President Obama is starring the greatest economic problem since FDR took office in 1933. FDR’s New Deal provided America with a few much needed institutions, including the SEC and the FDIC; however, critics of the New Deal highlight stifling tax hikes as a coagulant to the economic recovery. A few of the New Deal-esque policies (oversight, transparency, and employment stimulus) will provide a good template for the new administration; tax policy should be avoided at all cost.
The New Deal and Great Depression coincided with the rise of a new economic theory developed by John Maynard Keynes focusing on demand side stimulus. FDR simultaneously slashed unnecessary expenditures from the Government Budget, while implementing new projects to raise employment. A similar proposition has been presented by Obama, a careful examination of the each budget line item with the promotion of infrastructure projects, most notably the digitalization of medical records. The New Dealers felt a rise in spending with out a coinciding rise in tax receipts would create budget deficits that would impair the economic recovery in the medium term. FDR targeted Corporate America and America’s rich to provide the additional revenue; favoring income taxes over consumption taxes.
FDR took his pound of flesh from corporations through the Undistributed Profits Tax (UPT), essentially taxing corporations on ‘excessive’ retains. The controversial, short lived tax initiative has been widely criticized for reducing investment. Corporations were forced to dividend retained earnings or pay hefty federal taxes (upwards of 80%). The combination of higher taxes on the investment savvy rich and newly cash strapped corporations resulted in a substantial decline in investment in the laste-1930s. Capital investment will be a crucial patch to resurrect the sinking USS Economy. American industries are becoming less competitive in comparison to the low cost countries. Investment in America’s competitive industries, high tech, biotech, and pharmaceuticals can promote job development and hopefully a little labor mobility for the skilled engineers and factory workers in Detroit.
While there is no doubt American could use a little of the Japanese thriftiness, kick starting consumption is one option for short-term stimulus. The Obama administration needs develop tax neutral policies to promote investment and consumption. While it’s possible that the Bush capital gains and dividend holidays provide some incentives, these holidays should be allowed to lapse in 2010. But what to do in 2009? A few alternatives are examined.
- Depreciation and R&D tax credits – the trickle down often proves slow, but investment will increase labor productivity and eventually provide employment for the jobless Americans. Again, the US has proved competitive in biotech and high-tech industries.
- Repatriation Holiday – The American Jobs Creation Act of 2004 included a provision for multi-nationals to take an 85% deduction on repatriated income of foreign subsidiaries. This was a widely criticized move, as it may incent companies to shift jobs overseas. The repatriation would need to be a one-time plan to not have substantial negative revenue impact in the coming decade.
- Payroll tax on foreign nationals – Levy punitive payroll tax on US corporations with a labor force of greater than X% (say 10%) foreign nationals.
- Tax gaming – The US gaming industry has lobbied to be apart of the bailout, but typically when state budgets get tight, the states levy taxes on the gaming industry. A similar federal tax could be imposed on the gaming industry.
- Payroll tax on waistlines – Sedentary lifestyles and poor eating habits have contributed substantial to the healthcare burden on the US government. The US could again borrow from Japan, taxing corporations based on employee fitness.
- Restructure the AMT – The alternative minimum tax was morphed from its original intention to target a few hundred of the wealthiest Americans to more than 23 million in 2007. The AMT is hurting the struggling middle class.
The above list is by no means exhaustive, but is food for thought. The FED is generally thought to be pushing on a string; in the middle of the worst economic crisis since 1930, every sector of the US government appears to pushing on a flimsy string. Obama needs to reduce the wasteful spending proliferating the recent stimulus bill. Prudent spending with thoughtful tax incentives and revenue neutral policies will hopefully mitigate a difficult economic environment.
The New Deal and Great Depression coincided with the rise of a new economic theory developed by John Maynard Keynes focusing on demand side stimulus. FDR simultaneously slashed unnecessary expenditures from the Government Budget, while implementing new projects to raise employment. A similar proposition has been presented by Obama, a careful examination of the each budget line item with the promotion of infrastructure projects, most notably the digitalization of medical records. The New Dealers felt a rise in spending with out a coinciding rise in tax receipts would create budget deficits that would impair the economic recovery in the medium term. FDR targeted Corporate America and America’s rich to provide the additional revenue; favoring income taxes over consumption taxes.
FDR took his pound of flesh from corporations through the Undistributed Profits Tax (UPT), essentially taxing corporations on ‘excessive’ retains. The controversial, short lived tax initiative has been widely criticized for reducing investment. Corporations were forced to dividend retained earnings or pay hefty federal taxes (upwards of 80%). The combination of higher taxes on the investment savvy rich and newly cash strapped corporations resulted in a substantial decline in investment in the laste-1930s. Capital investment will be a crucial patch to resurrect the sinking USS Economy. American industries are becoming less competitive in comparison to the low cost countries. Investment in America’s competitive industries, high tech, biotech, and pharmaceuticals can promote job development and hopefully a little labor mobility for the skilled engineers and factory workers in Detroit.
While there is no doubt American could use a little of the Japanese thriftiness, kick starting consumption is one option for short-term stimulus. The Obama administration needs develop tax neutral policies to promote investment and consumption. While it’s possible that the Bush capital gains and dividend holidays provide some incentives, these holidays should be allowed to lapse in 2010. But what to do in 2009? A few alternatives are examined.
- Depreciation and R&D tax credits – the trickle down often proves slow, but investment will increase labor productivity and eventually provide employment for the jobless Americans. Again, the US has proved competitive in biotech and high-tech industries.
- Repatriation Holiday – The American Jobs Creation Act of 2004 included a provision for multi-nationals to take an 85% deduction on repatriated income of foreign subsidiaries. This was a widely criticized move, as it may incent companies to shift jobs overseas. The repatriation would need to be a one-time plan to not have substantial negative revenue impact in the coming decade.
- Payroll tax on foreign nationals – Levy punitive payroll tax on US corporations with a labor force of greater than X% (say 10%) foreign nationals.
- Tax gaming – The US gaming industry has lobbied to be apart of the bailout, but typically when state budgets get tight, the states levy taxes on the gaming industry. A similar federal tax could be imposed on the gaming industry.
- Payroll tax on waistlines – Sedentary lifestyles and poor eating habits have contributed substantial to the healthcare burden on the US government. The US could again borrow from Japan, taxing corporations based on employee fitness.
- Restructure the AMT – The alternative minimum tax was morphed from its original intention to target a few hundred of the wealthiest Americans to more than 23 million in 2007. The AMT is hurting the struggling middle class.
The above list is by no means exhaustive, but is food for thought. The FED is generally thought to be pushing on a string; in the middle of the worst economic crisis since 1930, every sector of the US government appears to pushing on a flimsy string. Obama needs to reduce the wasteful spending proliferating the recent stimulus bill. Prudent spending with thoughtful tax incentives and revenue neutral policies will hopefully mitigate a difficult economic environment.
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