BLOOMFIELD: An economic plan

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By Mark Bloomfield

OP-ED:

Several weeks remain before President-elect Barack Obama assumes actual economic policy-making authority. Yet, in a break with history, the soon-to-be 44th President of the United States has in many ways shared center stage on economic policy-making with the current occupant of the White House.

During the Great Depression, with the nation suffering through an even greater economic crisis, President-elect Franklin Delano Roosevelt ignored incumbent Herbert Hoover. But today, Timothy Geithner, Mr. Obama's designated secretary of Treasury and current president of the New York Federal Reserve Bank, is a key player in President Bush's economic crisis management team and the Obama economic team is in close and frequent contact with Bush economic policy-makers. Thus, an early report card on Obamanomics may be in order.

He gets an "A+" for expectations. Mr. Obama has done a thorough job of painting the economic realities of this crisis and has made it clear that it requires much more than a quick fix.

And "A" for the president-elect's economic team. The triad of Mr. Geithner as Treasury Secretary, Larry Summers as White House National Economic Council "czar" and Christina Romer as chair of the President's Council of Economic Advisers can't be beat. Add Paul Volcker as Chairman of the president-elect's new Economic Recovery Advisory Board with Austan Goolsbee as the Board's chief economist, and key players like Peter Orszag as budget director, among others, and you have a solid economic team. This is a team of free traders, centrists, supporters of earlier financial deregulation and proponents of capital formation. (Full disclosure, Messrs. Summers and Volcker have both served on the board of the American Council for Capital Formation (ACCF)).

A "C" is for the Obama fiscal stimulus package to date. The good news is that the economic recovery plan is still evolving. The rumored cost of the package, $700 billion or 4-to-5 percent of GDP, is a big number but commensurate with the size of the problem. It includes spending on infrastructure, education, and "green jobs," but it ignores the powerful impact that tax policy can have on economic growth. Therefore it does not warrant an "A."

President Kennedy proposed reductions in marginal individual tax rates, corporate income tax and the capital gains tax because of the impact on "investment, the mobility and flow of risk capital and the strength and potential for growth of the economy." Mr. Obama should do likewise to meet his short-term goal of jump-starting the economy and providing for long-term economic growth, job creation, international competitiveness, sensible energy policy, and retirement security. Four tax initiatives could balance the need for economic stimulus in the next several years with the need for long-term investment in America and fiscal prudence.

First, provide a temporary reduction in the corporate income tax rate on repatriated earnings of U.S. foreign subsidiaries. Because the U.S. has one of the highest corporate tax rates in the world, hundreds of billions in earnings from U.S. exports are trapped overseas. A temporary tax incentive, modeled after a similar experiment in 2004, through which U.S. corporations would pay a tax of 5.25 percent on a portion of their export earnings, would finance investments in jobs, research, and capital improvements in America rather than abroad.

Second, phase in a gradual reduction of corporate tax rates, which remain among the world's highest and are what Mr. Kennedy called a barrier to job creation.

Third, encourage greater investment in alternative sources of energy. Let's make the tax on investment in state-of-the-art machinery and equipment competitive with the rest of the world. In a recent international comparison commissioned by the ACCF, a U.S. company gets only 29.5 cents back after 5 years through depreciation allowances for each dollar invested in "smart meters," which can substantially reduce electricity use. In contrast, in India an investor gets $1.00 back in 5 years and in Germany the figure is 63.1 cents.

Fourth, too many Americans now face retirement insecurity as their nest eggs shrink from the two trillion dollar decline in net worth of U.S. households. How about an innovative capital gains tax cut for Americans who purchase (not sell) stocks or other investments in the next year or so. And how about raising the current capital loss each year to $20,000?

These tax initiatives could be a big boost to the U.S. economy in the short term but should be considered a down payment on the fundamental reform the U.S. tax system needs. Studies by the ACCF and others demonstrate the U.S. tax code hits saving and investment harder than do many of the tax regimes of our international competitors.

Our low national savings rate (personal, business and government) is the root cause of many of our economic problems. A move toward a consumption tax to partially replace our current anti-growth tax regime - once the current very serious economic downturn is behind us - is a policy Mr. Obama should seriously consider.

Mr. Obama has asked the new Congress for a stimulus package that he can sign on Inauguration Day. If the measure is a balanced package with both spending and tax cut components, Obamanomics will deserve a "straight A" report card.

Mark Bloomfield is president and CEO of the American Council for Capital Formation.