By John Lott
After focusing on health care and various regulatory bills for over a year, Democrats are trying to convince voters that they do care about the economy and the high unemployment rate. With the November elections looming (only 55 days away) and Congress set to adjourn on October 8, this is the week for Democrats to push new stimulus proposals. They're doing this although we already have had the $814 billion giant stimulus package last fall and the recent $26 billion in aid for state and local government workers. The various new proposals would increase spending to well over another $200 billion.
The centerpiece of today’s speech in Cleveland is to announce changes in the tax law. President Obama may never have managed a business, but he is sure making up for that lack of experience since becoming president. He is now making lots of business decisions for hapless firms as his new stimulus bills pick what firms should invest in and what product lines will get tax subsidies.
Obama talks tax cuts, but he wants to raise the marginal income taxes that small business owners pay and then give them back some of that money only if they make business decisions that his administration approves of. Large businesses also will get tax cuts, but only if they do what the Obama administration wants them to do.
Economists advise that the best tax systems have low, stable tax rates that let businesses make decisions on how to operate. President Obama violates all these rules, with high marginal rates, temporary tax changes, and very complicated deductions that micromanage how companies operate. Whether a company is even eligible for the deductions depends on how large the company is.
In Cleveland, today Obama will announce that he will fight to make sure that tax rates go up for those making over $200,000, many of them owning small businesses. But his “Small Business Jobs Act,” which will give small businesses $12 billion in loans and "targeted" tax advantages, offers to somewhat offset these higher tax rates.
In addition, the bill creates a “Small Business Lending Fund” that lets the Obama administration make $30 billion in investments in "community banks." You won't be surprised to learnd that the Obama administration has complete discretion over who gets this money.
The president’s speech will also put forward $130 billion for expanded research and development tax credits and a 100 percent temporary business tax deduction for capital investments made before the end of 2011. On Monday, the president proposed another $50 billion in spending on "roads, rails and runways."
The problems with the "Small Business Jobs Act" are revealed in the details: both the loans and the tax cuts micromanage how companies should be run. Take the "bonus depreciation," provision which provides a 50 percent first-year depreciation. Among the lucky assets that are eligible: "Single purpose agricultural (livestock) or horticultural structures," "Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum." "sewage disposal services," and "off-the-self computer software."
The Obama administration officials and Democratic congressional leaders somehow figured out that an agricultural building that serves just one purpose deserves a deduction. But if it does two or more things, it should not be subsidized.
So, a farmer who would have built one building will now build two buildings so that they can get a huge depreciation on both. Why should larger farms, where it may make more sense to have a building that does one function, be the ones who benefit? Of course, this is all nonsensical. And so is the quick write-off for certain types of computer software but not others. And why does "sewage disposal services" deserve such special treatment?
The loans being proposed are no different. The Obama administration and Democrats are picking what type of firms will get loans and what they can get loans for. "Brick and mortar" operations get a loan "to acquire major fixed assets for expansion or modernization." Why are those particular operations singled out in the CDC/504 loan program? Why can't those loans be used to for marketing or product development? And, similarly, if you export certain products, you can get a special loan. It all sounds like pork-projects directed to certain lobbying industries.
Of course, a simple way of getting more loans to firms is for banks to be allowed to make more profits on the loans they make. They could do that by lowering tax rates. But "profits" is a dirty word to Obama and Democrats. And another way is for the government to run less of a deficit. If the government borrows less, there will be more for private firms. Besides, to encourage businesses to invest and for households to have more funds to invest, lower taxes are crucial. This all means less wasteful government spending.
These bills are filled with pork. Does anyone believe that the Obama administration won’t let politics enter into the decisions about which “community banks” will receive the $30 billion in the Small Business Lending Fund?
Alas, the chaos created by politicians rewiring the economy will stay with us. When the gravy train runs out and politically favored companies have to fend for themselves, many of the companies that are growing now will have to retrench. All this is just throwing American's money down the drain.
R. Lott, Jr. is an economist and author of "More Guns, Less Crime."(University of Chicago Press, 2010)