The Obama Watch

Let’s Talk About the I-Word, Mr. President

Time for the Oval Office to grasp the notion of incentives.

By 9.22.10

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As the battle over extending the Bush tax cuts rages in the corridors of the Capitol, it's time for the Oval Office to grasp the I-word: incentives. It is also time to address the needs of the U.S. economy as a whole -- and stop hectoring the top 1%, who must by now be physically and mentally exhausted from being tied behind the presidential limousine and dragged over rough terrain.

Confounding the recession-weary nation further, the President seems to equate this 1% with Warren Buffett, whose spending patterns he says, will not be affected by a tax cut.

While this could technically be true for the remarkable investor and CEO of Berkshire Hathaway, the statement of the President might also be called sophistry, the ancient Greek art of misleading argument -- now used to rally all the President's peevish populists. Even some members of the President's own party seem to know that the top 1% are also Americans. They also know that many of that group may actually shop at Home Depot, Macy's, and the Gap and are a powerful consumer engine with global reach. They, along with corporate America, need incentives in order to give strength to a modest recovery.

In a country where the consumer sector is the largest driver of GDP, increasing disposable income for individuals to spend should be a principal objective. Writing recently in the Wall Street Journal and referring to IRS historical statistics, Arthur Laffer notes that increasing income tax rates on the top 1% of the population will likely result in lower tax revenue for the IRS. Many other economists have also called for continuation of the Bush tax cuts.

While abandoning failure is one of the first rules of good management, the Administration is still relentlessly embarked on the same flawed economic path. Proponents of Big Government have emitted a plangent cry for more stimulus. And the Fed, which like the men at the Alamo is running out of ammunition, thinks that buying government bonds and injecting even more liquidity will provide a monetary tonic. Both approaches have failed to yield appreciable results and are the result of a misguided ideology that inhibits entrepreneurship and does not recognize the concept of incentives. It is now time for a national debate on tax policy as an instrument of recovery -- to provide those incentives.

The record Treasury surpluses and economic growth of the latter part of the Clinton Administration did not materialize out of nowhere. The capital gains rate was cut from 28% to 20% in 1997. Philosophically, we should also look to the Reagan era, when there was a concerted effort to stimulate the economy and achieve growth through reduced personal and corporate tax rates. 

The U.S. corporate tax rate of 35% is the highest in the world, according to a recent bulletin published by the Cato Institute. This compares with approximately 28.8% for the G-7 and 19.5 % for the thirty nations in the Organization for Economic Cooperation and Development (OECD). When developing countries are added to the Cato sample of eighty nations, the average corporate tax rate is 18.2%.

How is it that the United States, which tends to see itself as the font of best practices, is so out of line with the rest of the world? What is it that our Congress knows and others do not? Not only does a high corporate income tax rate discourage investment and risk taking, it also engenders the same moral hazard that contributed to the global economic meltdown: It encourages the use of debt. It is well known that debt is cheaper to raise than equity, since interest is a tax deduction and payment of dividends is not. And debt, as we have seen, is great -- as long as revenue and asset values keep increasing. While it is true that the effective tax rate is significantly lower for many major corporations, the economic effect of lowering corporate income taxes for many other companies -- small, medium and large -- must also be part of a national debate.

In spite of soaring presidential rhetoric, beamed at the speed of light, failure is not only an option: It is also a reality. Since President Obama took office, we have now witnessed the failure of massive proportions of both monetary and fiscal policy to stimulate the economy.

It's time we abandon failure, have a dialogue as a nation, understand the meaning of incentives -- and look at tax policy as a real stimulus.

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About the Author
Frank Schell is a business consultant and former international banking executive. He serves on the Dean’s International Council of the Harris School of Public Policy Studies, University of Chicago where he is a lecturer.