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Thursday, November 27, 2008

The Politics and Policy of Bailouts and Corporate Tax Cuts

The other day, when speaking to a liberal colleague, I laid out plan for an economic stimulus and recovery. The plan is mostly a set of tax cuts including tax cuts to corporations. My colleague mostly liked the plan except the part where taxes were cut for corporations. Initially, he characterized these tax cuts as a bailout. Of course, I protested furiously. A corporate tax cut is in no way a bailout. Then, he said he was against giving fat cat corporations money. Again, I protested furiously. I wasn't proposing to give anything to anyone. A corporate tax cut would allow corporations to keep more of what they have already earned. My colleague next protested that corporations couldn't be trusted to do what's right with such a tax cut.

This conversation crystallized in my mind the dichotomy between the politics and policies of corporate tax cuts and corporate bailouts. Throughout the campaign, Barack Obama demonized corporate tax cuts proposed by John McCain as tax cuts to fat cat corporations like Exxon. Yet, as soon as the bailout was proposed, Barack Obama was quick to embrace it. As such, Barack Obama is against allowing fat cat corporations to keep more of what they earn while he is perfectly comfortable giving fat cat corporations someone else's money. Worse than this, these perverse dual policies worked to perfection as part of a successful campaign.

How does such a thing occur, and more than that, what are the policy consequences? Bailing out struggling corporations has a populist political angle. Eric Cantor lays out the political angle of supporting the bailout when he referred to the banks as a sort of utility that funds the day to day operations of businesses, consumers, and most everyday activity through their lending. A bailout is necessary because the commoner will soon feel the effects of a lack of a bailout when they get a car loan, student loan, or mortgage. A similar political angle is in play with a bailout for automakers. Those that support such a bailout bemoan the fact that autos are a fabric of our society and that they provide jobs in one way or another to one in ten Americans.

A corporate tax cut, on the other hand, rewards those corporations that are already successful and in need of no help. It's almost impossible to create a populist angle to a corporate tax cut. The benefits of a corporate tax cut are largely invisible. They are almost always created on a macro scale. In order to believe a corporate tax cut would be worthwhile, one needs to believe that corporations would use the extra money in a good and beneficial manner. That would require viewing corporations in a positive manner. Such a perspective gets politicians absolutely no favors and even fewer votes.

Yet, the policy behind a corporate tax cut is on much firmer ground than the policy behind a corporate bailout. First, you would be rewarding success not failure. Second, a corporate bailout requires oversight and strict accounting of the money. A corporate tax cut requires none of this because corporations would simply keep more of their money. In this environment, a corporate tax cut is exactly the right medicine. By giving successful corporations more of their own money, they will have more money to hire all those folks that will lose jobs from failed corporations. Rather than trying to prop up failed corporations in a desperate attempt to maintain jobs in a losing endeavor, you reward successful corporations so they have more capital to hire as many of these folks as possible.

Of course, in our current environment such a plan is likely impossible. That's a shame. The Bush tax cuts cost 1.3 trillion Dollars over ten years. The bailout has cost $700 Billion already. Another $100 billion and counting is going strictly to AIG. We still haven't counted Citigroup, the autos, or Barack Obama's promised bailout. We could approach $2 trillion in bailout money. A corporate tax cut would cost one tenth as much. It would also be far more effective because it would target those entities with a history of using money effectively. The politics, however, forces weak kneed politicians, charlatains, and demagogues, to propose policies with far more lucrative politics, even though its likely their policy effects will ultimately be counter productive.

1 comment:

Anonymous said...


Likewise, I have also gone blue in the face trying to explain the potentially disasterous consequences of the BHO policies on Education, Healthcare and Energy. Basically, in all three speres, the stated BHO policy is to penalize the providers and subsidize the users. This cannot work!

If you want to see the fate for all three industries, look at today's mortgage industry. It will eventually implode.