Get Serious about Jobs Creation

As I've previously discussed, President Obama launched his 2012 campaign by proposing a $447 billion stimulus proposal, the "American Jobs Act." He may not be able to bring the unemployment rate below 9%, but his main priority is to shift blame for the sticky unemployment rate to "obstructionist" Republicans. If he can't persuade Congress to "spread the wealth around," maybe he can persuade voters to "spread the blame around" and vote Team Obama.

The new stimulus proposal is heavy on payroll tax cuts ($240 billion total) and unemployment benefits ($62 billion). It also includes $140 billion in funding for state teachers ($30 billion) and first-responders ($5 billion), school modernization ($30 billion), road construction ($50 billion), an infrastructure bank ($10 billion) and neighborhood stabilization ($15 billion).

When talking about the ways to tackle the unemployment crisis, Obama loves to pull out the "infrastructure" card. If you took him at face value, you'd think the federal government could allocate funds to "infrastructure," load the funds into an enormous Jobs Vending Machine, and order up a few hundred thousand jobs over the next 12 months. Please deposit $1 billion and punch A1 for jobs in Alabama, A2 for jobs in Alaska, A3 for jobs in Arizona...

Unfortunately, infrastructure spending does not occur with the snap of a president's fingers. Major infrastructure projects involve years of lead time and millions of dollars in up-front costs. Project managers cannot get "shovels in the ground" until they have surmounted an exhaustive list of hurdles. To name a few: developing budgets and time lines; arranging engineering studies; procuring licenses, easements, land rights; procuring other state and local permits; environmental reviews; obtaining RFPs from prime contractors and/or subcontractors; resolving potential litigation and environmental remediation; navigating state, local and federal labor regulations; arranging committed financing; and paying legal and consulting fees for each step forward in the regulatory labyrinth.

The ugly truth is that local, state and federal regulatory hurdles significantly delay the infrastructure development process. When it comes to federal spending on infrastructure, President Obama talks a good game, but hasn't backed that up with meaningful legislative or regulatory proposals to accelerate investment in public or private infrastructure. A $10 billion "infrastructure bank" is a silly drop in the bucket. Moreover, banks and other financial institutions have plenty of capital. We don't need a new government bank to fund infrastructure development.

So how can President Obama get serious about jobs creation?

First, scrap the $447 billion stimulus proposal. It's another round of political gamesmanship that distracts from the problem at hand. In the real world, we're suffering from a slow-burning unemployment crisis. President Obama and his advisers should have trouble sleeping at night, because the unemployment crisis has largely unfolded on their watch. They should wake up every morning and get worked up into a slather over fresh ideas to improve the conditions for investment, development and job creation.

Second, the crux of my proposal. The Obama administration should use its platform to blast the following message to the private sector:

Private sector businesses and developers, we want to help you accelerate the development of your capital-intensive projects.

We will be shifting all resources necessary from other administrative functions into development-support functions until we have measurably decreased the unemployment rate.

Our goal is to accelerate $250 billion [or $500 billion, stretching for the biggest number realistically possible] in capital spending into the next two years.

You bring us a credible development plan for a project involving capital investment of $250 million or more. We will twist arms and use all executive powers available to ensure that your project is "shovel ready" no later than year end 2012. We will provide federal overrides of state and local red tape, relax environmental regulations for projects that do not pose an imminent danger to human life, and mediate settlements with litigants who seek to delay the start of construction.

We acknowledge that jobs creation is driven by private investment and private enterprise. Government regulation and frivolous litigation has been an impediment to jobs creation for too long. For now, we need to address the unemployment crisis. We can revisit the overall regulatory environment after we put millions of Americans back to work.

Here's the interesting thing. Although I've been noodling on this idea for some time, someone within the administration shares my perspective. The administration recently announced that it would "fast track" 14 infrastructure projects to accelerate jobs creation. My question for administration officials is: why limit this to 14 public infrastructure projects? You have just conceded that red tape delays public infrastructure development and jobs creation. Why not extend the "fast track" principle to private development projects (infrastructure, technology capex, industrial capex, utility capex, etc.)? Sure, it's a tacit admission that liberal regulatory objectives can impede economic growth. But we're in the middle of a crisis, so let's deal with the political blowback at a later date.

Do I think that President Obama is ready to get serious about jobs creation? All evidence suggests that he is not. So I'm not holding my breath, but I'd love to be wrong on this one.

The Vanderbilt Rule

President Obama has "branded" his proposal to increase taxes on "millionaires and billionaires." The new proposal will now be known as the "Buffett Rule."

The basic principle underlying the Buffett Rule is that uber-wealthy taxpayers should pay higher effective tax rates than middle-class taxpayers.

I'm not sure how the Buffett Rule is supposed to work in practice. Perhaps it is supposed to be a "Super AMT." Perhaps it is supposed to increase tax rates on capital gains for uber-wealthy taxpayers. Or limit the deductibility of charitable donations. Or cap the amount of qualifying tax-exempt income in a given year. Perhaps the President will limit the proposal to taxpayers that report more than $1 million in taxable income during a given year. Or perhaps he will extend it to working professional married couples with $250,000 taxable incomes.

Regardless of the mechanics, the spirit of the President's proposal is simple class warfare. It doesn't take a political messiah to persuade 90% of the voting public to favor increased taxes on the other 10%. You can play with the numbers (95/5, 99/1, etc.)

The irony of the "branding effort" didn't escape financial analyst Jeff Macke at Yahoo Finance Breakout:

Warren Buffett made billions off the financial crisis by getting Goldman Sachs (GS) and General Electric (GE) to pay him usurious rates in exchange for what amounted to endorsement deals. Buffett is giving his entire estate to the Bill and Melinda Gates Foundation because he is of the opinion that the government is a poor allocator of capital. Buffett would like me to pay higher taxes to the very government he's opting to stiff.

Mr. Buffett has never met a preferential deal he didn't like and has 56,000 times as much money as someone with $1 million. The only reason the White House is using Buffett to promote this tax hike is because the administration thinks voters are ignorant regarding who Buffett really is. Buffett has no more place in a Jobs Act conversation than does the ghost of Cornelius Vanderbilt.

Buffett is a legendary investor and has created fantastic wealth for thousands of his shareholders. However, Macke hits the nail on the head. Buffett's proclamation that millionaires and billionaires should pay higher taxes reeks of hypocrisy. And somehow, the hypocritical mega-billionaire has taken center stage in the debate over the President's second stimulus proposal (ahem, "jobs plan").

Next time, why not link class warfare tax policy to someone with more historical gravitas? Personally, I think the "Vanderbilt Rule" has a much nicer ring than the "Buffett Rule." And after all, Vanderbilt was one of the richest Americans in history.

Meanwhile, Halloween is just around the corner. Would it be difficult to pull off the Ghost of Cornelius Vanderbilt?

One Job Saved?

Obama's much-hyped speech outlining the "American Jobs Act" did not seem to resonate with anyone except this guy and this guy on YouTube. His cheerleaders on the political left questioned why Obama would rely so heavily on tax cuts, given the "obstructionist" bent of Congressional Republicans. His critics on the political right questioned why another round of temporary stimulus proposals would translate into net, long-term employment gains.

Various observers suggested that Obama's speech was primarily intended to launch his 2012 election campaign. He framed the stimulus proposal as a "silver bullet" that would create millions of jobs and reduce unemployment. A cynic would argue that he is mainly trying to save one job: his own.

The total cost of the new stimulus proposals is estimated to be $447 billion. How would that get "spread around"?

[1] The proposal would pump $175 billion into the private economy by cutting employee payroll taxes in half in 2012. This measure should be politically popular, because most working Americans will benefit, temporarily, from the payroll tax holiday. But we've been down this path before. Like a night of hard drinking, a temporary stimulus might be fun while it lasts. But the next day, or the next year, we'll wake up with a hangover. One "temporary" stimulus leads to the next (the "hair of the dog") and the next, and the next. President Obama (the politician) is perfectly happy to kick the can down the road. The rest of us see a looming budget crisis and desire a permanent improvement in the conditions to economic growth.

[2] The proposal has $62 billion in targeted spending intended to help the long-term unemployed. Most of that ($54 billion) involves a series of fuzzy changes to the unemployment insurance system, including a $5 billion "pathways back to work fund." Although not broken out, I'm guessing that a big chunk of the other $49 billion simply represents an extension of unemployment assistance.

The $62 billion also includes a tax credit of up to $4,000 for hiring workers who have been looking for a job over six months (projected cost of $8 billion). Although the price tag is low, this type of credit is frustrating tax policy at its worst. Very few (if any) managers or business owners would hire new employees for a $4,000 (or smaller) credit. The credit would primarily be a windfall to businesses that were otherwise intending to hire employees (so no stimulative impact). It would create an additional audit burden for the IRS, which is already overwhelmed by new responsibilities enforcing social programs. As such, it virtually invites fraud and abuse (which plagues all these ill-conceived stimulus efforts). Perversely, it does not reward employers that have struggled to retain employees during the Great Recession.

[3] The proposal includes $140 billion in "stimulus" measures, including $35 billion for "teacher rehiring" ($30 billion) and "first responders" ($5 billion), $30 billion for "modernizing schools," $50 billion for "immediate surface transportation," a $10 billion "national infrastructure bank" and $15 billion for "neighborhood stabilization."

The $50 billion in transportation spending is infrastructure spending that should be part of the regular Congressional budgeting process. We need first-class infrastructure if we are to remain a first-class global economic competitor. The funding mechanism should be part of the regular Congressional budgeting process.

The state grants for "rehiring" and "modernizing schools" represents a bail out for undisciplined state governments. State governments do not need federal funding to address local education and security objectives. They need to prioritize state and local spending on education and security over other spending measures. For example, if a state legislature cannot adequately fund teaching salaries, the state could impose cuts on other state employees (or other spending programs) and allocate the "savings" to the teachers.

[4] Finally, the proposal involves $65 billion in payroll tax cuts for employers (and $5 billion to extend 100% bonus depreciation into 2012). The main thrust of the proposal involves: a cut in the "employer portion" of the payroll tax from 6.2% to 3.1% in 2012; and a full payroll tax holiday for any expansion of payroll up to $50 million above the prior year. These proposals suffer from the same defects as the employee payroll tax cut and the $4,000 hiring tax credit. They are short-term in nature, are unlikely to "stimulate" hiring, and would primarily result in windfalls for businesses in growth mode.

President Obama's stimulus plan (ahem, "jobs bill") may save one job and get him re-elected. But its mix of short-term incentives and bad tax policy measures has failed before. Our political leaders should be focused on regulatory and tax reforms that will encourage private business investment and result in long-term employment opportunities. Short-term stimuli may appeal to a sitting President, but the rest of us will have to live with the hangover.

Robin Hood: Man in Speedo

President Obama has tried to position himself as a post-partisan Robin Hood, protecting the interests of the working class against rapaciously greedy working professional married couples with $250,000 incomes (bling-bling). He better stock up on Speedos, because his tax policies will leave us treading water for the next decade.

As I discussed yesterday, a dart-throwing monkey could put together a list of Obama's talking points for any given speech on tax policy. But, all fun aside, the posture of the U.S. political left on tax policy contains the seeds of its own undoing.

So what's the major flaw with the direction of Obama's tax policy?

The Obama administration and its cheerleaders generally believe that the solution to any budgetary issue is to "raise taxes on the wealthy" and to "close tax loopholes for greedy corporations." They make exceptions for favored industries and favored campaign donors, but they stay pretty consistent on message.

On the surface, this seems like good politics. If you convince 98% of the voting public that 2% of the voting public is not paying its "fair share," you can generate healthy majorities in favor of higher taxes on the 2%. At a minimum, you can use the Robin Hood card to get yourself elected or re-elected!

However, the political left harbors a desire to expand government and socialize the funding mechanism for various services (health care, green energy, affordable housing, etc.). The left's appetite for new programs requires new tax revenues. Mind you, we're not talking 'new tax revenues to reduce the trillion dollar budget deficit.' We're talking 'new tax revenues to pay for the President's new stimulus plan,' or 'new tax revenues to pay for Obamacare.'

Let me pause and note that politicians on the right have been complicit in the federal spending orgy that created our long-term budget crisis. However, the emergence of the Tea Party has created significant pressure on the right to end its complicity.

So the left needs new revenues, and it boldly declares class warfare on working professionals and their distant cousins in Martha's Vineyard and Sun Valley, the "millionaires and billionaires." In its thirst for revenues, it amends the Internal Revenue Code to create a series of "pay fors."

What do I mean by "pay for"? A "pay for" is a change to the Code that is projected to raise enough revenue to "pay for" a liberal spending objective. In recent years, Congress has enacted numerous "pay fors" without carefully weighing the consequences. One such folly was expanded 1099 reporting for small business (subsequently repealed). Another was the codification of the economic substance doctrine (which has left everyone, from the IRS to the tax practitioner community, scratching their heads).

Here's the thing about "pay fors." Tax policy driven by "pay fors" is no tax policy at all. "Pay fors" are a series of effectively random changes to the Code that are driven by political momentum to pay for a desired spending program. It is impossible to verify that the projected revenues from a given legislative change ever materialize.

And here's the other thing about "pay fors." When the political left closes a "loophole" to fund a new spending program, the revenues from that "loophole" are not available for deficit reduction. For example, President Obama would "pay for" the cost of his proposed stimulus act (ahem, "jobs plan") by raising taxes on the various bad apples described above (working professional married couples, millionaires and billionaires, oil and gas companies, private equity fund managers). However, if that proposal is enacted, we are still facing trillion dollar deficits as far as the eye can see. If the revenues of a new spending program are financed with a "pay for" that changes the existing tax rules, we're effectively trading water.

In this sense, the tax policy agenda of the political left contains the seeds of its own undoing. Sure, we can "pay for" new spending programs (the new stimulus act, Obamacare, whatever) by increasing taxes on the "wealthy" and "big corporations." But we're left treading water from a long-term budget perspective. Meanwhile, the Code gets more complex, and many businesses and individuals spend more time and money on non-productive tax planning and tax compliance activities.

The only way to finance the spending objectives of the political left and to tackle our long-term fiscal challenges is to increase taxes on everybody: rich, upper-middle class, middle class, lower-middle class, and poor. Maybe the left will convince voters and taxpayers that we should move in that direction. I wouldn't put money on that bet.

The Monkey, Millionaires and Billionaires

President Obama recently announced his latest stimulus proposal (ahem, "jobs plan"). To pay for the stimulus proposal, Obama went to the populist grab bag of tax "reforms," proposing tax increases oil and gas companies and on "millionaires and billionaires."

Oh, by the way, Obama defines "millionaires and billionaires" as "married couples earning $250,000" and "unmarried individuals earning $200,000." I still haven't thought of an easy way to describe this category of taxpayers, other than "working professionals." Apparently, in Obama's world, a working professional married couple that earns $250,000 is more similar to a billionaire than a working professional married couple that earns $249,999 or, for that matter, $149,999.

That's not my world, and probably not your world, but too much time in the Beltway scrambles all common sense. In any event, that topic is fodder for another post.

Obama tax policy would be infuriating if it were not so obvious that there is no policy behind the policy. Obama's solution to the nation's dysfunctional health care sector? Raise taxes on the "wealthy." Obama's solution to 9% unemployment? Raise taxes on the "wealthy." Obama's solution to the federal budget crisis? Raise taxes on the "wealthy."

Keep in mind, I'm a political independent and I support the notion that we should tax capital gains at the same rates as ordinary income. My problem is two-fold.

Number one, President Obama talks a big game about increased taxes on "millionaires and billionaires." But there aren't enough "millionaires and billionaires" to make a significant dent in any of his spending proposals. He is hiding behind class warfare rhetoric to make tax increases on working professionals seem like tax increases on the uber-rich. It's slimy behavior, regardless of the politics.

Number two, I want some policy debate around the idea that the "wealthy," including working professionals, are not paying enough tax. Let's slice and dice the distribution of income taxes at various income levels. Do we really want a society where half the population pays zero income taxes? (Yes, many are subject to payroll, and most are subject to sales taxes, but we're discussing income taxes.) Should the top 5% of taxpayers pay more taxes? The top 20%? The uber-wealthy in the top 0.1%? Let's have a national discussion about the numbers and whether different groups of taxpayers are paying their "fair share."

Instead, we get the same, tired proposals from the Obama administration. I suspect that President Obama has two large spinning wheels in a super-secret room in the White House (think 'Price is Right'). On one spinning wheel are a series of "stimulus" ideas: tax credits for this or that; infrastructure spending; cash grants to state governments. On the other spinning wheel are Obama's "tax policy" ideas: raise taxes on the "wealthy"; close "corporate loopholes" for multinational taxpayers that "send jobs overseas"; increase taxes on the "big oil and gas companies."

Before Obama decides to hit the road for the day, he assembles with his advisors in the super-secret room. His advisors trot out a monkey. Monkey seems to enjoy throwing darts at the spinning Price is Right wheels. Advisors spin the wheel. Monkey throws a few darts. Advisors track the landings and furiously scribble some notes. The darts plot out Obama's speaking agenda for the day. Obama slips into zen-like meditative trance as the Price is Right wheels turn and turn. Advisors break the trance with some fresh organic coffee ground by a Berkeley PhD. Monkey gets some fruit and tries to bite Berkeley PhD as a secret service handler leads him back to his monkey room for the day.

This is tax policy in the Obama administration.