Economic Ignorance And Thuggery Rule In Washington

Rob Sama points us to this disturbing event, where the true colors of one of Obama's appointees shine through.

This (as yet unproven) yarn goes exactly like this:

Confronting the head of a non-TARP fund holding Chrysler debt and unwilling to release it for any sum less than that to which it was legally entitled without compelling cause, this country’s “Car Czar” berated the manager of said fund with an outburst of prose substantially resembling this:

“Who the fuck do you think you’re dealing with? We’ll have the IRS audit your fund. Every one of your employees. Your investors. Then we will have the Securities and Exchange Commission rip through your books looking for anything and everything and nothing we find to destroy you with.”

Faced with these sorts of threats, in this environment, with valued employees in the crosshairs and AIG a fresh, open wound upon the market, the fund folded.

I wish I could say this surprised me, but seeing the attitude of others in or involved with the Obama Administration, it does not. It shows the willful ignorance of members of the government when it comes to economics and finance, and such ignorance can do incalculable harm to the American economy. Unfortunately I get the impression many of these same people could not care any less about the economy as long as they control things. As Rob stated in his post “ It is truly straight out of Atlas Shrugged.”

I'm afraid he's right.

Another example of the Obama Administration's dalliance with the Law of Unintended Consequences is the President's focus on punishing USA companies doing business overseas by eliminating the many of the tax breaks given to them due to the double whammy of having to pay taxes to both the foreign country and the US. Somehow he believes these tax breaks have allowed these companies to outsource jobs overseas at the expense of American workers, therefore they must go.

Never mind the US already has some of the highest corporate taxes in the world (only Japan's are higher and their economy hasn't been performing all that well since the taxes hit those heights). Somehow he's come to believe that by hitting US companies in their profits that somehow it will help keep jobs in the US.

The problem? He's so wrong, so ignorant of economic cause and effect, I'm not sure where to begin.

His plan would limit the tax deferral on income earned abroad by tightening the rules, limiting allowable deductions and restricting eligibility for foreign-tax credits. This "solution" is antigrowth, job-destroying, protectionist and unlikely to raise the tax revenue Mr. Obama predicts.

Congress long ago created the corporate tax deferral to compensate for this competitive disadvantage. Under deferral, a company doesn't have to pay the U.S. corporate rate until it repatriates its earnings. It can retain them overseas or reinvest them abroad with no penalty. But if it brings them home or pays them as dividends, the tax bill comes due.

Few major U.S. companies pay 35% of their profits in taxes because of the foreign tax-deferral and other deductions, credits and loopholes. But that's precisely why Mr. Obama should want to take the better path to corporate tax reform by reducing the rate and removing loopholes. America now has the worst of both worlds -- a high statutory rate and a tax code so riddled with complexity that it is both expensive to administer and inefficient at collecting revenue. And yet Mr. Obama's proposal to limit deferral only layers on the complexity.

Some of Mr. Obama's advisers understand all this, but then their real goal isn't tax reform or U.S. competitiveness. It's a revenue grab, one made easier by the fact that overseas tax "avoidance" is easily demagogued. To that political end, Mr. Obama conflates tax deferral with the offshoring of jobs -- hence the sly reference to Bangalore, India. With trillions of dollars of new spending, the White House and Treasury are desperate for new tax sources to pay for it all.

Of course they could just decide to forget the deficit laden $3.7 trillion budget proposal and create a new one without all that pork that will have to be paid for by the taxpayers. But we know that isn't going to happen. Therefore the Law of Unintended Consequences takes over.

But even as a revenue raiser, this is likely to fail. Fewer companies will keep their headquarters in the U.S., especially small or mid-sized firms that can slip away without becoming a political target. Those companies that can't flee will sooner or later demand relief from Congress, which will be happy to create even more loopholes.

If Mr. Obama's proposal has a silver lining, it is that he has embraced the principle that tax rates matter to investment decisions. If his new and short-sighted proposal becomes law, he and all Americans will discover just how much.

Those wishing to make investments will decide to invest elsewhere, which will have a negative effect on the economy. Companies wishing to maximize their profits and minimize their tax burdens will move out of the US, taking their money and their jobs with them. Companies wishing to do business in the US will rethink their decision to do so, not wanting to be burdened with such onerous taxes which will reduce any profit they might realize. In effect, Obama's move will stifle job growth, investment, trade, all while reducing the tax revenues collected. In other words, his effort to collect ever penny 'owed' will have the opposite effect, and he'll cripple the economy at the same time. But don't expect that to stop him from going forward with his ill thought out plan. He'll just find someone else's money to take.

Yours.

When that happens, it will put even more downward pressure on the economy because consumers won't have the money to spend because the government has taken it, which in turn will cause even less revenue to be collected, which will spur even more tax hikes...well, you get the picture.

It is indeed a nightmare right out of Atlas Shrugged.