Evansville for Change

The US is now in crisis with three monumental problems….the Gulf Oil Spill, Joblessness and the Federal Deficit. My suggestion here is for the country to use the disastrous Gulf Oil Spill as an opportunity to spark a country-wide private sector job creating, fiscally sound economic recovery.

My proposal here is to provide very bold, quick-acting tax incentives to spur country-wide job creation, and to do so while also reducing markedly the heavy US Federal Deficit. My proposal has the Gulf Oil Spill taking the lead by double downing on the tax incentives given to the Region directly impacted by either the Gulf Oil Spill or by Katrina. The resultant substantial property investments in the Gulf, triggered by these strong tax incentives, will speed up both the Gulf clean up and the area’s economic revitalization.

This isn’t your typical cyclical US recession. Instead, this is a structural recession. To solve the catastrophic unemployment/underemployment/low wage and US federal deficit problems triggered by this structural recession, much bolder, creative actions are needed, that are also quick hitters.

Let me explain why I think the Economic Stimulus, although very well intentioned and certainly creating some private sector jobs, hasn’t been very effective in reducing the overall unemployment/underemployment rates. In doing so, let me use an analogy from the recent BP Oil Spill in the Gulf of Mexico.

When you have oil all throughout the Gulf, and you try to get rid of it “One Scoop at a Time”, you have little success, especially when more oil continues to spill out into the Gulf.

So much of the private sector job creating portions of the ARRA Economic Stimulus Plan was designed the same way……”One Project at a Time”. On so many of the projects, the government, being fair, thorough and transparent, takes quite a long time to review each proposal and then decides which company, organization or individual best deserves the government money incentives.

This is crazily inefficient. Just like more oil continuing to be spilled in the Gulf, the unemployed and underemployed rolls, as well as the lower wage full-time jobs, keep expanding from US jobs continuing to be transferred overseas, from US jobs cut due to US company productivity initiatives, and from the many newly-minted college graduates, high school graduates and high school and college dropouts.

Instead, I think what would work much better is for the US government to creatively design US government desirable tax incentives for businesses to execute. Thus, you would be unleashing the creativity of all of businesses, right away, to solve the deep, structural US economic problem. And can businesses ever quickly respond to something like this…..the key salient point to understand is that businesses are driven to action by reported earnings. You give them an incentive to increase their earnings, they’ll go after it quickly and intensely.

Why is this a structural recession rather than a typical cyclical recession?

So many pundits think that if you solve the financial markets and the housing regulatory problems, the jobless problem will later go away in a reasonable amount of time. This is crazy reasoning. You fix the regs, you still don’t have business demand.

Many of these same pundits also think the major problem causing joblessness is that there is no lending to small businesses. However, the major problem in reality is the lack of demand for the products and services of the small businesses, caused by the horrible economic crater we are in. You really can’t blame a prudent bank for not lending to a small business, whose financial statements are not sufficiently solid, and more importantly, whose future cash flows are now even more uncertain given the horrible economic environment, coupled with a government which hasn’t as yet shown that it is willing to spur, in a significant enough way, the critically needed business demand growth. When business demand returns and thus small business financial prospects look much better, these prudent banks will then open up their small business financing spigots.

One thing is for certain. The longer real private sector job creation is put off, the worst the structural recession will get.

First, the high number of unemployed and underemployed substantially increase, on a continuing basis, the US federal deficit, as well as also putting State Government finances under severe pressure. And second, the average time the unemployed will be out of work will increase and the harder it will be that the skills of these long-term unemployed will be desired by companies.

The structural recession has been caused by the 2000s Lost Decade. To give a historical perspective from the Bureau of Labor Statistics, here are the net US jobs added (lost) by decade:
…1960s Decade…17.1 mil added
…1970s Decade…19.4 mil added
…1980s Decade…18.1 mil added
…1990s Decade…21.7 mil added
…2000s Decade…944,000 LOST

No, the above is not a misprint. And in the 2000s Decade, there were 1,941,000 net government jobs added and an incredible 2,885,000 net private sector jobs lost.

The 2000s Lost Decade was mainly caused by the massive offshoring of jobs overseas by multinational corps, with the resultant catastrophic effect on the US federal deficit (with US Public Debt increasing by a massive $6.535 trillion in the 2000s Lost Decade, advancing from $5.776 trillion to $12.311 trillion), on US full-time employment, especially at livable wages, on US States financial coffers, and also on US real GDP percentage growth (averaging a dismal 1.9% annually in the 2000s Lost Decade vs. a very stable and substantially higher average of 3.1% to 3.3% annually in the three preceding decades). And this huge real US GDP growth decline occurred in the laissez-faire 2000s Lost Decade even though there was a substantial federal income tax cut for the wealthy.

The massively detrimental US federal deficit impact as well as the US states severe financial pressure here result from the monstrously lower corporate income tax receipts resulting from the corporate income shift from US to Intl, and the gargantuan employment individual income tax receipts lost and the related gargantuan payroll tax receipts lost, due to moving these jobs overseas.

And then there are several other primary reasons for this structural recession caused by the 2000s Lost Decade.

First, health care costs increased dramatically to both US businesses and to US individuals in the 2000s. And the three health care industries causing this massive cost increase (i.e. Big Non-profit Hospitals, Big Pharma and Big Health Insurance) all generated windfall profits in the laissez-faire 2000s Lost Decade.

Second, and in like manner, energy costs increased dramatically to both US businesses and to US individuals in the 2000s. And all of Big Oil, causing this massive cost increase, generated massive windfall profits in the laissez-faire 2000s Lost Decade.

Third, the substantial income tax cuts for the wealthy substantially increased the US federal deficit during the 2000s. Of special note here is the massive drop in US federal income tax receipts due to the monumental decrease in the dividend tax rate on individuals. There wasn’t much in the way of capital gains in the financially depressed 2000s decade, but there was still a gargantuan amount of cash dividends received, taxed at incredibly low tax rates.

Fourth, the US federal deficit ballooned in the 2000s from many unfunded spending initiatives, including unfunded spending on wars, the first TARP spending and the 2009 ARRA Economic Stimulus spending.

Anyway, given this structural deficit, how best to quickly jump-start real, sustainable private sector job creation and particularly in the Gulf Region?

Certainly, the business research tax credit is a winner. I think you’ll see some version of this pass shortly. What scares me is that Congress will just extend it exactly like it has in the past, where a good chunk of the future jobs created from it were overseas. Instead, it should be changed to make it fairer and much more of a US job creator, and at the same time, to provide disincentives for multinational corps to offshore jobs, which is the main reason for the structural recession we now have.

Also, there are many energy independence jobs that can be wisely created in a fiscally sound way. This will all be done in the near future as part of some form of Clean Energy legislation, thus I won’t address them here. But I do want to point out that the private sector Green Job creation here will only put a very small dent into the giant-sized structural recession we are facing. Something much bolder is needed when you are facing such a severe structural recession. It is far better to overstimulate the US economy, rather than continuing to understimulate it.

But what one, single bold job creation initiative is needed right away, which would be fairly simple to apply and also very effective? There have been many that I have proposed and that many others have proposed.

But the single one? OK, I think it’s clearly the Manufacturing Tax Credit, somewhat like the Investment Tax Credit of many years ago. This Manufacturing Tax Credit would be computed as a pretty healthy percentage, perhaps at least 10%, and double downed to at least 20% in the Gulf Region, of the purchase price of all three-year, five-year and seven-year MACRS tangible personal property placed in service.

I am certain this one would really juice up the economy and job creation, and do so right away. And wholescale US property infrastructure additions like these are ones that would add much muscle to the goal of the US being an Economic Powerhouse on the worldwide scene.

And what would really help here is to also make all external computer software costs, including web design costs, as well as all manufacturing plant facility costs, including remodeling costs, eligible.

Also, just in the Gulf Region directly impacted by either the Gulf Oil Spill or by Katrina, all retail, lodging, restaurant, leisure, and rental property building facility costs, including all remodeling costs of these facilities, would be eligible.

I would make it a refundable Manufacturing Tax Credit.

Also, for multinationals corps only, or at a minimum, all multinational corps above a certain size, I would include a requirement for some form of very simplified overall US payroll count increase to earn the Manufacturing Tax Credit, and then these payroll counts increases must continue for a reasonable number of subsequent years or else the Manufacturing Tax Credit gets recaptured.

For maximum effect and fairness, I would enact the same Manufacturing Tax Credit percentage for businesses of all sizes, although doubling the percentage for property placed in service in the Gulf Region. I’d make it eligible for all property placed in service, or for all manufacturing plant facilities committed to be constructed or remodeled, from now to December 31, 2010.

Also, for retail, lodging, restaurant, leisure, and rental property buildings located only in the area directly impacted by either the Gulf Oil Spill or by Katrina, new facility and facility remodelings costs incurred from now until December 31, 2010 are eligible. Further, such retail, lodging, restaurant, leisure and rental property facility costs committed to be constructed or remodeled by December 31, 2010 are also eligible. .

It would be expensive, so how best to pay for it, and also significantly reduce the US federal deficit? Nearly all pundits say this is impossible, but they lack the necessary creativity and financial savvy to understand how to wisely get there.

Well, the most dollars of tax benefit would go to large multinational corporations. This can be easily 100% paid for by the foreign earnings repatriation tax….a bit of sorely needed Backshoring.

And these multinational corps would love to get their hands on some of their cash and cash investments locked away in tax havens like Ireland…..ouch, that European financial mess. I would grant a somewhat healthy Dividend Received Deduction Percentage (perhaps 20%?) on the Foreign Earnings Repatriated used only to 100% fund this Manufacturing Tax Credit. And yeah, a large multinational corp would be eligible for this Manufacturing Tax Credit only to the extent it is 100% funded by a like amount of its foreign earnings repatriation tax.

Then the larger problem….how to pay for this for pure domestic companies, and still have enough left over to also substantially reduce the US federal deficit?

If multinational corps get their reported earnings markedly impacted negatively by this funding, they’ll do everything they can to stop this Manufacturing Tax Credit for all companies. Unfortunately, that’s a fact of life. And they are so powerful.

Here’s eleven funding sources that won’t negatively impact corporate earnings, for the most part, and should provide much more than enough to also substantially reduce the US federal deficit.

First, there’s some automatic funding from the payroll count increase requirements for multinational corps. If they don’t increase their US payroll counts, they won’t initially earn this Manufacturing Tax Credit. And if they don’t subsequently maintain these payroll count increases for a reasonable period, this Manufacturing Tax Credit will be recaptured. On the other hand, if as expected, they do increase their payroll counts and continue them, there will be a huge pickup in US individual income taxes and payroll taxes from these US payroll adds. Thus, CBO scoring has to be substantially helped by this payroll count increase requirement feature.

Second, there’s the partial deposits on open IRS tax audits of large corps. Corps already have an earnings charge on their books for this and thus there wouldn’t be any additional earnings charge to them. All these large corps would be doing is partially paying for liabilities that are already recorded on their books. The favorable CBO scoring here is also huge.

Third, there’s the closing of the many tax loopholes of Big Oil, Big Health Insurance , Big Hospital, and Big Pharma. There is a long list of these. Since these industries all played a major role in creating the 2000s Lost Decade, in all fairness, they should all kick in to help solve the country’s economic mess it is now in. Since I am only targeting closing tax loopholes for a few industries here, only a very small set of corporations/organizations would have earnings hits here from this funding.

Fourth, there’s some of the uncommitted ARRA Economic Stimulus funds that I think can be much more effectively used for this highly-effective, quick-acting Manufacturing Tax Credit. I think the uncommitted ARRA Economic Stimulus projects should be ranked for direct private sector job creation. And then the lower ranked ones should be used to fund this Manufacturing Tax Credit program.

Fifth, in all fairness, individual dividends received should be taxed at ordinary tax rates. It’s just not right for hard-working employees to get taxed at up to more than twice the income tax rate that cash dividend recipients are taxed at.

Sixth, the LIFO Inventory tax loophole should be closed for all companies above a certain size in all industries. There’s no earnings hit here. Nearly all companies now using LIFO would switch their inventory accounting. And as an added benefit, the switch out of the unrealistic LIFO accounting will result in much stronger financial statements of these companies….much higher cumulative earnings and higher equity. I wouldn’t have businesses start paying for the taxes from this switch out of LIFO until after the country is completely out of this horrible structural recession…thus start scaling it in after say three years.

Seventh, and I really like this one, a refundable tax credit on Marketing, Selling and Advertising costs incurred from now until Dec 31, 2010. To make the Manufacturing Tax Credit explosively effective in increasing the desperately needed BUSINESS DEMAND, and the resultant job creation that flows from it, businesses doing the selling of this eligible property, and perhaps even for some or all other items they sell, would get a tax credit for marketing, selling and/or advertising these products.

So where’s the funding here on this Seventh one? Well, it’s potentially massive. I would give say a 5% tax credit for the Marketing, Selling and Advertising costs incurred in the remainder of the current year, but then more than pay for it many times over, for the next ten-year CBO scoring period, by extending the life that all future Marketing/Selling/Advertising costs are to be deducted over to say one year, 18 months or even two years. I wouldn’t start extending the life until after the country is completely out of this horrible structural recession…thus start scaling it in after say three years. The positive CBO scoring on this should be off the charts. And businesses would get a very nice bump up of their reported GAAP earnings from just this, since the tax credit increases reported GAAP earnings, but the life extension is treated as a temporary tax difference. And from a fairness standpoint, many Marketing, Selling and Advertising costs incurred are in essence Investments, benefiting businesses for many, many years.

The really cool part about the tax credit on Marketing, Selling and Advertising costs is that there are infinite ways to very easily fine tune them to get the desired result. For instance, if you wanted to reduce its CBO cost, you could just allow a tax credit on Marketing, Selling and Advertising Costs over and above some base period amounts, like the way the R&D tax credit works, and then you would also have the flexibility to significantly increase the percentage tax credit. Also, if you wanted to increase the CBO favorable scoring, choosing a two-year life for amortizing these costs for federal income tax purposes would give you a monumentally higher more favorable CBO scoring than choosing a one-year life. Another way to reduce the CBO cost here is to allow, or perhaps even require, multinational corps to use their foreign earnings repatriation tax, with a related incentivized favorable dividend received deduction percentage, to be 100% funded by a like amount of tax credit for their Marketing, Selling and Advertising costs incurred.

Eighth, in all fairness, there should be some form of windfall profits tax on all of Big Oil, not just the Big 5, which everybody always focuses on, but also on all of the remainder of US Big Oil. In total, there are 20 other US Big Oil companies, which each had total profits in 2007 and 2008 combined of more than $2 bil. In the aggregate, these 20 other Big Oil companies had total profits for 2007 and 2008 combined of $90.4 bil, up an incredible 733% from profits of eight years earlier (1999 and 2000 combined) of only $10.9 bil. Included in these 20 were:

……………………Total Profits 2007-2008…..% Increase from 1999-2000
…..Transocean……………$ 7.3 bil………………………4,344%
…..Halliburton…………….$ 5.2 bil………………………1,330%
…..Schlumberger..………$10.6 bil.………………………..896%
…..Andarko Petroleum….$ 7.0 bil…………………………706%
…..Marathon Oil…………..$ 7.2 bil…………………………571%
…..Occidental Petroleum.$12.1 bil…………………………467%

The earnings hit here will be confined to just this one industry. But as a perspective on just how huge the above Big Oil earnings and earnings increases were, comparable profit numbers for the same years for the Big 3, that dominate Health Insurance, were:

……………………Total Profits 2007-2008…..% Increase from 1999-2000
…..Wellpoint……………..$ 5.8 bil……………………….1,154%
…..United Health Group.$ 7.6 bil…………………………485%
…..Aetna..………………..$ 3.2 bil.…………………………280%

Ninth, to address the devastating offshoring problem, for 2010 and going forward, I think a multinational corp, or at least a multinational corp above a certain size, should pay a US income tax for years in which its US Pretax Income Mix (i.e. as a percentage of its Worldwide Pretax Income) is clearly unreasonably low in comparison with its US Revenue Mix. To soften the blow on the hit to earnings of multinational corps here, a multinational corp should have the option of paying for this annual tax by a like amount of foreign earnings repatriation tax related to its foreign earnings repatriated, which should be given an incentivized Dividend Received Deduction. The favorable CBO scoring to the US Government on just this proposal could be off the charts.

Tenth, as a second measure to address the devastating offshoring problem, for 2010 and going forward, I think a US multinational corp, or a multinational corp above a certain size, manufacturing products in a low wage or low tax haven offshore and then subsequently selling this product back to a US customer, should pay a US tax computed as a percentage of the sales price to the US customer, with a portion of this tax being transferred to US States in some reasonable manner. To soften the blow on the hit to earnings of multinational corps here, a multinational corp should have the option of paying for this annual tax by a like amount of foreign earnings repatriation tax related to its foreign earnings repatriated, which should be given an incentivized Dividend Received Deduction. Depending upon what percentage of sales is chosen, the favorable CBO scoring to the US Government on just this proposal could also be off the charts.

And eleventh, I would creatively tweak the annual tax depreciation on certain of the longer-lived property of all multinational corps above a certain size in order to get favorable CBO scoring to the US Government for the first ten years, and at the same time, to also get aggregate positive net present value economic benefit to the corp. To achieve these two goals, I would move some of the tax depreciation from say the 6th through the 10th years to all years subsequent to the 10th year. Also, I would reduce the number of years of tax depreciation subsequent to the 10th year, thereby increasing the annual tax depreciation in those years. There would be no earnings hit to the multinational corp for this tax depreciation change. The total tax depreciation wouldn’t change, just the timing of when it is tax deducted. Depending how aggressive you want to be here, the positive CBO scoring to the US Government could be substantial.

Further, I would even consider combining some form of bonus tax depreciation for 2010 on the same property getting this new manufacturing tax credit. This can easily be designed to have no ten-year CBO scored cost. I would place some payroll count increase requirements on large multinational corps for this bonus tax depreciation too, though. For property placed in service in the Gulf Region, I would give a significantly higher first-year bonus tax depreciation than for property placed in service in the rest of the country.

I think the severely stressed State government financial coffers will be helped monumentally in the near term by most of the above proposals.

First, the large taxable dividend from foreign earnings repatriation will substantially increase state business taxable income of multinational corps.

Second, if the States are wise enough to pass legislation to include both the Manufacturing Tax Credit and the Marketing Tax Credit in business taxable income, business taxable income will be substantially further increased.

Third, States will share with the US Government in the tax on large US multinational corps, which manufacture offshore in low wage or low tax havens, and subsequently sell their products back to the US.

Fourth, States should not allow the bonus tax depreciation.

Fifth, state taxable income should increase markedly from the incentives here to increase sales and thus profits of all businesses.

And sixth, payroll counts will increase and thus States will see much higher individual income taxes.

And then in the far term, states will significantly benefit from the life extension on the Marketing costs deduction.

End result, I think this program effectively hits at the Trifecta of Crises….Gulf Oil Spill, US Joblessness and the US Federal Deficit. The clean up and economic revitalization of the Gulf Region will be dramatically accelerated. There will be strong private sector job creation all across the country. And the US Federal Deficit will be significantly reduced…..A very desirable three-fer.