By Nancy Thorner and Ed Ingold
When we mentioned assets as equity or debt in a previous post, we neglected to mention that assets can also take the form of cash, rather than investments or growth. In a strange twist of logic, saving money may be harmful to the economy, because savings don't yield much in terms of earnings, and further don't translate into goods, services and jobs.
Companies and individuals are retaining cash as a hedge against an uncertain future, as cash on hand allows companies to react quickly to changes in the economic environment. Unfortunately, this practice is especially reviled by Keynesian economists, and frequently cited by Democrats as proof that corporations and wealthy individuals are holding back the recovery. The implied threat to seize this cash in some way becomes a self-fulfilling prophesy. The greater the threat, the more retrenchment against that threat.
For multi-national corporations, the easiest way to keep their cash out of reach of Washington is to keep revenues generated overseas in those countries, under governments more friendly to business. This practice is, in fact, encouraged by Washington, to the extent that repatriated cash from foreign operations is subject to double taxation - in the country of origin and the United States. Many countries are more generous in allowing credit for taxes paid to other countries, notably throughout the European Union.
Individuals receive much less protection, except that foreign corporations benefit from favorable tax treatment in those nations, resulting in higher profits and dividends, hence higher returns for investors. Distributions to U. S. citizens are taxed as income, regardless of the country of origin, but the investments which generate this income benefit other countries even more. A company in the Cayman Islands has a 20% tax advantage over companies based in the United States. People invest there, Including Harry Reid (Senate majority leader) and Sally Wasserman Schultz (DNC Chairman), not for tax evasion, but because they can make more money even after taxes. As a result, our tax policy creates jobs in other countries, rather than in the United States. You can't say jobs are being shipped overseas when they were never in the US, but the effect is the same.
Regarding those in the so-called middle class, they have less to spend and even less inclination to do so. If they buy cars and houses, it is because they have no alternative. If they move to find work or keep their job, or need a reliable way to get to work, they must dig into their savings, or do whatever else is called for, like skimping on necessities or borrowing if possible. The recent bump in car sales and real estate is probably temporary, because cars wear out (the average age is now over 9 years), and you need a place to live relatively close to work. Perhaps you know a "two coast" family, split apart by their jobs. Maybe it's good for the economy, on paper anyway, to pay both mortgage AND rent, when the family can't sell their house and move together.
Quite surprising was President Obama's closing statement in the 2nd presidential debate on Tuesday, Oct. 16. Obama, with a straight face, told the American people that he believes in the free enterprise system. This came from one who has single-handedly destroyed jobs in the energy and manufacturing sectors with his tax philosophy based on redistribution of wealth (a trickle-up economy) realized by soaking the rich as a way to spread the wealth around. Mr. President, when has a poor person ever created a job? Unfortunately, this is not the only example where the President says one thing and does another.
Placing the burden of taxation on the wealthy has another effect which is often ignored. The vicissitudes of the economy affects investment income even more than wages. When you depend on taxing the wealthy, this volatility affects the ability of governments to plan for the future; and an extended dip in the economy causes a disproportionate drop in tax revenue. This affects states as well as the nation. California is a notable example where even now, tax increases are directed to the most successful companies and individuals. The effect is compounded when these individuals move from the state, or remove their assets, sometimes out of the country. While it is politically safe to tax a tiny minority to the benefit of the majority, it divides the country between those who produce and those who consume, and places few boundaries on what the majority are willing to spend.
Bad government in California translates to a booming economy in Texas. The West coast, otherwise known as the "Left" coast, is being left behind. The East coast, notably New York, has the same problems, which generates the same responses. Assets are streaming to the south and midwest. The Northeast should, perhaps, be relabeled the "Wrong" coast. "Right" just doesn't seem to work in this context.
Romney has the right idea.