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Damning: Obama's economic plan exposed

Anthony Randazzo
October 22, 2008, 9:02am

Barack Obama's website gives very limited details about his plan for "helping Americans," but there is enough detail given to show his ideas are going to massively increase the problems our economy and nation are facing. As the election deadline nears, Reason offers this breakdown of Obama's core budget proposals (directly from his website) and a commentary on the out of control madness: Enact a windfall profits tax on "excessive oil company profits": This would provide a $1,000 "Emergency Energy Rebate" to American families to "help pay rising bills." Counter: What incentive will firms have if you're going just tax away whatever you deem to be "excessive" profit? This is problem number one. The facts are that oil companies don't have nearly as the same windfall profits as firms like Apple or Radio Shack do. "Big Oil" takes in a profit of 8.3 cents on the dollar, but electronics in America pull in 14.5 cents per dollar, and Microsoft has a profit margin of 27.5 cents per dollar of sales. So what makes the oil companies so specially evil? Why do we demonize them, but not Apple? Its because of their cool computers isn't it. In case anyone hasn't noticed, oil has fallen below $67 per barrel; that is HALF its value from this summer. Gas prices are bellow $3 per gallon on the national average, and by now everyone has adjusted their budgets to $3 gallon gas, we have figured out how to cope with it. The problem of oil prices isn't getting worse at the moment, but if you tax the companies higher, watch out, here comes trouble. Most importantly, some of the leaders in research and development for clean, renewable energy are the big oil companies. They understand times are changing that they are in the best position to meet that challenge and change with the times. Taxing away their R&D money only hurts the nation's energy futures. And does Obama seriously think oil companies can't get around his plan; they'll just use creatively balanced PNLs and change their definitions of costs.
$110 billion federal dollars to save jobs, create jobs, and stablize state social programs: This would give $25 billion to the states to prevent them from cutting health, education, housing, or other assistance programs and use another $25 billion to fund infrastructure projects providing construction work that will save over 1 million Americans jobs. Additionally Obama will create the National Infrastructure Reinvestment Bank, that will invest $60 billion over 10 years into transportation infrastructure, creating two million jobs, and creating $35 billion in new economic activity. Counter: This is exactly the provision that states like California are drooling over. California is facing a $7 billion shortfall in its budget this year and has considered asking for federal bailout dollars to keep from cutting state programs. Obama's money for states would allow fiscally irresponsible states from having to make tough decisions and reap the consequences of their actions. It creates a type of moral hazard in that, the state money earmark is covering budget mistakes and not letting states learn from their errors. The infrastructure projects amount to a Brand New Deal, and as Amity Shlaes has so eloquently chronicled in her new history of the Great Depression, The Forgotten Man, FDR's New Deal programs did not help the economy recover, but instead created perverse incentives for corruption and only temporary employment relief that was not sustainable. The jobs that Obama thinks he can "create" will most likely employ people who had jobs elsewhere or will only create jobs in the short-term, which is more like establishing the worlds biggest temp agency.
Create a "Making Work Pay" tax cut and a "Universal Mortgage Credit": This "tax cut" would provide a credit of $500 to working individuals and $1,000 to working families, all making under $250,000 a year. Additionally, the mortgage credit would give all homeowners who do not itemize their returns an average credit of $500. Counter: You can put lipstick on Das Kapital, but its still just socialism with a gooy, red substance all over it. How these proposals can not be considered redistribution of wealth is beyond me. Unfortunately, many seem to be embracing it as redistribution, a by-product of the Robin Hood mentality taking hold. Obama calls his "Making Work Pay" plan a "tax cut" but it is more accurately a "tax credit," the difference being that one cuts the taxes you pay, and the other gives you money after you pay taxes, or as is the case with Obama's plan, gives you money even if you don't pay taxes. Those working for very low pay often don't wind up paying any income taxes anyway. In fact, Obama's plan says it will provide "150 million workers" with tax relief. To start with, the IRS only processed 140 million individual tax returns in 2008, many of which were net zero taxes. Even if all those returns paid taxes, that's still 10 million people who don't pay taxes that Obama plans to give money for the "tax relief they need." Then consider that at least a couple million of those filing taxes earned over $250,000, so the number of people who don't pay taxes, but are still getting a credit, is probably closer to 15 million. I'm not a math guy, but I think that's $7.5 billion dollars being redistributed from those with wealth to those who don't even pay taxes. We also call that socialism, but I'm not a name caller. This universal mortgage credit is the same kind of shenanigan. It is anything but "universal," excluding those who "itemize their tax returns." The assumption is that only "the wealthy" itemize so it will exclude many of those above Obama's arbitrary $250,000 threshold. (Plus, I itemized my tax returns in 2006 and 2007 while making less than Obama's rich line, so I guess guys like me would just fall through the cracks.) Ultimately, this is an attempt to help those struggling to pay their mortgages, but it is again pure redistribution of wealth: the taking from those who have to give to those who don't. Obama wants to spread the wealth around, but the problem when you do that is that, pretty soon, people lose the incentive to make money and there isn't much left to spread around. It's not an abstract argument; we saw EXACTLY that happen in the USSR under communism.
Fix NAFTA: Free Trade has been "oversold" to America and Obama says he will fix it so its better for American workers. Counter: What does "fix" mean? Free trade is a relatively simple concept. People should be free... to trade. I'd ask for more detail, but the reason Obama hasn't spelled it out on his website is because he shifts on this from day-to-day, stump speech-to-stump speech. Somehow Obama has decided he supports free trade, but not necessarily NAFTA. Obviously, no one would be opposed to trading between countries (at least no one who wants to be seriously considered sane). So it's little comfort to hear Obama say: "I believe in trade... I just want to make sure that the rules of the road apply to everybody and they are fair and that they reflect the interests of workers and not just corporate profits." Dragging this ideology out to its logical conclusion winds up back with the lipstick covered Das Kapital, but again, I'm not a name caller... Obama's position on NAFTA has been quite amorphous. He has taken firm stands against it as "damaging to American jobs," missing the value of competition to increase innovation. Yet, his website currently says: "Obama and Biden will also pressure the World Trade Organization to enforce trade agreements and stop countries from continuing unfair government subsidies to foreign exporters and nontariff barriers on U.S. exports." I wonder if he'll ask the WTO to stop the USA from continuing the unfair subsides and tariffs we have on imports. It is unlikely that he'll back lifting the 54-cent per gallon tariff on Brazilian ethanol or the incredibly complicated sugar tariffs because they would create competition for American jobs. Never mind that without competition businesses can become stagnant, lack incentive to innovate, and charge above what the market rate would set. Real free trade would get rid of those problems; that is the kind of change we need.
End tax breaks for outsourcing: All profits earned overseas are tax deferred until that money is returned to the U.S., creating an incentive to operate more U.S. business interests overseas where taxes are lower; Obama will end this tax break because it encourages outsourcing. Counter: It is easy to see why Obama would want to end this tax break from the surface perspective. However, it is not really a "tax break," it is simply a law that says U.S. companies will not be taxed in the U.S. for business deals done in other countries. The law makes sense because it avoids us having to figure out what a "U.S. company" is. The first issue is the validity of outsourcing; it should not be condemned the way Obama and others condemn it. If a company can save money by hiring people in Alabama as opposed to New York, what is the difference if they decide to go to Bangkok or Abu Dhabi? One way or another jobs are going to the cheapest possible place to maximize value. In a globalized world the value and definition of "an American company" is taking on a different meaning. If firms can't outsource they will have higher personnel costs, which will affect the effectiveness of their business. They will not have access to the high quality talent outside America that can enhance their business, which would enhance their profitability, and increase the taxes collected from the business transactions they do here in the States. If you end this tax provision you will have a series of unintended consequences, including thousands of companies moving their headquarters and money outside the U.S. and doing business from the outside back in. Companies aren't just going to stop outsourcing. (And then there is this from The Onion.)
Invest in new technology: Obama wants to double funding for basic scientific research to "foster home-grown innovation" and "ensure the competitiveness of U.S. technology-based businesses." He will make the Research and Development tax credit permanent, and provide funding to get broadband internet into every American community through tax and loan incentives. Counter: Again, on the surface many would think this is a good idea. Even neo-cons like Thomas Friedman back this sort of government "investing" in America. But setting aside the question of role of government (though its important), how will America afford this and Obama's tax credits? How much will America spend on funding science? And what are they funding? Is that where taxpayer dollars should be going, or can we trust the private sector to move innovation along at the pace it should be? We tried to get more people into houses faster than the market would allow, and created the subprime mortgage bubble. Any government driven innovation, even as simple as broadband internet, carries big risks and increased fiscal weight. Remember, the cost of any government "investment" is the dollar amount, plus the interest our national debt accrues by not using that investment money to pay the debt off, plus the opportunity cost of what the private market would have done in the void created by government inaction.
ON THE FLIP SIDE Ultimately, there is light at the end of the tunnel. There are some good things in Obama's plan, such as cutting capital gains taxes for start-up firms and small businesses. He also wants to simplify tax filings for the lower and middle classes who have less complicated returns. And he wants to eliminate income taxes for seniors making under $50,000. So we're only buried up to our neck in this crap, instead of being wholly drowned. And that's the breakdown.

Anthony Randazzo is Director of Economic Research


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