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Larry Kudlow: The Road to Economic Demoralization
There’s no question that current government policies for taxes, spending and regulation are causing the United States to lose competitiveness in the global race for capital, prosperity and growth.
Of course, China has been moving in the direction of free-market capitalism for years. To some extent, this shows the positive benefits of America’s free-trade policies and its open-mindedness in helping nurture not only Chinese growth, but also middle-class prosperity worldwide.
But what’s particularly galling about Obamanomics is that we may well be losing our competitive edge with Europe. While Europe is ever so slightly moving toward Ronald Reagan and Margaret Thatcher, the United States is shifting toward an overtaxed and overregulated model that smacks of Francois Mitterrand. That’s something no one should want to tolerate.
Heavy government controls at home, along with an income-leveling social policy couched in economic-recovery terms, is no way to run a railroad. At the simple stroke of a computer key, world investment flows to its most hospitable destination. That includes a reliable currency. But in President Bush’s last year and President Obama’s first, the United States has become a less hospitable destination for global capital. That should worry everybody.
But let’s first look to the China story.
We know that China is already our principal banker, to the tune of nearly $1 trillion. As President Obama’s record spending and borrowing continues — he’ll be the greatest bond salesman in U.S. history — our financial reliance on China grows daily. But that’s not all.
Fortune magazine recently reported that the number of U.S. companies in the world’s top 500 fell to the lowest level ever, while more Chinese firms than ever made the list. Thirty-seven Chinese companies now rank in the top 500, including nine new entries. Meanwhile, the number of U.S. firms has fallen to 140, the lowest total since Fortune began the list in 1995. This is not good.
China also surpassed the United States as the world’s biggest automaker in the first half of 2009, with June sales soaring 36.5 percent from a year earlier. The Chinese registered 6.1 million car sales for the first half of the year. That way outpaced U.S. sales, which were only 4.8 million.
And China has no capital-gains tax. It has only a 15 percent to 20 percent corporate tax. The United States, on the other hand, is raising its cap-gains tax rate to 20 percent. It’s also increasing its top personal tax rates.
In fact, the scheduled income-tax hike along with a much-discussed 4 percent health-care surtax will balloon the top U.S. tax rate all the way to 51 percent. And there’s more. In order to finance so-called health-care reform, congressional Democrats are now talking about raising the tax rate on capital gains and dividends by another 1.5 percent, while installing a value-added tax (VAT) that would begin at 1.5 percent.
So top tax rates in the United States may edge into the mid-50 percent range. Compare that with the Organization for Economic Cooperation and Development average of only 42 percent. And when those tax hikes kick in, the top U.S. tax rate will rank above that of France, Germany and Italy. That can’t be good.
Incidentally, our 40 percent corporate tax rate is already nearly 15 percentage points higher than the corporate rates in most of Europe.
Washington’s enormous expansion of the state-, local- and federal-government spending share of gross domestic product to more than 40 percent — including Bailout Nation, TARP and takeovers in numerous industries — is eerily reminiscent of Old Europe’s old policies. And in an ironic twist, Europe seems to be moving toward a lower tax-spend-and-regulate, Reagan-type approach, while the United States is regressing to the failed socialist model of Old Europe. This makes no sense.
Higher tax rates undermine the incentive model of growth. At the margin, investment risk and work effort become less rewarding. On top of this, Obama’s regulatory moves toward greater government control of the economy will further drown animal spirits in a sea of red tape born of bureaucratic officialdom.
Think about this in terms of the threat to nationalize heath care, which is more than 15 percent of the economy. Additionally, Washington’s cap-and-trade proposals essentially will nationalize the entire energy sector — another 15 percent of the economy — sending long tentacles into every nook of the economy that’s impacted by energy, which is virtually everything.
And all this comes on top of the U.S. government’s takeover of auto companies, banks, AIG, Fannie and Freddie. Instead of Schumpeterian gales of creative destruction, we’re on the road to economic demoralization.
Here’s the clincher: Year-to-date, Dow Jones stocks are off 8 percent, while China stocks are up 71 percent. The world index is up 4 percent. Emerging markets are up 25 percent. They’re all beating us. None of this is good.
We’re going the wrong way. That’s why stock markets are not voting for the United States any more.
— Larry Kudlow is the founder and CEO of Kudlow & Co. LLC, an economic research and consulting firm in New York City, and host of CNBC’s Kudlow & Company. Click here for more information, or click here to contact him.
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» on 07.11.09 @ 06:31 AM
Larry once again please do your homework. Eventhough the corporate tax rates are relatively high in America, the actual tax payment rate is one of the lowest in the world due to various tax shelters,offshoring, write-offs and other tricks. This is also true with the payout rate of the top income population in America. Tax codes in other countries are much more straight forward in that the rate is what you pay with no tricks and no creative accountants to find the loopholes.
As far as the government taking over various companies, this would have never happened had there been proper regulations, oversight, visiblity and enforcement. Unfortunately, we need the government to look over the shoulder of capitalism because there are too many that will take advantage of the existing rules, cheat and steal to make millions. Just look at the financial products division of AIG, the offshoring of undisclosed accounts by UBS or Bernie Madoff as prime examples.
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» on 07.11.09 @ 09:59 AM
For heading the wrong way, look at the Bush administration, which followed Kudlow’s thinking. Larry Kudlow has yet to be right about anything.
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» on 07.12.09 @ 12:05 AM
Interesting that the one area of government spending that Mr. Kudlow neither mentions nor criticizes is military spending - the biggest drag on our economy because military spending is a complete waste - virtually nothing produced by the military-industrial complex contributes to civilian uses or adds value to our economy, and only a small fraction of the population benefits from military spending; moreover, cost-plus military contracting, with all its inefficiencies, has been proven to have a corrosive effect on the U.S. economy as a whole. http://www.njfac.org/us8.htm
“Wrong Again” has it right about the tricks that corporations pull to avoid paying taxes. In my view, the traitorous actions of the super-rich and mega-corporations in hiding assets in offshore shell corporations is the problem, not spending on programs that put people back to work. http://jimhightower.com/node/6862
John Douglas
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» on 07.12.09 @ 10:04 AM
Been there, done that, got us to where we are today, don’t like 16.5 percent unemployment (u6)!
Dwight Eisenhower had higher taxes with a growing real wage. He also had a high degree of trade protection (tariffs) which prevented the outsourcing of jobs.
Producing jobs with lower taxes gets only low wage jobs. Besides what is the difference between government taking money out of the economy in the form of a tax and government taking money out of the economy in the form lower taxes but more borrowing?
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