Right Down Reality: 2011

Last week a discussion on the wall of the President’s Facebook townhall left an impression on me. I was speaking to another economist about the policies of the current Administration and we each had different opinions about the success of them. When we came to a wall, the question was asked: What are your ideas then? I had ideas, and I shared them, but it made me think about how much time is spent criticizing others without presenting alternatives. Most of the criticism isn’t even based upon logic, but a personal dislike for the owner of that thought. Well, this gave me the idea of starting a video series explaining the criticisms of the current Administration based simply on economics and presenting alternatives to them.

Now, I’ll warn you, the subject of economics probably wouldn’t be as exciting to you as it is to me, but because it is important enough to affect everyone’s lives than it should be important enough to try to have a better understanding of it.

That being said, I would like to start with our tax code, specifically with the notion of “corporate taxes”. When asked who pays corporate taxes, many of us have been led to believe that the business pays those funds to the government, which is a serious misconception. Taxes are funded solely on an individual basis, and as such a corporation does not pay corporate taxes at all. Businesses are tax collectors on behalf of the government. Think about it. A business treats the tax as any other expense which gets passed down one of three ways: the consumer, employee, and shareholders (as explained in a piece I did in 2008). The pain of paying the higher taxes trickles down to one of the three beneficiaries of the business’ success as long as the business can remain competitive in the market. In a roundabout way, I’m basically saying that the idea of taxing businesses and corporations is another way for politicians to essentially tax the public (without the public being aware of it). Have you ever heard of a politician promising to lower the income taxes for the lower and middle classes, while also promising to get back at those greedy businesses and corporations by raising the corporate tax rates to fund social programs to benefit the growing poor and middle class? Ever notice how wages have stagnated as the cost of goods rise prior to the current recession as early as the 90s? Notice that as the world’s become globally connected, business has left this country to beneficial nations?

Retaining what I just pointed out, consider this idea to stimulate the economy: abolish the Corporate Tax rate completely. Doing so will allow business to have more revenue to play with, which would result in any of the following: stable stocks, expansion (jobs/wages/benefits), lower prices for the consumer. Business overseas will notice the friendly change and move to take advantage of the zero rate, making this country more appealing compared to other nations. If you want true stimuli, this purely economic based act would have an immediate (within a year) impact on the marketplace that would benefit the people. Yet, this act alone would not suffice….

The President recently called for the removal of federal subsidies to oil companies in retaliation to the steady increase in the price per barrel in a letter addressed to the Minority an Majority leaders of Congress with the intention of punishing the private oil companies for the increase in fuel prices. To his base and the uneducated, the idea of punishing big oil is considered a great idea. For the pain of paying at the pump, someone has to be blamed and punished. Just think about this for a second, and also consider what I said earlier about businesses and expenses. The initial shock of having those subsidies removed will dramatically increase the price we’d pay at the pump simply because what we pay at the pump has been subsidized by the government this whole time. In effect, the very people cheering this movement on will be hit the hardest once this action is taken. The trickle down effect will spread to every single industry that uses any product that comes from the oil industry, inflating the prices of food, clothing, housing, etc. Not to mention that when it comes to federal involvement in the marketplace, this is another example of the feds picking which industry wins/loses based on the political climate. In the quest for “fairness” in the marketplace, this is hardly fair business practice.

Couple the zero Corporate rate with a plan to end to all forms of Corporate Welfare. In 2006, the federal government allocated $92B subsidies to many companies including Boeing, Xerox, IBM, Motorola, Dow Chemical and General Electric. The state and local governments collectively paid out $40-50B. I just pointed out that the President is calling for the removal of subsidies to the oil industry simply because the political climate calls for it. I would agree with him, if he would take it further and completely remove all forms of corporate welfare as an economical gesture of good will. The government should be neutral in the choosing of which business receives an incentive over another. This practice of choosing who wins/loses has opened the doors for political corruption, lobbying, damaging policymaking, etc which hurts the average citizen and tainting the political process. By removing the practice, the average consumer has more say in the decisions a business makes and the future of the company. The company would no longer have to concern themselves with trying to obtain subsidies before their competitors by wasting time and money in lobbying efforts to that end, but would have to rely on catering to their customers in order to compete.

There are some concerns about the transition to such a system because there will be some of the same issues. Market influence into politics will never die unless the politicians themselves choose to make decisions that benefit the people they represent and not their campaign coffers. Regulation (a good thing, BTW) opens the door for lobbying/bribery as long as the restrictions are unnecessary, redundant and created for the purpose of assisting special interests. A reduction in some of the government programs that depend on the corporate tax system is a given, much of which can be sustained by removing waste fraud and abuse within them (no, really!) and the influx of jobs would reduce the number of Americans that are dependant on programs like WIC, Welfare, Section 8, etc.

These ideas aren’t perfect, but are simple and address the main concerns of the people in the country. The free market system works…..if the government reduces it’s influence to levels that benefit society as a whole.

For more ideas based on economic principles I've already covered (would coincide with the above):

Business
Social Security
Healthcare
Taxes

Acknowledgement: Michael Ramirez for the editorial cartoon