Sunday, April 19, 2009

TAX OVERSIMPLIFICATION

On Tuesday of last week, President Obama gave a terrific speech at Georgetown University, explaining and defending his approach to the economic crisis better than at any time to date. His message for Americans was that:

“… each action we take and each policy we pursue is driven by a larger vision of America's future - a future where sustained economic growth creates good jobs andrising incomes; a future where prosperity is fueled not by excessive debt, reckless speculation, and fleeting profit, but is instead built by skilled, productive workers; by sound investments that will spread opportunity at home and allow this nation to lead the world in the technologies, innovations, and discoveries that will shape the 21st century. That is the America I see. That is the future I know we can have.”

For a short while I felt much better about the prospects for a new-style American economy. Obama’s ringing statement was at least the beginnings of the sort of national strategy I’ve been seeking for several years now. Some of what has passed for “stimulus” thus far might not serve the President’s “larger vision.” But this strong statement set forth a real test for future policy – it should promote future investment, economic growth, jobs and incomes. Bravo!

Then the following day (not coincidentally, April 15), the President set an objective for change in a major policy area that left me scratching my head. He directed his Economic Recovery Advisory Board headed by Paul Volcker to come up with recommendations for tax reform by the end of this year. In doing so, he left the impression that he sees the big problem as the “monstrous” complexity of the tax code.

The focus on tax and the sense of urgency are commendable. The code does run to over nine million words. Compliance is a nightmare for average citizens and a challenge even for smart CPAs. It’s full of special-interest gifts and replete with essentially failed social policy (think of the many provisions related to health care, savings, and retirement).

Yet you don’t have to be a cynic to be skeptical about the benefits of tax simplification, particularly as they relate to our central problem: as a country we don’t produce enough to satisfy our needs and pay down our debt to the world. Simplification of the tax code, even if it were to materialize as intended, would not by itself address this problem. Our code is not just overly complex; it rewards the wrong behavior. Alongside simplification, let’s hope that Volcker will broaden the agenda to include:

a) lack of any border-adjustable consumption tax. Such a tax – like a value added tax or a national sales tax – can be rebated when goods are exported and imposed when they are imported. Virtually every US trading country does this, and it’s allowed by international law. The unsurprising result is that we have a persistent, massive trade deficit.
b) relatively slow depreciation rates. The US forces businesses to recoup the cost of investment, particularly major ones, over relatively long periods, thereby increasing the cost of capital. The result is to steer investment away from the US to a more generous country, such as Canada.
c) high corporate income tax rates. In 1986 when the US last undertook an overhaul of the tax code, one objective was to reduce the marginal corporate tax rate to match or overmatch the rates in the OECD area. We succeeded in that, but the world did not stand still. Within a short time, the US once again had the highest marginal rates in the developed world.

Simplification is not the be all and end all of tax reform. If we’re serious about regaining international competitiveness and the long-term integrity of the dollar, we need to aim for more than mere simplification of that monstrous tax code. Let’s get a first-class tax system for now and for the future.

Saturday, April 18, 2009

WORKING ON THE RAILROADS

WORKING ON THE RAILROADS

A much ballyhooed element in the Obama stimulus package is the $8 billion dedicated to inter-city rail projects. That’s an impressive sum compared to the paltry investments of the past, and it’s to be complemented by an additional one billion dollars in each of the next five years. It’s an example, say some, of the sort of transformative change that the administration is seeking to bring to this country. Thirteen billion dollars is a big enough pie, reports The Wall Street Journal on April 16, to spark a fierce competition among states from coast to coast to secure a bigger slice for themselves.

Meanwhile, across the Pacific, China has committed to build its own high-speed rail system by 2020. The Shanghai - Beijing link, the longest such line in the world, is almost complete and will cut the trip to five from eleven hours. Even relatively small provincial cities – eleven in Hebei Province alone -- will also be networked together, unleashing a vast potential for development. The cost? A cool five trillion renminbi, or almost $700 billion at current exchange rates, by 2020, most of it planned for the next few years.

Even if construction costs weren’t substantially lower in China, the vast discrepancy in ambition is glaring. My point isn’t that we ought to try to match the Chinese in the scope of our commitment to inter-city rail – though I would love to see that. The payoff of a major commitment to rail transportation is alluring. Lower green-house gas emissions. Less congestion on the highways. An end to a lot of short-haul air travel. Reduced demand for imported oil and gasoline. In short, a big step forward in the greening of America’s transportation system, which is a far greater polluter than our much maligned manufacturing sector.

Instead, what is most striking are the economic benefits that China is already seeing from its commitment to fundamental rather than incremental change in rail transportation. All across China factories are reportedly gearing up to produce steel track, locomotives, rail cars, switches, electronic equipment, and more to satisfy the half-trillion dollar market. The Chinese pie is big enough that investors are eager to produce all that’s needed to supply the burgeoning rail system.

Our incrementally bigger but still woefully inadequate investment, by contrast, is so limited that we will in all likelihood end up importing a good portion of what we eventually do install. That would deliver little of the vision the President laid out earlier this week at Georgetown University of a “future where sustained economic growth creates good jobs and rising incomes.”

In the 19th century, a few thousand Chinese workers were brought to America, to our shame sometimes by duress, to build the transcontinental railroad, using foreign capital and mostly American-made equipment. In the 21st century, more than 100,000 Chinese workers are building their own first-class rail system with their own capital and Chinese-made equipment. We should learn a lesson or two about the multiplier effects of high ambition and get to work on our railroads in earnest.