Basis Point

Jim Rickards with Great Insight on the G-8 This Morning on CNBC

Fox News Appearance Today

A debate between Democrat Kelly Bingel and me on the future of the Republican politics from Fox News Channel this morning.

NY Times Gets it Right on Obama Tax Plan

In a post yesterday on Obama's tax plan, I argued that the Administrations proposals to limit the ability of U.S. companies to defer foreign income and restrict the use of credits for foreign taxes paid will hobble the competitiveness of U.S. firms and may end up costing jobs rather than saving them.  The NY Times expands on this point in a well-reasoned op-ed today critical of the Obama tax plan:

One of the most controversial proposals would delay deductions against overseas profits until those profits are brought back to the United States. In theory, that makes perfect sense, because matching deductions and income in the same year is a fundamental principle of United States tax law.

In practice, applying the matching principle to overseas operations could put American companies at a competitive disadvantage to foreign companies that do not face United States tax laws. It could even impede job creation in the United States — exactly the opposite of what the Obama administration intends. That’s because some of the expenses incurred in generating foreign profits are for support jobs in the United States, like human resources and accounting positions. If companies cannot write off those employment expenses in the year they are incurred, they may move the jobs overseas.

If you want to reduce tax avoidance, the best solution is a simpilar tax system that abandons the tangle of deductions and credits that distort economic decisions and provide opportunities for gamesmanship.  If President Obama wants to make a real contribution to addressing this problem, he would be better served to set his Treasury to work untangeling the maze of counterproductive tax preferences  accumulated through decades of (usually) well-intentioned tinkering with the tax code. 

Underdogs and the Republican Reboot

Interesting post by my friend Alex Conant today expanding on Malcolm Gladwell's essay on underdogs in The New Yorker.  Alex writes:

The piece credibly argues that underdogs can substitute effort for skill by playing within the literal rules rather than social norms, and stretching out the playing field as much as possible rather than attacking the opponent head-on.

Gladwell focuses on basketball and war, but I think you could also apply the theory to explain Barack Obama’s win over Hillary Clinton for the Democratic nomination...The theory is also encouraging for Republicans, many of whom see a long and uphill road back to power against a more powerful and better organized Democratic Party. But as Gladwell reminds us, the only thing standing between underdogs and victory is hard work and innovative thinking.

I was most struck by that last insight: "the only thing standing between underdogs and victory is hard work and innovative thinking."  Therein lies the key hurdle for Republicans.  Republicans are working hard, as anyone on Joe Pounder's email list can attest.  They are also taking steps to better organize and develop ideas as a credible opposition.  The National Council on a New America effort being spearheaded by Rep. Eric Cantor and others is a step in the right direction.

While Obama's political skills and approval ratings present Republicans seeking to rebuild the party with daunting obstacles, history gives a measure of comfort.  Even the greatest Presidents don't stay on top of the world forever.  George Washington weathered a bruising political battle over his support of the Jay Treaty, a treaty with Great Britain that was vehemently opposed by Thomas Jefferson and his supporters.  The issue provided the political steam that transformed the Jeffersonian movement into the Republican Party and created the first party system in the U.S. with Hamiltonian Federalists and Jeffersonian Republicans vying for political power.  It sometimes takes only one issue to catalyze support for the underdog and give birth to a real movement.  

As dark as things may seem for Republicans, like George Washington and all Presidents before him, Mr. Obama will reveal chinks even in his formidable armor, prompting voters to ask if there might be a better way.  When voters start asking this question, an effective opposition party must be ready to answer with a coherent competing vision for the future of the country.

There are opportunities for Republicans.  The Administration’s lack of substantive follow-through on promises of fiscal responsibility will not sit well with voters over time.  Rhetoric and a compliant press can’t paper over this reality forever.  Additionally, the financial rescue, while grand in scale, has been far from flawless in execution.  Finally, the undertow from the left will inevitably drag the Obama administration towards out of the mainstream policies.

The distance between the wilderness in which the Republicans now find themselves and success as a newly ascendant party will be measured by the strength of the alternative ideas they present to the American public.  The Republican brand is badly damaged, but it’s not broken beyond repair.  Rebuilding will be a struggle, but that’s what it means to be an underdog.

More on Obama's Overseas Tax Plan from Greg Mankiw

Greg Mankiw posts an analysis from Harvard's Mihir Desai on overseas taxation that concludes, "modern welfare norms that capture the nature of multinational firm activity recommend a move toward not taxing the foreign activities of American firms, rather than taxing them more heavily."

Obama’s Foreign Tax Proposal and the Law of Unintended Consequences

We’re still waiting to learn the exact details of the Obama Administration’s new offshore tax proposal.  But, from what I’ve seen so far, my “law of unintended consequences” alarm is flashing red.  Some of these changes may undermine the ability of U.S. companies to compete overseas.

For years, the political class has derided some of our foreign tax rules as rewarding offshoring.  At question is an aspect of the U.S. tax code called deferral.   Deferral allows U.S. companies to defer U.S. taxes on foreign-sourced income until that income is returned to the U.S. or “repatriated.”

That all sounds like tax-avoidance -- but, there’s a good reason for this.  Most of our foreign competitors operate under a “territorial” system of taxation that does not tax income earned outside the home country.  The U.S., on the other hand uses a system of global taxation that taxes income of U.S. domiciled firms wherever it is earned on the globe.  This puts U.S. companies at a disadvantage when operating overseas.  To correct this, the U.S. tax code allows U.S. firms to defer income earned overseas and gives tax credits for taxes paid in other countries.  This helps to level the playing field somewhat. 

Reducing the ability to defer foreign income and take advantage of foreign tax credits further hobble the competitiveness of U.S. firms globally.  The U.S. already has the highest tax rate in the world.  These measures, which claim to encourage keeping jobs in the U.S., may have the opposite effect.  The tax disadvantages of headquartering business in the U.S. are fast approaching a tipping point that will undermine the very jobs Mr. Obama hopes to save. - Taylor Griffin

Grading Obama's Press Conference

Discussing President Obama's press conference on Fox News Channel earlier this week (and looking a bit grim), I gave the President a B-minus.  He was very strong on the style.  The President is really coming into his own at the podium.  He was crisp, clear, and confident.

However, the budget is becoming a gigantic albatross hanging around the President's neck, a fact that came through clearly in Tuesday night's press conference.  In dealing with the budget issue he fell short.  While his rhetoric was good, he hasn't done enough yet to gain real credibility on fiscal responsibility.  By not putting up a fight on the thousands of earmarks in the omnibus spending package he signed last month, President Obama missed a real opportunity.  HIs explanation that it was the previous Congress' bill just doesn't hold water.  He is the President and people hold him responsible.  He has a veto pen, and a surprising number of people (Nancy Pelosi not among them) would have liked to have see him use it.

Next time he gets the chance  on earmarks, he should take on Congress in a meaningful way.  It may cause a showdown with Congress, but its a showdown he can win.  The American people will be with him all the way.

Tony Fratto's Take on the White House CEO Meeting

 Tony Fratto has a smart (and sort of poetic) take on Obama's meeting with White House CEOs today on CNBC.com.

President Obama can set aside (but not bury) the hatchet with Wall Street by emphasizing the Administration's goal of full participation by the banks, and by committing to watching their backs should congressional anger management be necessary.

By hosting this meeting, the White House is also fully employing the power of the Office of the President. They know that the CEOs, upon exiting a meeting with the President of the United States and with the West Wing as backdrop, are guaranteed to utter only warm and sunny tones in harmony with the sun-dappled White House on this fine spring morning.   LINK

 

Obama and the CEOs

Last week's rage-fest over AIG bonuses brought the antipathy between Wall Street and Washington to a boiling point.  As angry as Washington may be at Wall Street and as suspicious as Wall Street has always been of Washington, to address the incredible challenges presented by the financial crisis, the two have to work together.  This opening of dialogue is an important demonstration that the President understands that Washington can't do this alone.  The new issue of The Economist features a photo of a pensive President Obama under the headline, "Learning the Hard Way."  He may be learning the hard way, but he is learning. - Taylor

CNBC has the story here.

TRANSCRIPT: Jamie Dimon on CNBC

JP Morgan's Jamie Dimon talks to CNBC's Erin Burnett about today's meeting with President Obama.  Here's the transcript: