As you already know, I am very pessimistic on the Obama administration’s economic policies. We (all of us) will be subject to more and higher taxes, the amount of government debt and money being printed will lead to inflation, and the debt will lead to higher interest rates that will significantly slow down economic growth.
It has happened before, here and elsewhere in the world. It
will happen is happening again, and the current administration’s policies will bring it soon, and for a long time.
All of these will cause businesses to leave the country, particularly now that the administration proposes to end the deferral of multinational taxation. Kevin Hassett looks at the effect that will have on businesses:
Obama Tells American Businesses to Drop Dead
The U.S. now has about the highest combined corporate tax rate, second only to Japan among industrialized countries. That rate is so high that U.S. firms have an enormous disadvantage versus competitors. The average corporate tax rate for the major developed countries in the Organization for Economic Cooperation and Development in 2008 was about 27 percent, more than 10 percentage points lower than the U.S. rate.
U.S. firms have nonetheless prospered because our tax code allows a business to set up a subsidiary in a low-tax country. When that subsidiary earns profits, they are taxed at the rate of that country, and don’t face U.S. tax until the money is mailed home.
The economically illiterate partisan Democratic view is that this practice is unpatriotic and bleeds jobs from the U.S. The economic reality is that American companies use this approach to acquire market share overseas. The alternative is losing the business to foreign competitors.
Don’t just take my word for it. A recent paper by Harvard economists Mihir Desai and C. Fritz Foley and Berkeley economist James Hines and published in the distinguished American Economic Review, gathered data on American multinationals to explore the impact of foreign investments on domestic U.S. activity.
Encourage Overseas Sales
Their conclusion was striking. The authors found that “10 percent greater foreign capital investment is associated with 2.2 percent greater domestic investment, and that 10 percent greater foreign employee compensation is associated with 4 percent greater domestic employee compensation. Changes in foreign and domestic sales, assets, and numbers of employees are likewise positively associated; the evidence also indicates that greater foreign investment is associated with additional domestic exports and R&D spending.”
So when firms expand their operations abroad, taking advantage of the lower foreign tax rates, it helps their workers in the U.S. Higher sales abroad (surprise, surprise) are good for domestic workers.
It is worth noting that this study, which is confirmed by a boatload of evidence elsewhere, was coauthored by the same James Hines who recently wrote a sweeping review of international tax policy with Obama’s top economist, Larry Summers. Summers has to know what the literature says.
So the question is, why does Obama advocate a policy that so flies in the face of everything that economists have learned? How could Obama possibly say, as he did last month, that he wants “to see our companies remain the most competitive in the world. But the way to make sure that happens is not to reward our companies for moving jobs off our shores or transferring profits to overseas tax havens?” Further, how could Treasury Secretary Tim Geithner call a practice that top scholarship has shown increases wages and employment in the U.S. “indefensible?”
I have to admit I am at a loss. Maybe it is good politics to bash American corporations, and Obama isn’t really serious about making this change happen. But if the change is enacted, and domestic corporate taxes aren’t reduced to offset the big tax hike, the result will be a flight from the U.S. that rivals in scale the greatest avian arctic migrations.
If that occurs, the firms that stay in the U.S. will be at such a huge tax disadvantage that they will absolutely need a “rescue.”
In other business news, James Pethokoukis looks at Elizabeth Warren’s recommendation for more bank “stress tests” (Warren chairs the TARP oversight panel)
Yes, rising joblessness will mean more bad loans to individuals. And commercial mortgages don’t look so hot either. But the super-steep yield curve is great for bank earnings, as is the relaxation of mark-to-market rules. Moreover, the case for new stress tests is no less dodgy than the case for the original ones. Remember that when Treasury Secretary Timothy Geithner announced the tests back on Feb. 10, the Dow Jones industrials fell nearly 400 points as investors interpreted the move as a prelude to bank nationalization. Instead, they turned out to be a poorly executed exercise in investor relations to show Uncle Sam proactive in dealing with Wall Street. Pass-pass instead of pass-fail with many key financial details unavailable to the public. (”Show us the spreadsheets!,” said banking analyst Bert Ely of the lack of data granularity.) The market didn’t fully recoup its losses until early May.
Speaking of TARP, Barry Ritholtz asks, Was TARP a Ruse?, and concludes,
The hurry to repay this cheap cash confirms that the fix was in. If this banks were really in the basd shape Paulson suggested, they would hold onto this cheap source of credit. Instead, they want to throw the yoke of government monies off as soon as possible.
At least I’m not alone in believing we’re being taken for a ride.
Oh, and in case you haven’t noticed yet, Citigroup and GM are now officially worthless.