There are some really good things in the Obama Administration’s American Jobs Act (AJA) proposal. But certainly the country can do much better than what’s here.
Instead of Republicans taking their normal stand of stopping-on-arrival anything that the Obama Administration proposes, I have a better idea.
It’s pretty clear to me that the Obama Adminstration’s economic and housing advisers have again shown here that they don’t have the level of business acumen and financial creativity necessary to solve the country’s pressing economic problems.
Thus, the Congress should immediately take charge, in a bipartisan way, and continue to work around the clock until the job is done, keeping the good parts in AJA that make sense, but vastly improve it.
If they can do this, their ratings will go up dramatically, but more importantly they can make very substantial dents in solving this horrible, ongoing, challenging US economic problem, where only the Big Corps and the Well-to-Do's continue to thrive, and the rest of the country keeps getting worse.
I am certainly not an expert, but let me offer some thoughts on just four of the key issues in AJA…..employee payroll tax cut, housing, 100% tax expensing, and infrastructure.
I think you have to start with the $447 bil total cost amount of AJA, and the breakdown of it to see if the money is being properly and effectively invested in the real problem, which is Job Creation. After all, it is entitled American "Jobs" Act.
First off, 39% of the $447 bil, or $175 bil, is for one item…..Cutting employee payroll taxes in half in 2012. What was Obama’s economic team thinking here?
Liberals rightfully point out the absurdity of conservative attempts at fixing the US economy by reducing the top corporate federal income tax rate, or by keeping the historically very low Bush top individual tax rates.
Such an indirect approach does nothing to create US jobs, and costs the US Government tons of money.
But cutting employee payroll taxes does precisely the same thing. It is also clearly an indirect approach, and does nothing to directly create US jobs, and costs the US Government tons of money.
Cutting the top corporate income tax rate, or keeping the Bush low top individual tax rates, is trickle down. Cutting employee payroll taxes is trickle up. They both are intellectually flawed.
The problem with abstract-thinking IVY League economists who dominate the thinking of the Obama Administration is that they look at everything macro, and just assume that just because money is inserted into the US economy, that will automatically create US jobs. That’s crazy reasoning.
Instead, the Obama Administration needs people advising him that have “business acumen”, who know that to create US jobs, you have to instead target it directly.
Giving a business a jobs tax credit for hiring a worker creates a job, as long as there is a requirement that this job must be retained for a reasonable period of time, or else the jobs tax credit is recaptured.
Just throwing money into the US economy by any kind of an untargeted tax cut, either given to corporations or to individuals, does not create jobs. With so many cold, calculating, greedy, financially-astute CEOs and CFOs now effectively running US Big Corps, much of this money thrown into the US economy ends up as additional profits of Big Corps.
When you think about it, this massive employee payroll tax cut giveaway is consistent with several very popular, but failed, initiatives tried in the first Economic Stimulus. Back then there were mass individual tax cuts for mainly the middle and lower classes, as well as another massive tax cut for the wealthy related to the Alternative Minimum Tax.
These very popular, but extremely expensive indirect tax cuts did nothing for job creation, since untargeted money was just thrown into the US economy.
If instead, that massive amount of money would have been used for wise job-creating initiatives like well designed, directly targeted Jobs Tax Credits and Investment Tax Credits for all businesses, I think we would presently be looking at a US unemployment rate below 7.5%, rather than at one above 9%. It would have been much more effective having the entire country working simultaneously on solving its deep recession, rather than leaving out the business community.
Further, liberals also point out the unfairness of Big Corps taking advantage of all of these corporate tax loopholes. Clearly, these need to be closed.
But what the Obama Administration’s economic team is proposing here with this $175 bil employee payroll tax cut is creating a new tax loophole for employees…..who are able to avoid paying 50% of their payroll taxes.
How in the world can you argue for closing Corporate Tax Loopholes out of one side of your mouth, and then simultaneously backdoor the creation of a new Individual Employee Payroll Tax Loophole out of the other side of your mouth?
And this AJA is not just extending the 2011 employee payroll tax cut Individual Tax Loophole, but it is expanding it in 2012.
And once this Individual Tax Loophole is there, it is very difficult to ever remove it…..just look how hard it is to get rid of Big Oil Subsidies, even though more than 80% of the country agrees they should be eliminated.
Since once enacted, this $175 bil Employee Payroll Tax Cut Subsidy will likely remain and continue to grow, the cost to the US Government over the next 10 years will be much more than $2 trillion. That pretty much wipes out the entire Debt Ceiling Deficit reduction over the same 10 years, that the US Congress recently passed.
So anyway, I think spending $175 bil, or 39% of your economic stimulus, on the employee payroll tax cut is clearly crazy economic policy. It makes the recipients happy, but it doesn't address the problem.....Job Creation.
If it is necessary to have an employee payroll tax cut, I would target it at the forgotten Underemployed, thus give it on only say the first $30,000 of wages in 2012. That is fair economic policy. These Underemployed did nothing to create the 2000s Lost Decade, but are suffering severely from it, and have been clearly forgotten by everyone.
But why throw the country’s money away on people already making a decent wage. They already have a good-paying job. Why reward them more, when the US Government already has a US Debt level of about $15 trillion?
Enough on the employee payroll tax cut.
Let me focus on some of the other 61% of the cost of AJA.
So many in the country, as well as the US economy as a whole, have suffered severely from underwater mortgages, and the Obama Administration housing advisers continue to offer nothing in the way of true solutions here. And neither has anyone in Congress, on either side of the aisle. It’s pretty clear the country needs a new housing advising team, with fresh ideas, as well as new ideas on this critical issue in the US Congress.
Since the Obama Administration’s housing advisers are not proposing wise effective initiatives that would make significant strides in solving the housing crisis, including what’s included in AJA, it behooves Congress, in a bipartisan manner, to take the ball here and put real effective housing initiatives in the AJA.
Maybe I missed something, but when I look at the details of the $447 bil on the last two pages of the AJA, I see no dollar cost amounts in there for solving the housing crisis. You’ve got to be kidding. The housing crisis is one of the major reasons for US unemployment and US underemployment, and there’s no money there to even try to fix it?
I suggest that wisely targeting money at the solving the housing crisis is much better use of the US government’s finances than an employee payroll tax cut giveaway.
Let me now address the key 100% tax expensing in the AJA.
At first thought, a simple mind would conclude that extending 100% expensing of all investments in new plants and equipment is a great idea, since it only costs $5 bil, or only 1% of the total $447 bil cost of AJA.
But why in the world do something that instead of creating jobs, actually reduces jobs? And the US Government is actually paying money to reduce jobs with this initiative.
Big Corps are major beneficiaries of 100% tax expensing. Their profits have been substantially enhanced by the higher sales resulting from it. And they also get this massive tax benefit from it, and are pretty much hiring no one. And many of them get 100% tax expensing and the increased sales from it, and at the same time, continue to lay off many of their employees.
No doubt that US Big Corps are chuckling at the 100% tax expensing in the AJA, which has no strings attached, just like they chuckled at a US Government that would give them the same incredible 100% tax expensing largesse, with no strings attached, in 2011. And so many in the country still wonder why Big Corp Profits are at record levels in both 2010 and 2011, but yet the US Deficit is so high in both 2010 and 2011, and also there has been so little US job creation in both 2010 and 2011?
There's a reason the US Congress has an approval rating of only 13%.....it's been earned.
When I look at the individual resumes of members on both sides of the aisle of the US Congress, I am really impressed. So what's the problem?
I think it is clearly a situation where the whole of the US House and the US Senate is substantially less than the sum of its parts. The whole is substantially below the sum of its parts because of the Congressional Leadership of the parties, particularly the Republican Leadership in both the House and the Senate.....it is bringing down their parties to the demise of the entire country.
The individual Republican Senators and Republican House members, for the most part, aren't permitted to think independently, and do what they think is right for the country. Instead, they are looked down on if they aren't in complete lockstep with the Republican Leadership.
That is why there is so much Party Line Voting, and so much of it is how US Big Corps direct them to vote. But yet the Congressional Republican Leadership always publicly declares that they are voting in line with the interests of Small Businesses, but that is not the case at all. Their policies are clearly designed to benefit Big Corps, and it has really worked. Small Busineses are still suffering.
At some point in time, the entire country is going to realize that, no matter what they say publicly, US Big Corps are only out for themselves. Because of this whole-scale self interest of US Big Corps, it should be the US Government's role to continually be intimately aware of this fact, and design policies that take that into account. That's obviously not happening.
A significant problem with job creation here from 100% tax expensing is that the bulk of these tax incentives are for technological efficiencies, where investments are made in equipment, with the ultimate result being that employees are replaced by machines.
And this $5 bil cost is really misleading. For full financial transparency, the US Government should broadly and clearly display what the cost to the US Government was in 2011, and will be in 2012, due to 100% tax expensing by all Corps, big and small.
It wouldn’t surprise me if this cost number to the US Government in just 2012 alone is much closer to $500 bil than to $5 bil. And the cost disclosed here should also compare 100% tax expensing in 2012 to present continuing first-year tax depreciation, before the 50% first-year bonus tax depreciation for 2012, which was temporarily enacted at the end of last year.
Given the dismal current US Government Debt level, can the country really afford a $300 bil to $500 bil addition to US Debt in 2012 for a 100% first-year expensing program that instead of creating US jobs, does just the opposite?
On the other hand, it is really not that difficult to convert 100% first-year tax expensing into a very effective US job creator. The Congress should take the initiative here, in a bipartisan way, and do this.
I'll make a prediction. If there was both sufficient financial creativity and business acumen placed on the 100% tax expensing intiative, there would be many more jobs created by it than by all of the other parts of the AJA combined.
How could that be possible?
You need to focus on accelerated tax depreciation incentives for all building investments, particularly on building remodelings, and not just on manufacturing buildings, but on all commercial buildings.
True Job Creation from 100% tax expensing doesn't come from equipment purchases, but rather from a massive number and a massive dollar amount of building improvements.
With massive commercial building improvements, you get construction jobs on the front end. And with the much improved buildings, you also get many subsequent jobs created from the upgraded building environment.
So how do you get 100% tax expensing on a building? Well, you don't...exactly.
Instead, you give the first ten years of present building tax depreciation all in the first year....still an incredible stimulation for investing in building remodelings.....and at little or no CBO scored cost to the US Government, since you also reduce the building tax basis, for subsequent building tax depreciation, by the amount of the first-year highly accelerated tax depreciation taken. Thus, you don't allow any building tax depreciation in Years 2 through 10. And as an additional tax incentive, you allow much faster tax depreciation than before on the years subsequent to the first 10 years.
And the thing that really makes this an explosive stimulus is when you combine it with the upcoming corporate and individual federal income tax reform, where the corporate federal income tax rate, as well as the effective individual tax federal income rate on non-corporate entities, are substantially reduced, particularly for smaller and medium-sized businesses.
Thus, a business making a building remodeling, as well as making equipment and software investments in 2011 and 2012, will be getting first-year very highly accelerated tax depreciation deducted at a 35% front-end tax rate, but yet the future earnings stream from these investments will be getting federal income taxed at a much lower tax rate under any reasonable corporate federal income tax reform.....This is explosive stimulation.....businesses will get it, since they have "business acumen".....the US Government suits haven't yet, and probably won't, unless perceptive Congresswomen can explain it to them.
And companies making substantial PPE investments in 2011 and 2012 will also be getting a substantial subsequent year GAAP reported earnings increase from the related Deferred Income Tax Liability write-down when corporate federal income tax reform is enacted, with the resultant lower tax rate. Again, businesses have the financial acumen to understand this.....US Government Suits don't.....US Congresswomen need to explain this to the Suits.
And because of the massive tax benefit US Big Corps will be receiving from 100% tax expensing, it is absolutely essential that they get these massive tax benefits only if they also add a sufficient number of new full-time employees, and retain them, on a total payroll count basis, for a reasonable period of time, or else these massive tax benefits are recaptured, and recaptured back at the 35% tax rate, rather than at the lower tax rate that will prevail after wise corporate federal income tax reform is enacted.
And if you wanted to make building remodelings, and the job creation flowing from it, even more explosive, and I clearly would, you could add in a wise additional energy tax credit for the portion of the building remodeling that the US Dept of Energy defines as clearly green. This wise addition would also permit the business to reduce its future energy costs for many years after the investment is made. And the additional continuing pretax income from these annual energy cost savings are income taxed at the substantially lower post corporate income tax reform income tax rates. Further, the added benefit of these green investments, made on a whole-scale basis by businesses throughout the country, is that it will permit the US to be closer to its critical long-term goal of being energy independent.
Given what's in the current AJA, it’s pretty clear that the Obama Administration has again been deceptively hustled by the Big Corps in their clearly self-interest, company-over-country 100% tax expensing, with no strings attached, desire. Big Corps want no government regulation over 100% tax expensing, even though it is disastrous to the country’s economic interests, and clearly shows that these Big Corps value their patriotism to their company over their patriotism to their country, even in these dismal US economic times.
The Obama Administration keeps emphasizing Country-over-Party, and this is indeed an excellent thought. However, I think the thought should be expanded to include Country-over-Big Corp Special Interest and to also include Country-over-Well-to-Do Special Interest.
Moving to another issue, frankly, in looking at the overall $447 bil price tag cost of AJA, I think this cost is much too low, when a country, and the world for that matter, is going through such disastrous economic times…..i.e. except for the Big Corps and the Well to Do.
And even though I think the $175 bil cost of the employee payroll tax cut should be substantially reduced, the $447 bil cost is still much too low.
So clearly there should be more money invested in directly targeted jobs tax credits and other tax incentives for smaller businesses, and for business start ups. What’s in the AJA is something designed by and written by IVY League abstract-thinking economists, just discussing with each other.
And I didn't see a dime of direct tax incentives in AJA for stimulating desperately needed R&D investments, which are clearly people intensive.
Congress should take the ball here, in a bipartisan way, and instead focus on what incentives potential entrepreneurs need to start and grow new businesses. This is where much of the job creation will come from......and get away from the Republican off-target, myopic, very time-consuming, and continually whining focus on government over-regulation.
And then there should be more money invested in making true dents in solving the housing crisis, with particular focus on writing down principals on underwater mortgages.
So what else is short in AJA that is truly needed to stimulate the US economy and create US jobs?
Clearly, it’s infrastructure spending. Much more is needed here. And it can be done more wisely, where the true economic cost to the country is substantially reduced.
The Congress should take the ball here, in a bipartisan way, and make the proper expansions of the infrastructure proposals now in the AJA.
Just as one thought, I think more money needs to be invested in things like building many massive, very secure Pipelines. And if designed wisely, in addition to the many new jobs created from building these Pipelines, this initiative should also reduce future energy costs. Further, the country's security will be enhanced. The money related to these US Government incentives shouldn’t go to the Big Oil Corps, but rather to smaller companies investing in building Pipelines.
And let me add one more thought.
When the US economy is this bad for everyone but Big Corps and the Well-to-Dos, the US Government needs an infusion of talent into the economic area.
When you look at the effectiveness of the entire US Government, the person whose performance clearly sticks out above all others is Hillary Clinton. She has made a monumental enhancement to US Government relations around the globe.
I think it would be wise to move her into the Economic Area, just for the successful completion of this critical AJA. Agile, highly successful US businesses do this kind of stuff all the time. And frankly, US economic security is so integral to successful foreign relations. She is not just incredibly talented as a leader, but she also is viewed very favorably by both sides of the aisle, and this is really needed to turn the AJA into something really special.
And spending a lot of time recently watching the many Deficit and Tax Discussions on C-Span and on the Internet, I make the following brief observations.
The Obama Administration should permanently place Edward Kleinbard at its Economic Table. What a brilliant mind on effective tax policy. Marty Feldstein also had some really good insights, but Kleinbard towered over everyone else with his broad knowledge and perceptive insights on these matters. USC is very lucky to have him.
The initial presentation by the Congressional "Supercommittee" on Deficit Reduction really disappointed me. If these are the best financial minds that the US Government has, then our economy will continue to be very troubled for a very long time.
I am sure they are well meaning heads of the US House Ways and Means and of the US Senate Finance Committees, but in these just horrible economic times, can the country afford to have Dave Camp and Max Baucus as heads of these two absolutely critical Congressional Committees? It's easy to see how US Big Corps have just run herd over these key Congressional Tax Committees.
It's also easy to see why the approval rating of the Republicans in the US House is so low. All three of them on this Supercommittee.....Jeb Hensarling, Fred Upton, and Dave Camp.....have such mediocre financial minds.
The one Supercommittee member who pleasantly surprised me was Republican Pat Toomey. I thought he had some good insights.
And lastly, I think it would be wise for some of the key CBO members to get some real-world business experience. Just being brilliant, and endlessly examining the data, isn't enough. No matter how intelligent you are, the data gets interpreted much better if you also have real-world business insight.
Maybe the US Government should fund some Executive MBA programs, or some short-term business internships, for some of these key CBO members, whose entire background is government and education.
Given the horrible US unemployment, US underemployment, the low median pay of those employed full time, the full-time employed being scared to death of losing their jobs, and the awful housing crisis, it would be really sad if, due to lack of proper business insight, the CBO is unrealistically too conservative in its scoring of a clearly fine job-creating, business incentive proposal.
