Sunday, November 7, 2010

One Idea for the New Congress

Last week's mid-term elections, which were a landslide for Republicans nationwide, have essentially turned the domestic political landscape upside down.

Rather than holding a massive 77-seat majority in the House, the Democrats now find themselves outnumbered by perhaps 51 seats in the aftermath of a crushing 64-seat swing in the mid-terms.  And instead of a comfortable 18-seat majority in the Senate, the Democrats now cling to just a six-seat edge, not meaningful enough to force passage of any legislation that is even remotely controversial with the constituents of Senators in close re-election battles in 2012.

There are dozens of opinions about the explanations for last week's election results -- some on the Left see it as a failure of the Democrats to communicate with the voters, many on the Right see it as a loud referendum on the Obama-led policy agenda -- but of course the only objective data we have to work with are the exit polls themselves.  According to what the voters reported to the pollsters after they cast their ballots, there was one overwhelming issue (69% cited Jobs) and one peripheral issue (18% cited Health Care), with all others being relatively minor factors.

So, after all the dust of the last year settled -- all of the name calling and finger pointing came to an end -- the election once again came down to the simple fact that unemployment remains high and the party in power was dealt a blow on Election Day.  And once again, it was Independent voters who dealt the decisive blow, with Republicans winning the Independent vote by a massive 18 points.

Alas, before the week was out, we had graphic reminders of two challenges we face as a nation in the pursuit of arete in public life.  First, our politics are still very polarized by the absence of a "middle" in Washington.  Many of the newly elected Representatives ran extremely partisan campaigns, with full-throated calls for "no compromises" in the work they'll strive to do in the Congress.  This does not give one reason to be optimistic about bipartisanship in the next term.

Second, our media continues to feed on the worst impulses of point scoring, at the expense of reason.  This week, conservative talk show hosts (Rush Limbaugh, Sean Hannity et al), blogs and even elected officials (Rep. Michelle Bachman) were whipped into a frenzy over their stunning discovery that President Obama's trip to India was costing taxpayers roughly $200 million per day and was forcing a redeployment of dozens of Navy warships into the region.  There was just one problem: it wasn't true.  It was an absurd story based on a report from one Indian news agency, which quoted an anonymous source in India, but it became so widely reported here that federal officials in both the Secret Service and the Pentagon felt compelled to break with their policy of "no comment" on these matters in order to dismiss the insanity of the report.  This latest example of media outlets run amok also does not bode well for building bridges of sanity in the next two years.

Despite the many reasons to be pessimistic about the potential for cooperation between the two major parties in the next two years, I believe there are some very specific ways that we can and will see progress made.  There are a couple reasons for this optimism, including the basic economic fact that we are now seeing more positive data on jobs and private sector profitability, but also because the 2012 presidential campaign is going to require those who are running to point to accomplishments -- voters aren't typically inspired by politicians who are running against someone else's agenda, they want to hear a positive vision for what a candidate wants to achieve.  In other words, the party that can get the most done -- as opposed to the most stuff blocked -- will be better positioned with the voters the next time around.

In that spirit, I think there is a giant issue right in front of both parties that is screaming for bipartisan support and would have a significant impact on economic progress in the U.S.  It's a bit obscure, but it's very real.

The U.S. has an unusual tax policy that treats corporate income earned by foreign business interests (e.g., a U.S. company that makes money from the business it conducts in Europe) as income that must be "repatriated" to the U.S.  In the process, that income is taxed at a federal rate of 35%, which stands in stark contrast to the tax policies of almost every other developed country in the world -- including our friends in Canada, Germany, France, the U.K., Italy, Japan, Australia and Russia.  Those countries tax repatriated corporate earnings at rates between Zero and 2%.

There was good reason for this in times past, when the global economy was less interdependent and the federal tax policy was designed to incentivize domestic investment ahead of foreign investments.  But those days have passed us by -- we live in an era where access to capital from anywhere in the world is a good thing for our economy.  For those on the Left who dispute this axiom, I encourage them to study who has been buying hefty chunks of American debt in the past decade, enabling us to fund the Iraq War and the massive deficit spending inside the U.S.

Many experts estimate that there is roughly $1 trillion in earnings that American companies have sitting in their foreign operations that could be repatriated to the U.S. if the tax penalty weren't so severe.  That's money that could be invested in U.S. jobs, purchase of commercial real estate assets, research and development, etc.  I'm not naive enough to believe that these corporations would reinvest all of the dollars they could bring back to the U.S. -- those who believe in "trickle down" economics have a hard time finding any evidence to support the idea that corporate executives are fueled by generosity of spirit -- but it's inevitable that more dollars on the balance sheets of corporations would trigger additional investment in the U.S. economy.

Moreover, by imposing a small federal tax on repatriated earnings (3% 5%? 10%), we could generate tens of billions of dollars in tax revenue.  That's good for the U.S. Treasury at a time of staggering deficits and a slow recovery that is not replacing tax revenue into the federal coffers as quickly as needed to pay the bills we have in Washington.

Increasing corporate investments into the U.S. economy, increasing private sector hiring and increasing tax revenues into the Treasury ought to be three goals on which everyone in Congress can agree.  Slashing the tax on repatriated corporate income seems like a pretty good place for them to start working together in 2011.

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