First, let's begin with Herman Cain's terrible train metaphor, which led into "That means lower taxes, lower the capital gains tax rate to zero, suspend taxes on repatriated profits, then make them permanent. " To unpack this a little, I sort of agree with his first two points: I, and the Congressional Budget Office and a number of economists, think that we should absolutely lower our corporate tax rate. While doing so, we should just go ahead a simplify the corporate tax code. The CBO noted that by so doing, we would actually broaden our revenue base while encouraging foreign investment. As our tax code currently stands, the government ended up owing GE money because GE had successfully lobbied for a number of subsidies, tax breaks, and similar fiscal shennanigans, whereas foreign businesses (who have not spent years lobbying Congress to defend their interests) are repulsed by our prohibitively high corporate tax rates. Similarly, a more effective corporate tax policy would reduce the need for a corporate capital gains and dividends tax, which encourages business. As far as the refusal to tax repatriated profits, I agree conditionally. As it currently stands, businesses are allowed to count foreign expenses as deductions: if this continues to be the case, then repatriated income should be taxed. No deductions, then don't tax them. Simple enough.
The next item on the agenda: Tim Pawlenty's projections of consistent 5 percent GDP increases. Mr. Pawlenty is kidding himself. Historically, 3 percent growth has been the average for the US this century. Boom years have been 4 percent growth. Pawlenty's claim that if China or Brazil can do it, we can do it is insubstantiable. China and Brazil are developing economies that are rapidly growing due to large-scale increases in economic inputs like education, capital investment, and infrastructure. This means that they will have decreasing returns over time. The US economy grows because of increased efficiency, or increased output per unit of input. Economic growth based on innovation or increased efficiency seems to average about 3 percent. Ron Paul's claim that 5, 10, or 15 percent annual growth is possible in a true free market economy is similarly ridiculous. Assuming that Mr. Paul was just pulling numbers out of the air to make a rhetorical point, his idolatry of the free market is justifiable only if the free market also has perfectly developed markets, perfect distribution of information, and perfect competition (which has never happened and never will).
Moving on, we'll notice that Mr. Pawlenty says, "my plan involves a whole plan, not just cutting taxes. We're proposing to cut taxes, reduce regulation, speed up this pace of government, and to make sure that we have a pro-growth agenda. " So we have cutting taxes, reducing regulation, and...the nebulous promise of a pro-growth agenda. Reduced taxation and deregulation are staple Republican policies lately, but judging by the economic performance of the Bush administration, tax cuts and deregulation are the key to 2.4 percent growth (less than half of the promised 5 percent), negative median wage growth, and a stagnant job market. The "speed up this pace of government, and to make sure that we have a pro-growth agenda" bit of his answer sounds a whole lot the wheels in Mr. Pawlenty's head turning and coming to the conclusion that he can't just promise tax cuts and deregulation because everyone knows that's what Bush did and it clearly didn't work.
The most ridiculous part of the debate was the discussion of bringing manufacturing jobs back home. First of all, it's safe to assume that every single person in the debate is campaigning on the promise of reduced government spending, also known as fiscal austerity, which is widely acknowledged to prolong and deepen recessions/depression. Second of all, manufacturing jobs have left the country because other countries can manufacture things more cheaply. The cost of labor in Taiwan, Singapore, China, Brazil, et cetera ad infinitum is simply lower than the cost of labor in the United States. It is simply more profitable to manufacture things in developing countries. This will not change any time soon. Moreover, there's a large, untapped supply of cheap labor throughout Asia, Africa, and South America (the majority of the world's population, actually), so the playing field is unlikely to level any time soon. To be competitive in manufacturing the things that were staples of the American economy, we would have to lower wages for employees to an unacceptable level.
Accordingly, it's a fools errand to try to recapture the sort of manufacturing base that we used to have. We need to look seriously at the world around us, and look at our own strengths to determine the course that we take. Japan and Germany, both countries with strong, successful economies, make their manufacturing bread and butter selling microprocessors, quality automobiles, and other high end goods. Given the rapid growth in China, India, Singapore, South Korea, and elsewhere, there are expanding markets for high end goods. Moreover, the production of such goods is capital intensive (you have to buy lots of expensive machines to manufacture that sort of thing) which works in our advantage (we're the wealthiest nation in the world) and require an educated workforce (which we have). GE is the largest employer in the nation precisely because it manufactures high-end, capital-intensive goods. To remain competitive in this arena, we need to ensure that we continue to produce well-educated human capital, especially individuals who are proficient at math, science, and engineering.
Similarly, GE has a large foothold in the market for green equipment like waste processing facilities, biodiesel manufacturing, windmills, etc. Given the increasingly large number of people competing for a finite amount of fossil fuels, especially in over-crowded developing countries, green technology will play a prominent role in the future, simply because it allows for the efficient use of scarce resources. Implementation of green technology can begin domestically: our aging infrastructure can use a renovation. Moreover, the majority of so-called green jobs are in fact construction jobs. They involve replacing aged pipes, replacing sewer systems, laying the foundation for windmills, etc. The obvious argument against this sort of endeavor is the prohibitive cost to the taxpayer in an age of austerity, but it could easily be financed by an expanded revenue base (in the form of corporate tax reform mentioned above) and a large decrease in military expenditures (which is very easily accomplished, given the byzantine nature of the military bureaucracy).
The other side of this coin is that we need to continue encouraging the growth of developing economies. Richer citizens in Asia, Africa, and South America mean more people who can by the sort of goods that America produces. Stronger foreign economies are good for everyone.
These are just some initial thoughts: there will be more to come in the days ahead, especially about evil Obamacare (which I need to research before I can comment intelligently).
Incidentally, it should be noted that arguments like "Well, the steel industry is probably never going to be revitalized because production costs are simply much lower in other countries, so what we should really be doing is investing in the capital-intensive production of high-tech consumer goods and ensuring that we have a well-educated labor force to ensure continued competitiveness," don't carry much weight in a political debate. The question we should be asking is "Whose fault is that, America?"
ReplyDeleteRegarding taxes, I think lowering corporate taxes and eliminating capital gains taxes entirely would mean that the investor class would pay virtually no taxes. Lowering rates in a revenue-neutral way (by broadening the base and eliminating industry-specific subsidies) is a worthwhile goal in the name of efficiency, but effective tax rates are already quite low, and coupling corporate tax reform with further reductions in capital gains rates seems misguided. To me, paying dividend and capital gains taxes are the price one pays for the privilege of doing business in corporate form.
ReplyDeleteRegarding a tax holiday for repatriation, it has been done before, and it resulted in profits being moved onshore for long enough to get the 5% tax rate, then moved right back offshore without pausing to create jobs. Herman Cain's tax plan is like a wishlist for corporate America, but taken as a whole, it doesn't seem to me to do much that would be positive either for the domestic economy or the deficit.
I was thinking more about a reduction of the capital gains/dividend taxes to, say, 20%, (because the Bush tax cuts still aren't permanent, I think), as opposed to Herman Cain's 0%.
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