Wednesday, May 1, 2013

Optimal Short-term Sequester Solution: Everybody Wins

The country has two major short-term economic problems.

First, the US economy flat-out sucks.  Not only are unemployment and underemployment so high, but also key US companies, across-the-board, are now reporting just horrible 1Q 2013 operating earnings, especially in the key manufacturing and technology sectors.  The companies reporting EPS increases are nearly all accomplishing this by using financial engineering.....substantially lowering their income tax rates and substantially buying back their common shares. 

And second, everyone admits that the way the sequester is working, it is grossly unfair to US citizens and to key US government programs.  And it is also very damaging to the US economy.

Here’s my solution for solving this horrible sequester in the near term, and to do it in such a way that both the Republicans and the Democrats can consider themselves winners.

The Republicans want the $85 bil sequester spending cuts to remain.  OK, leave all of them in, but have them done wisely, and also have them stagger in over the next say 10 years.

The Republicans also want no tax increase.  I have a way to solve that too.  Read further.

The Democrats want $42.5 bil in tax loophole closings.  OK, let them get that, but have them exactly offset with wise business income tax reductions of $42.5 bil which do the best at stimulating the US economy right away.  But focus on the most effective near-term US economy enhancing and US direct job creation initiatives like the following:
  • giving smaller businesses a substantial payroll tax credit for substantial increases in organic payroll dollars, but with the requirement that these increases must also be retained for at least several years
  • disallowing tax deductions for moving US jobs overseas and giving substantial tax credits to businesses for moving overseas jobs back to the US
  • enhancing the R&D tax credit and also simplifying the way it is computed (R&D is predominately payroll expenditures)
  • enhancing the domestic production activities tax deduction, but only for labor-intensive US manufacturing companies
  • 100% tax expensing of equipment purchases for medium-sized US businesses which increase their full-time organic payroll counts and which also retain this increase for at least several years
  • permit smaller and medium-sized US multinational corps to repatriate their foreign earnings at a somewhat discounted US federal income tax rate if they also increase their full-time organic payroll counts and also retain this increase for at least several years
On the other hand, the least effective new tax incentive is the payroll tax holiday, which is very expensive and does not directly create US jobs.

The end result is that the Republicans get their $85 bil of spending cuts and no tax increase.  The Democrats get their $42.5 bil of tax loophole closings. 
And more importantly, the US economy and US job creation benefit greatly from the near-term economic stimulus provided by not just eliminating the unsound, economic-damaging $85 bil of near-term sequester spending reductions, but also provided by the $42.5 bil of wisely-designed, directly targeted at US job creation business income tax incentives.