reagan was born 99 years ago. To remember what made him special, here are a couple of videos.
Over at Downsizing Government, we focused on the following issues this week:
Federal government jobs that is. According to the president’s new budget, federal civilian employment in the executive branch will be 15 percent higher in 2011 than it was in 2007:
*I subtracted out the Department of Commerce because it’s temporary hiring of workers for the 2010 Census skews the chart.
Private sector unemployment remains high despite the the administration’s claim that massive deficit spending was necessary to return the economy to health. Instead of fostering private sector growth, the administration is fostering government growth at the expense of the private sector.
Politicians in Washington have come up with something far more impressive than turning lead into gold or water into wine. Using self-serving budget rules, they can increase the burden of government spending and say they are cutting taxes instead.
This bit of legerdemain is made possible, thanks to the convolutions of the personal income tax, by adopting or expanding refundable tax credits. But in this case, “refundable” does not mean the government is returning money to taxpayers. Instead, it means that money is being redistributed to people who do not earn enough to be subject to the income tax.
This is hardly a trivial issue. According to the Congressional Budget Office, the amount of income redistribution being laundered through the tax code is now so large that the bottom 40 percent of the population has a negative “effective” income tax rate. In simple terms (though perhaps with profound political implications), the income tax is a revenue generator for a big share of the population.
And the problem is going to get worse if the President’s budget is approved. Buried in the fine print, on pages 188–189 of the Analytical Perspective of the Budget, you will see that the President is proposing to increase this hidden form of spending by more than $152 billion over the next 10 years.
It is worth noting that proponents argue that it is OK to classify this new spending as tax cuts because it somehow offsets other tax payments, especially the payroll tax. I’m sympathetic to lower taxes on everybody, including the poor, but surely it is better to be honest and simply cut the taxes that people pay. The current methodology, by contrast, is open to abuse. Heck, I’m surprised politicians don’t classify other forms of spending as tax cuts. Maybe corporate welfare can be reclassified as a corporate tax cut. (I better stop lest I give the political class any ideas.)
Defenders also assert that some so-called refundable tax credits, particularly the earned income tax credit, are designed to encourage work. That is partly true, but credits like the EITC are withdrawn as income climbs, and this means poor people face punitive marginal tax rates, so the overall effect on hours worked may be negligible.
The right approach, of course, is to get the federal government out of the racket of redistributing income.
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.
Senator Kent Conrad (D‑ND) has a reputation for being a “deficit hawk.” But the bar is apparently so low in Washington that merely paying lip service to “fiscal responsibility” is enough to earn you the hawk title in the press. In reality, Conrad is a tax and spender as a story in today’s Wall Street Journal demonstrates.
These examples illustrate Sen. Deficit Hawk’s commitment to deficit reduction and fiscal responsibility:
“Wealthy Face Higher Taxes.” That’s the headline that greeted two million American businesspeople Tuesday when they opened their Wall Street Journals. Inside, another banner head: “Big Firms Would Face Deeper Tax Bite.” Turn to the New York Times: “A Red-Ink Decade/Obama Budget Sees Years of Deficits.” The Financial Times: “Obama to target overseas tax breaks.” Investor’s Business Daily: “Higher Taxes for All in Obama Budget, $1.6 Tril 2010 Deficit.” And the Washington Post (not that many productive people get that on their doorstep): “Obama budget would spend billions more.”
And President Obama wonders why banks aren’t lending, employers aren’t hiring, and investors are holding back? As the Economic Policy Institute illustrates, this is the slowest recovery of any postwar recession.
Let’s hope the Obama administration soon learns that higher taxes, more regulation, a larger share of GDP shifted to government, fears of Fed monetization of soaring debt — not to mention newspaper reports of Obama budgeteers “flipp[ing] through the tax code, looking for ideas” — can only discourage employers, investors, and entrepreneurs. Robert Higgs has cited the role of “regime uncertainty” in prolonging the Great Depression, as investors worried about what FDR might do next. Will Wilkinson points to Treasury Secretary Tim Geithner’s saying “businesses want certainty. They need certainty so they can make long-term plans today.” Unfortunately, Will says, “Creating completely irresponsible, economically chilling regime uncertainty would appear to be the basic modus operandi of the Obama administration.”
Taxes, regulation, and uncertainty — and Obama asks why businesses aren’t lending, investing, and hiring.