ON STIMULATING TAXES

SOLUTIONS FROM BEYOND

Barron's this weekend has a timely piece for this election season, titled "Taxing Vote", now that the candidate field is narrowing on both sides:

"WHAT, EXACTLY, ARE THE leading candidates' positions on taxes?

Obama would raise taxes on the wealthy to pay for tax credits for 150 million low- and middle-income workers.

He'd raise the tax on dividends and capital gains to 24% but grant a tax holiday for some period of years to start-ups and their venture-capital investors, to ensure job creation.

Clinton would return the tax rates on people making $250,000 or more to the 39.6% rate in effect when her husband, Bill, was president. She'd keep rates low for middle-income and low-wage earners. She'd raise taxes on oil companies to create jobs to build a "green" energy infrastructure.

As for the Republicans, McCain says he will preserve the Bush tax cuts and strive for an overall tax code that is simpler, fairer and flatter.

Huckabee would adopt the so-called Fair Tax, a 23% sales tax with refunds for poorer people. He would completely eliminate corporate taxes. Opponents claim the rate would have to be closer to 30% in order to work, and that it would be an unfair tax."

The piece goes on to point out one area of bipartisan agreement on the tax front:

"...there is bipartisan consensus that the current rates are far too high.

The U.S. corporate tax rate, according to the U.S. Treasury, can hit 39% when state taxes are included, making the U.S. the second-highest tax jurisdiction within the Organization for Economic Cooperation and Development, which includes most Western countries. Japan has the highest rate at 40%. The average statutory rate for the OECD is 31%. Germany plans to reduce its rate from 38.65% to 29.8% this year; and the United Kingdom plans to reduce its rate from 30% to 28%.

DEMOCRATS AND REPUBLICANS seem to concur that a 25% rate is required, and CEOs have said they would give up tax breaks like the research-and-development credit, to get to that lower level."

A substantial area of opportunity missed in proposals from both sides, is an aggressive initiative at the federal level to court increased foreign direct investment in the U.S. 

With the U.S. dollar at historically low levels against major currencies, this is already starting to occur via market forces, in the form of foreign buyers making strategic investments in U.S. companies. 

But if we're going to fiddle with our individual and corporate tax rates, we might as well see what if anything, can be done to boost this area for our benefit as well.

And while we're at it, candidates from both parties would do the nation a favor by extending the current debate and discussion on the Economy and Immigration, by highlighting the fact that two issues do not stand by themselves.  That they're intricately inter-twined, and go way beyond illegal immigration across our  Southern border.

For example, both U.S. and foreign companies need far greater flexibility in hiring and transferring people to work in the U.S., in addition to any advantages we may offer via tax incentives.

Same thing goes in the tourism industry, which at over a trillion dollars, is one of the biggest industries on a global basis.

Again, with the dollar at historic low levels, we need to encourage international visitors to come and visit the U.S., not just for a holiday, but for increased active and passive investment in the U.S.  And have incentives to keep coming back on a regular basis.

New York City and other major coastal cities are already seeing the anecdotal benefit of these types of visitor/investors in their real estate markets.  In Manhattan alone, these real estate purchases have provided some needed lift in an otherwise slowing real estate market.

These benefits should not just accrue to the major cities on either coast, but to the country as a whole.  Tax policies that are targeted to both individual and corporate investment from overseas, along with more flexible immigration policies would go a long way to stimulating the country's economy both at a national and local level.

Our northern neighbor and largest trading partner, Canada, has perfected this trick for decades now, to their long-term economic benefit, as this Wikipedia entry highlights:

"Canada has the highest per capita immigration rate in the world,^[67] driven by economic policy and family reunification; Canada also accepts large numbers of refugees. Newcomers settle mostly in the major urban areas of Toronto, Vancouver and Montreal."

And they continue to focus on enhancing these efforts in the future.

From our perspective, such a focus would be far more effective than mailing $150 billion plus dollars to American families to "stimulate" a little bit more buying at Walmart this summer.  Not to mention far more sustainable in the long term.

Comments

[Ian from Ann Arbor]

Gov. Huckabee's advocacy of the FairTax ( snipr.com/irsgone ) is the single most important policy position in this election. Research findings explain why:

The FairTax rate of 23 percent on a total taxable consumption base of $11.244 trillion will generate $2.586 trillion dollars – $358 billion more than the taxes it replaces [BHKPT] ( snipurl.com/whatratewks ).

The FairTax has the broadest base and the lowest rate of any single-rate tax reform plan [THBP] ( snipurl.com/baserate ).

Real wages are 10.3 percent, 9.5 percent, and 9.2 percent higher in years 1, 10, and 25, respectively than would otherwise be the case [THBNP] ( snipurl.com/realwages ).

The economy as measured by GDP is 2.4 percent higher in the first year and 11.3 percent higher by the 10th year than it would otherwise be [ALM] ( snipurl.com/econbenes ).

Consumption benefits [ALM] ( snipurl.com/econbenes ) :

• Disposable personal income is higher than if the current tax system remains in place: 1.7 percent in year 1, 8.7 percent in year 5, and 11.8 percent in year 10.

• Consumption increases by 2.4 percent more in the first year, which grows to 11.7 percent more by the tenth year than it would be if the current system were to remain in place.

• The increase in consumption is fueled by the 1.7 percent increase in disposable (after-tax) personal income that accompanies the rise in incomes from capital and labor once the FairTax is enacted.

• By the 10th year, consumption increases by 11.7 percent over what it would be if the current tax system remained in place, and disposable income is up by 11.8 percent.

Over time, the FairTax benefits all income groups. Of 42 household types (classified by income, marital status, age), all have lower average remaining lifetime tax rates under the FairTax than they would experience under the current tax system [KR] ( snipurl.com/kotcomparetaxrates ).

Implementing the FairTax at a 23 percent rate gives the poorest members of the generation born in 1990 a 13.5 percent improvement in economic well-being; their middle class and rich contemporaries experience a 5 percent and 2 percent improvement, respectively [JK] ( snipurl.com/kotftmacromicro ).

Based on standard measures of tax burden, the FairTax is more progressive than the individual income tax, payroll tax, and the corporate income tax [THBPN] ( snipurl.com/lessregress ).

Charitable giving increases by $2.1 billion (about 1 percent) in the first year over what it would be if the current system remained in place, by 2.4 percent in year 10, and by 5 percent in year 20 [THPDB] ( snipurl.com/moregiving ).

On average, states could cut their sales tax rates by more than half, or 3.2 percentage points from 5.4 to 2.2 percent, if they conformed their state sales tax bases to the FairTax base [TBJ] ( snipurl.com/staterates ).

The FairTax provides the equivalent of a supercharged mortgage interest deduction, reducing the true cost of buying a home by 19 percent [WM] ( snipurl.com/homebenes ).

ALERT: Kotlikoff refutes Bruce Bartlett's shabby critiques of the FairTax ( snipr.com/bbrebuke ).