Thursday, April 03, 2008

McCain, Hillary and the economy

Here’s an interesting piece on the stability of Switzerland.  I’ll quote the same section that Instapundit did.  

      They have one of the world’s most stable economies, a skilled workforce, internationally recognized export companies, a sound currency, and renowned banking and financial services. All this is combined with remarkable social harmony, given that Switzerland has four national languages and great religious diversity. 

While I appreciate it’s success, something I noted from the article was that while there might be much we can learn from the system they have in place, much of their success is due to foreign actors.  Wealth generated in places like the US and Germany feeds the economy there.  They haven’t really had to defend themselves (although they do have an army) without help from vaster allies like the US, and indeed during the world wars they declared themselves neutral to avoid large expenditures for military.

The article spends time on their harmonious political environment, but one has to wonder how that type of government would work in a country of 300 million rather than 7.5 million, smaller than New York City (not the metro area, just the city).

Hillary talks about tax incentives designed to create jobs inside the US.  Quote from TaxProf:
·       Increase the R&D credit by 50% (from 20% to 30%) and increase the Alternative Simplified Credit by 67% (from 12% to 20%).

1       Create a 40% Basic Research Credit.
2       Create a 10% Start Up Research Jobs Credit.
3       Create a new $5 billion Insourcing Markets Tax Credit.
4       Close loopholes that encourage companies to ship jobs overseas:
·       Eliminate deferral provision that allows U.S. companies to defer paying U.S. taxes on income earned by their foreign subsidiaries until that income is repatriated to the U.S.

        1       Close tax loopholes to ensure that companies cannot continue receiving tax benefits for locating abroad. She will disallow companies from engaging in transfer-pricing arrangements where companies avoid taxes by shifting income or assets to low-tax jurisdictions. She will eliminate incentives in the tax code (like the ability to “cross-credit”) that encourage U.S. companies to shift operations or at least profits to low-tax jurisdictions. And she will eliminate the unfair advantage that foreign insurers located in tax havens have against U.S. insurers competing for U.S. business.

Tax credits aren’t necessarily a bad thing.  Government and political types are constantly thinking of ways to modify the behavior of the American public and American business.  One way is create law that restricts and imposes that behavior.  However, this has the unfortunate side effect of political resistance from large portions of society. 

Another way is to modify tax code so that the behavior is not mandatory, but changing that behavior leads to benefits, i.e. your taxes are reduced if you comply.  I certainly have less of a problem with this, although it has it’s own drawbacks.

Notice in the last couple of items regarding closing loopholes though.  Clinton says that she’ll eliminate deferral provisions that allow companies to defer paying U.S. taxes on income earned by their foreign subsidiaries.  Think about that for a second.  If your foreign office creates income, even if the income never touches American soil you’d get taxed.  Right now that doesn’t happen, and companies usually use the money to invest further in the foreign operation (better salaries for employees, update equipment, R&D). 

Note here a common resistance to the notion that companies are not necessarily tied to nations any more.  One of the tenants of globalization is that companies are international entities, without national allegiance.  One of the reasons that companies outsource in the first place is because the corporate taxes in the US are among the highest in the world.  But instead of trying to solve that problem, people like Clinton instead attempt to force companies to pay the taxes regardless.  Which in the end will compound the problem, causing some companies to move their corporate offices overseas (which is already happening).

It’s no wonder that businesses, foreign and domestic, freak out about this sort of thing.  The American economy drives economic expansion all over the world, and having a candidate for the highest office in the largest economic market in the world act all protectionist isn’t exactly making people around the world all warm and fuzzy.  Note this article by Fareed Zakaria in Newsweek that insists that instead of improving our reputation around the world, as they are so often telling is they’ll do, Clinton and Obama might actually cause some further damage because of their tendency to be economically protectionist.

In reference to the original story above, Switzerland has one of the most robust economies in the world, but they do so because of their very open market and reliance on foreign investment.  We can’t go down the road in the other direction and think that we’re going to truly improve the lives of ordinary Americans in the long run.  Further protectionism is the road of economic stagnation and a people over-burdened by taxes.

So let’s look at McCain on the economic front.  What he’s saying at this point makes sense from a Republican stand point.   Tax cuts for the middle class.  Cut corporate taxes.  Ban internet/ cell phone taxes.  Reform Health care and Medicare (and SS).  Eliminate wasteful spending.  Reform the budgeting process.  More free trade.  This might all seem pat from the red side of the fence, but it’s miles different from what the Democrats propose, so to all my right leaning friends who think that McCain represents some leftward angle here, I implore you to compare what we would get otherwise.

He hits all the high points, and I don’t think you can argue that he’s been solid on the wasteful-spending issue for many years.  One thing that bugs me is that, while he would continue the Bush tax cuts, he was initially against them because he thought they benefited the rich primarily, and authored a bill with Tom Daschle to curtail the reduction in the capital gains and dividend taxes (never mind that some economists will tell you that this is double taxation anyway).  I’m not  sure where he’s at here.  He’s mostly about open capitalism, but has a streak of populist anti-wealth type thinking.  While he is generally for tax cuts, one wonders how much he’s really willing to cut in the budget enough to make up for it all. 

I’m encouraged in other areas, though.  He seems a bit antagonistic toward the current mood regarding the mortgage crisis.  Many on both sides of the aisle, including the President, seem inclined to bail out those caught in over their heads after signing sub-prime mortgages (including the weird tax rebate we all are supposed to get).  McCain says that people need to be responsible for their own mistakes, a sentiment that I concur on.  He’s likely to get hammered on this in the general election, but I agree with him there.  I read lately from noted columnists decrying the complicated world of mortgage financing and how the consumer is left helpless in the face of uncontrollably tempting 2% loan rates.  However I disagree, as I’ve seen all these rates (as a home owner you drown in offers like that), and knowing that anything below 6% is certainly variable interest they all end up in my garbage.   Needless to say that I would expect that I would be paying for my own mistake if I went down that road without taking the time to research a rate on probably the largest and most important bit of financing I’ll ever do. 

Sorry.  Rant over.

McCain is noted, on this issue, of proclaiming a certain amount of ignorance.  Is this worrisome or refreshing?  You could make an argument either way, and the Democratic candidates of course argue worrisome.  That doesn’t bother me, as their positions are worrisome and they think they know how the economy works.  It’s not quite refreshing either, though, and it really is going to depend on who McCain ultimately pins down for Secretary of the Treasury and who he appoints as advisors.  I’m not sure his recent advice people, like Phil Gramm, are helping ease my conscience on this point.

All and all he’s got some issues, and for the most part I have a difficult time supporting a Senator for an administrative office like this one.  However, in the area of finance, especially government finance, McCain is heads above the Democratic candidates at this point.  He’ll probably not be able to stop over spending entirely or free up markets as he says he does, but I’d rather have him in there being the Maverick on the economy. 

Here’s some more reading on where McCain is at on the issue if the economy.  Enjoy.

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