Nutter's Washington

Ten Questions on #Politics and #Congress: Plus Answers

Mitt Romney won two primary elections yesterday. Depending on the spin, your politics, and which mal-informed pundits watched on cable, the results were either a stagger to the finish line, a ho hum event, a momentum builder, the end of the inevitable or some other twist.

Since it is mid-week and very little real political news or proposals to ponder, some questions are in order with the answers for a change. To wit:

#CorporateTaxFramework: Attack on Debt and Depreciation

The positive reaction to the “Framework” plan on corporate tax reform released this week by the Department of Treasury and the White House has been underwhelming. Most have dismissed it as a political document, unlikely to be seriously considered this year. However, it needs to be read closely as it reveals the thinking of the Administration and may portend of things to come if returned next year for another four-year term.

The previous rendition on the Framework left a few things out but they are important to note. The first is the direct bias against debt financing that can be described as a desire to raise more tax revenue by curtailing the deductibility of interest to pay for other favored causes.

#CorporateTaxReform: Disappoinment, Retreads but a Start

The Department of Treasury and the White House have released a “framework“ of proposals to reform the corporate tax system. There is no real question the system needs an overhaul. Economists, businesses, and politicians all agree. To even have the Administration move forward on this important issue is progress. However, even though the details are not complete, this framework is a major disappointment. It is hard to believe it took them three years to come up with this incomplete effort of platitudes and retreads. .

There are a few good suggestions. The centerpiece is a cut in the top corporate rate - now at 35 percent to 28 percent. The proposal suggests broadening the income base, also a good suggestion and, with deficits more than $1 trillion a year, announced their plan will not "add a dime to the deficit." However, that is about as far as it goes. 

The proposal provides special tax treatment for manufacturing - cutting that tax rate to 25 percent - and a minimum tax on profits earned in abroad. More on these later.

This is where we get to the disappointment, and showing the framework is not only a political document but also a reflection of the philosophy of picking winners and losers. It is so inconsistent by saying one thing and proposing another.

The plan calls for the elimination of dozens of business tax loopholes (whatever they are) and tax expenditures starting with  “a presumption (to)… eliminate(s) all tax expenditures for specific industries, with the few exceptions that are critical to broader growth or fairness.”

Here are all the cited examples of specific reductions in tax expenditures and loophole closers as seen many times before:

• Eliminate “last in first out” accounting-This has been a dream of liberals for years. I take no view on it.
• Eliminate oil and gas tax preferences-An old standby and whipping post for the Administration. Makes the numbers look better and very little chance to pass.
• Reform treatment of insurance industry and products- Basically this is to halt the use of life insurance on a corporation’s officers, directors, or employees to create  “inside build up” on policy earnings that can tax-deferred. Same treatment individuals get on annuities and life insurance now. This is a very minor issue and hardly a highlight for corporate tax reform. (The framework would also make other changes in the tax treatment of insurance (Subchapter L) but I am not qualified to judge them, as this is a very specialized field.)
• Taxing carried (profits) interests as ordinary income for financial managers-This is been around the block more than once being saved the last time by the Democrat-controlled Congress. It has no real place in corporate tax reform, as it is a partnership issue and effects individuals.
• Eliminate special depreciation rules for corporate purchases of aircraft-This one will also not go away. The Obama Administration and the Democrat Congress approved the current treatment in 2009. They now want to dump it in the bone yard. Corporate jets are almost an obsession for Mr. Obama. This is such a minor provision in the law; it should be embarrassing to have it featured in this important issue. Why waste the space?  

So there you have it--- the great list of tax base expansion and reforms! I did not make these up.

While details are incomplete, the framework also focuses on manufacturing, however that is defined, by giving them a preferential tax rate, pours more subsidies for research and development and the production of clean energy. This would seem to be in direct conflict with the principals stated in the framework: “the tax expenditures and loopholes in the U.S. tax system, together with the structure of the corporate tax system, produce significant distortions that can result in a less efficient allocation of capital, reducing the productive capacity of the economy and U.S. living standards.” It looks to me that picking winners and losers is exactly what should not be done and what the Administration is proposing. One man’s distortion is another’s unfairness.

The conclusion is that it is fine to give a preference to a manufacturing facility in Ohio-a political swing State in November- but not to the oil and gas industry, a vibrant, essential and robust part of the economy. Is there some inconsistency here? What about non-manufacturing businesses? Are they not worthy? 

Finally the framework goes after multinational corporations. The taxation of these behemoths deserves review. The current U.S. tax system subjects foreign subsidiaries of U.S.-based multinationals to taxes on their overseas income offset by foreign tax credits. However, corporations are not required to pay taxes in the United States on that income until they repatriate it back to the U.S., a principal called a deferral (since it defers taxation of the income). Under the President’s proposal, income earned abroad must be subject to a minimum rate of tax.

Many policy makers including House Ways and Means Chairman Dave Camp and many in the business community favor revamping the system from a worldwide tax system to a territorial one. The Administration opposes any shift to a territorial based system and this issue will be strongly debated and contested.

There are other items of concern such as a proposal to deny deductibility of interest that should be examined. While the framework is disappointing, shows a lack of effort on some issues, a favored industry bent on others but at least it is an effort to kick start the process. One thing is for certain; it will not be resolved any time soon.

 

 

#ObamaCampaign: Calls Economic Policies Unrealistic---Huh?

I saw a news article this morning that has got to be a joke or at least the manifestation of some kind of doublespeak. Maybe it is just campaign rhetoric. In any evert the Obama campaign railed on Republicans for promoting economic policies that would add billions of dollars to the deficit. Since when does the President care about the deficit? 

The statement from the crack re-election team says 'Their budget math simply doesn't add up" when referrring to possible Republican opponents. Seems like the deficit is a problem. 

These statements from the Obama math wizards come from the same thinking that has created more than $4 trillion in new debt in the last 3 years , been responsible for the downgrading of obligations of the United States, just submitted a phony new budget that has massive deficits for the next 10 years. I could go on-- but not worth it. Say anything about the Republican economic plans but refrain from saying it would add to the deficit. There is no credibility to utter such a statement. 

The real question is how do these people say this with a straight face? Aren't they worried about embarrassing themselves with this kind laughable statement? Do they think the public is so stupid or they do not know about the deficits? How do they defend themselves? 

I understand a campaign, politics and what people will do or say to be elected. Every campaign has its moments of exaggeration and misdirection. However, there comes along from time to time such total smoke and laughable pronouncements that it makes a person just shake the noggin. 

#Taxes: What is Next? Nothing for now!

Congress has passed the employee payroll tax relief. Now the question is what is next? What will the Congress do? The Washington Post in a front page news piece over the weekend stated the obvious and alerted the public in case they have not been paying attention that higher taxes are coming if Congress does nothing--- surprise ,surprise.

Let's see what is on the horizon:

• The payroll tax extention just passed will expire at the end of the year meaning taxes will increase for all working American. This is a two percent increase on wages up to the Social Security Wage Base. If  both spouses are collectively  making $100,00  year, then the increase is $2000.
• The Bush tax cuts will expire at the end of the  year. Unless Congress acts not only does the top rate increase but so do the bottom tax rates. The marriage penalty will also be re-instated.
• The current rates on capital gains now at fifteen percent will expire at the end of the year.  
• The lower rates on dividends installed in 2003 will expire at the end year.
• The Alternative Minimum Tax (ATM) will scoop up millions of taxpayers unless a correction is enacted before the end of this year.
• There are about 140 other either already expired or expiring provisions ready to raise billions by eliminating existing tax treatment. 

#PayrollTaxExtension: Lessons and Conclusions

A House-Senate Conference has agreed to avoid once again sound solutions to the fiscal woes on the nation. In agreeing to extend the employee portion social security 2 percent tax reduction until the end of the year, extend long-term unemployment benefits and make sure physician’s Medicare payments are not reduced, both political parties can claim victory and eliminate political backlash at the same time.

The cost is a measly $100 billion added to the deficit. The country has the Chinese to thanks for providing the extra-borrowed money.

Since passing a 2-month extension of these programs in late December, Republicans and Democrats have been vexed on how to find a way out of a box. Both side wanted to get these political thorns out of the way. But, how?  Easy, just charge it.

#ObamaBudget: Tax and Spend and Tax

The 2013 Federal budget has been released by the Administration. Given the state of politics and conflict, it is more akin to a political wish list than a serious proposal that can be molded by Congress into an adopted Budget. It does, however, reveal the thinking of the President about his view of the role of Federal Government, the state of the economy and the direction he intends for the country.

The Budget calls for Federal spending to top $3.8 trillion dollars next fiscal year by adding new and expanding existing programs in areas of renewable energy subsidies, education, school construction, payments to protect local government worker and infrastructure. One thing for sure, it is not a deficit reduction blueprint. It shatters his promise to cut the deficit in half when campaigning for office. This will be the fourth consecutive year the deficit is more than $1 trillion and more, bold red ink for years to come.

.:                            Deficits Under President Obama

Fiscal Year	Deficit
2009	$1.413 trillion
2010	$1.293 trillion
2011	$1.296 trillion
2012	$1.327 trillion (projected)

#FederalBudget: What is the Point?

It is about an hour or so before the Administration releases its 2013 budget. It is, of course, not a serious document but it does reveal the thinking of the President about his view of the role of Federal Government, the state of the economy and the political determination of his opposition.

Mr. Obama has given up trying to lead or govern the country for some time in my opinion. This budget reflects the situation that re-election is the call to order. Everything is focused on it. Nothing else matters.

 A few of the details of the Budget have been released. It will emphasize new spending, more spending and more government growth and intervention. Deficits at outer space levels already will increase and will continue to increase. Of course, Congress appropriates the actual spending in the end, but this Budget is the political blueprint. No leadership on either end of Pennsylvania Avenue.

The Federal deficit totaled $1.3 trillion in fiscal 2011. The Congressional Budget Office last month projected the Federal deficit would decline to $1.1 trillion in fiscal 2012. Mr.Obama will project even higher deficits than that of the CBO. Under his plan the deficits will modestly decrease after the expiration of the Bush tax cuts. However, they will continue at record levels until Obama leaves office in 2017, assuming he is fortunate enough to be returned for another term

The Federal government borrows roughly an extra $4 billion a day to fund all the income transfer programs, plus defending the country, paying interest on the debt, making sure we all get frisked at the airport, and to write all those ten of thousands of pages of regulations. The sums are staggering. For a President who promised to cut the deficit in half at the end of his first term, the red ink just keeps getting bigger and bolder.

I am interested in of course, the revenue side of the equation. I believe I know what will be in the proposal already--wealth taxes, repeal of the carried interest rules, higher taxes on capital gains and dividends, phase out of deductions to make them almost meaningless, inefficient subsidies for renewable energy, higher taxes on fossil fuels, taxes on multi-nationals, and incentives for this and that favored industry. Most of these have been in the previous Budget submissions, all previously rejected by Congress. Creating this wish list makes the numbers look better, but the reality is that it is intellectually dishonest.

The Budget submission used to be an important part of the political process. It does set a marker of how the Administration projects its plan, where it wants to take the government. But, it is all for the politics, all to game the system. The Budget has become irrelevant in trying to get some kind of hold on the fiscal mess created by both the Legislative and Executive branches of government.

To add even more irrelevance, the Democrat-controlled Senate has no intention in passing a Budget; they have not done so for almost 3 years now.

 

 

CPAC: The Gathering of the Committed

Every year the around this time, political conservatives gather for three days in Washington at CPAC, the Conservative Political Action Conference. It is sponsored by various groups but primarily by the American Conservative Union. I have attended a few of these and will go again tomorrow as an observer to basically to hear the various politicians speak and get a few free canvas tote bags.

The real participants at CPAC are not like run-of-the-mill, normal conservatives. The ones who attend are REAL conservatives. It is a call to arms, a crusade to save America with liberal-socialist bashing of unparalleled proportions. The words liberty and freedom, Founding Fathers, Constitution are used seriously and with intimate conviction. Ronald Reagan is the holy spirit and Barry Goldwater the messiah himself. 

Congressional Legislative Tax Preview 2012: Low Expectations but High Drama

The ensuing year will focus Congressional attention on the national economy and various proposals by both political parties on measures to increase employment, investment and growth. It will also be a crucial year in addressing, or at least, laying a foundation for major revisions of the individual and corporate tax regime. There are apparent and real differences between Republicans and Democrats, which will have a profound impact on the results and accomplishments or lack thereof.