A Superhero Fit for the Economy
By Brandon Garrett

“5…4…3…2…1…”  The countdown to change has reached a crescendo. From New York to New Delhi, San Francisco to San Salvador; the superhero fascination with President-Elect Obama is undeniable. As much as he and his family try to curtail delusions of grandeur, he can never again assume the status of a mere mortal in part because he has so much to accomplish so quickly. 

For those who still haven’t figured out how this credit crisis impacts you and your bottom line, your once unsinkable 401k is down 35%. That 750 credit score isn’t what it used to be—even on a used car lot.  There is no bottom for the real estate market in sight and, according to Labor statistics, we have experienced one million job losses this calendar year alone.  Unemployment could hit a gaping 8% by 2009. All of this may mean no office party for the hard working associates this holiday season, but hey, at least you are employed.

Obviously, an economic recovery program for the post-bubble economy should be the President-Elect’s top priority. Stimulus programs comprised of tax rebates for consumers and tax cuts for businesses just won’t cut it anymore. Instead, Obama’s plan must focus more on job creation and growth.  He would be wise to tackle the draconian complexities of the tax code, and advance legislation that emphasizes increased industry regulation and transparency. This will help to restore consumer confidence at home and international faith in the dynamism of the US economy abroad.

The best route to direct and aggregate job creation is through investment in public infrastructure.  The US Department of Transportation concludes that every one billion dollars of federal highway investment creates 47,500 jobs.  Consider the multiplier effect across industries—a much needed increase in demand for materials and services.  And when compared to tax relief public infrastructure investment’s return on investment is outstanding. The New America Foundation found that for every one dollar spent in public infrastructure, the resulting increase in GDP is $1.59.  Conversely, for every one dollar given in tax relief, the GDP takes a loss of roughly $0.33.  This illustrates just how short sighted rebate checks and tax breaks ultimately are.  The long-term sustainability of the economy is a question of public infrastructure.

Blinding economic uncertainty. A roller coaster barreling off the tracks and we all want off. It may seem mundane at a moment like this, but the tax code is pivotal.  Its complexity comes at a cost—not only to individuals and families but to the government as well.  The President’s Commission on Tax Reform reports that compliance alone costs the Federal Government over $200 billion dollars annually. Tracking down all of the “Joe the Plumbers” and Wesley Snipes’ is no small feat.

While an overhaul of the entire code is necessary, it would take a great deal of time, a near impossible to complete in Obama’s first term. To make a substantive impact fairly quickly the President-Elect should develop a strategy to repeal the Alternative Minimum Tax (AMT) and institute changes to the tax code that would keep jobs in the US

Every year middle-class Americans are threatened by the Alternative Minimum Tax (AMT).  Originally written in 1969, the AMT is an alternative tax structure that sets a minimum tax rate (depending on the amount of the taxpayer's "alternative minimum taxable income," as adjusted) on some taxpayers so that they cannot use certain types of deductions to lower their tax.  However, when the base for today’s income-exemption levels were set nearly forty years ago to insure the wealthy paid some income tax, those levels were not indexed to keep pace with inflation. So each year, the Senate Finance Committee and House Ways and Means Committee creates a patch for the AMT insuring that more than 26 million middle-class Americans are not slammed by this tax. Even the most conservative estimates suggest that these ATM patches cost the taxpayers about $4 billion each year.   

Repealing the AMT, however, is not a simple matter.  Under current pay-as-you-go rules established by Congress, which our President-Elect supports, legislators must propose a way to offset the $1 trillion cost of repealing the tax.  In 2007, House Ways and Means Chairman Rangel attempted to create a way to pay for the cost by adding a surtax to high-income taxpayers, a cap on itemized deductions and personal exemptions, and a limitation on miscellaneous itemized deductions.  The revenue generated would increase taxes for only 1.3 million Americans while cutting taxes for 90.3 million.

To help the US economy with tax revenue and job creation President-Elect Obama should also address corporations’ deferred foreign profits.  Currently, the tax code provides incentives that encourage employers to ship American jobs abroad.  It also treats profits earned by foreign subsidiaries of American corporations differently than it does profits earned in the US  For example, there is a 35% corporate tax for US companies, but multinational companies can defer paying US taxes on their overseas profits until they return those profits to the United States.  Typically, these transfers do not happen for years and it costs the economy a great deal.  And while the US has one of the highest corporate tax rates in the world and one of the most complex tax systems, it takes in less annual revenue from corporate taxes than almost any other major economy.

According to the Bureau of Economic Analysis, from 2000 to 2005, US multinationals eliminated 2.1 million jobs at home while adding nearly 800,000 jobs abroad.  The most recent statistics report that nearly 9 million people were employed by US companies abroad.  And regardless of the employment impact, the deferral compensation provision in the tax code in 2004 allowed multinationals to shift $50 billion in income to low-tax countries, depriving the government almost $18 billion in tax revenue.  To further illustrate possible losses, according to the Securities and Exchange Commission, General Electric has $62 billion in “undistributed earnings” offshore, Pfizer has $60 billion, and ExxonMobil has $56 billion.  Consider what that additional revenue could do in our current marketplace.

For things to improve companies, individual investors, and the international community must be confident that the US economy is sustainable and will rebound.  Attempts to reassure the doubtful citizen are underway.  Obama has already worked to secure the passage of the $750 billion Emergency Economic Stabilization Act of 2008, but there is more work to be done. The cornerstone of this legislation is its Troubled Asset Relief Program (TARP), which is designed to tackle many of the problems resulting from complex debt securities and credit default swaps.  TARP is split into five administrative units—(1) mortgaged-back securities purchase, (2) whole loan purchase, (3) equity purchase, (4) home ownership preservation, and (5) executive compensation and compliance.  As banks have begun to borrow money from the federal government, more bank to bank lending is slowly occurring; however more must be done to ensure that the TARP is used to stimulate loans rather than purchase additional securities.

Similarly,consumers must be sure that the government will protect their assets. President-Elect Obama should demand strong regulation, capital requirements and anti-fraud provisions. In an economic climate impaired by corporate mendacity, transparency is more critical than ever. Because corporate balance sheets have been so sketchy and funds so terribly mismanaged, full disclosure and stronger governmental review will be invaluable moving forward. Collusion and conflict of interest between federal agencies and financial institutions must be eradicated in order to allow consumers to invest with peace of mind. 

President-Elect Obama has inherited an economy that seems to call for superhuman, strategic know-how.  The American people—indeed much of the world—believe he has what it takes.  Yet every superhero, even Obama, has a weakness…and only time will tell if Wall Street is paved with kryptonite.

E. Brandon Garrett is a native of LaPlace, Louisiana and serves as the Policy Advisor on Economic Issues for US Rep. William Jefferson.  He completed his undergraduate degree in economics and international studies at Texas A&M University and graduate degree in business training and development, studying the international work force at North Carolina State University.  He freelances for The Green Magazine.