Although George Santayana’s observation that those who do not remember the past are condemned to repeat it is generally viewed as wise counsel, political leaders often think themselves immune. The late Barbara Tuchman validated this phenomenon in “The March of Folly,” which chronicles examples of leaders who acted against their own self-interest by ignoring information and counsel that conflicted with their preconceptions.
The Obama administration looks as if it’s preparing to add another chapter to Tuchman’s book by making economic blunders that are reminiscent of decisions that made the Great Depression longer and worse than it had to be.
Specifically, two pending actions will almost certainly make it more difficult for America’s economy to recover robustly and for unemployment to decline to more acceptable levels.
First is the increase in individual tax rates scheduled to take effect Jan. 1. Higher tax rates leave consumers with less money to spend, and consumer spending is a major source of economic growth. Consumer confidence is low and shows no signs of improving. If left with less money to spend due to higher taxes, it is unlikely that the public will have strong incentives to increase its spending.
The second action is the Obama proposal to tax the foreign source income of U.S.-based companies, even though they already pay taxes in the country in which it’s earned. Currently, the IRS credits those paid foreign taxes against a company’s global taxable income. Our nation already imposes the second-highest corporate tax rate among developed countries. If the Obama proposal becomes law, we could end up with the highest tax rate — a troublesome distinction for any country eager to attract investment and grow its economy.
U.S. nonfinancial corporations have accumulated almost $2 trillion in funds that could increase productivity, develop new technology and be invested to create jobs. Uncertainty over the extent of an economic recovery and government policies is impeding the capital spending necessary to boost economic growth. Even the prospect of higher taxes will act as further deterrent to productive capital investment and an incentive to seek other uses for those funds.
Although this “dual capacity” tax hike would apply to all American corporations that operate in foreign countries, lawmakers have singled out our oil companies as targets for this added burden. Our energy sector has to compete globally with both foreign oil companies like BP and national oil companies owned by their governments like Venezuela’s PDVSA and China’s CNOOC. Imposing higher tax rates on our own businesses would put them at a competitive disadvantage in the world market. As a consequence, revenue brought back to the U.S. will be lower. Lower earnings and less growth translate to less employment and lower returns to shareholders, including most states’ already struggling pension funds.
America’s oil and gas industry employs more than 9 million people. At a time when unemployment is more than 9 percent, the last thing that the government should do is take actions that will directly cost American jobs. Additionally, most major pension funds have large holdings of oil and gas companies. If those companies are subjected to punitive taxes, the returns going to retirees will be lower, putting a further burden on the growing ranks of the retired.
The prospect of higher tax rates along with overly stringent regulations and extended moratoriums on oil and gas exploration signals a hostile investment climate. In turn, that ensures a decline in both investment and jobs. Consumers will become more reliant on foreign sources of energy. And a company like BP, which has caused the largest environmental calamity in our history, will be rewarded with a de facto subsidy.
The potential damage of higher taxes and an anti-business climate is writ large in the history of the 1930s. Amity Shlaes in her book “The Forgotten Man” observes, “The story of the mid-1930s is the story of a heroic economy struggling to recuperate but failing … because of perverse federal policy. The worst factor was [Franklin] Roosevelt’s war on business.” We may be on the verge of looking back to the future unless Congress and the president take seriously the lessons of history and our Great Depression.
This article appeared in Roll Call July 30, 2010 http://www.rollcall.com/news/48878-1.html