Why the White House Proposed Corporate Tax Reform

Posted on February 28, 2012 by Dr. David Edward Marcinko MBA MEd CMP™

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Twenty-Five Years Since Last Revision

By Children’s Home Society of Florida Foundation

On February 22nd 2012, Treasury Secretary Timothy Geithner spoke to Congress and outlined the White House proposal for corporate tax reform. Geithner noted that there has not been a comprehensive corporate tax reform for 25 years. Since the last major corporate tax reform, there have been many significant events. These include the following changes.

  1. Internet is widely used.
  2. Cell phones are now common place.
  3. China and India have become significant economies.
  4. Global trade has greatly expanded.
  5. Nearly all other industrial societies have lowered their corporate rates.

The Five Elements of Reform

  1. Reduced Rates – The elimination of tax loopholes and subsidies will permit a reduction of the corporate tax rate from 35% to 28%.
  2. Manufacturing Incentives – The effective tax rate for manufacturing companies will be reduced to 25% through incentives.
  3. International Taxation System – Companies could pay penalties for shifting income overseas.
  4. Simplification – Small businesses would benefit from reduced complexity in the Tax Code.
  5. Revenue Neutrality – The reduced rates are achieved through eliminating various tax deductions.

Assessment

Treasury Secretary Geithner indicated that he plans to meet with Senate Finance Chair Max Baucus (D-MT) and House Ways and Means Chair Dave Camp (R-MI). He hopes that it will be possible to build a bipartisan consensus for corporate tax reform.

Editor’s Note: Sen. Baucus and Chairman Camp have been holding hearings and proposing corporate tax reform for the past year. With the White House announcement, that the President, the House and the Senate agree that there should be simplification and a lower corporate top rate. The challenge will come when the government grapples with the question of which major corporate deductions (such as bonus depreciation) will actually be removed in order to lower rates. Because of the magnitude of major tax reform, it is not likely that an actual bill could be passed before 2013.

Conclusion

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US Reaches Debt Limit

Posted on May 16, 2011 by Dr. David Edward Marcinko MBA MEd CMP™

May 16th 2011 Deadline

By Children’s Home Society of Florida Foundation

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In February of 2010, the federal debt limit was set by Congress at $14.294 trillion. Treasury Secretary Timothy Geithner indicates that the United States will reach that debt limit on May 16th, 2011. Through various internal borrowing strategies, Secretary Geithner believes that there will not be an actual default on U.S. bonds until August 2nd, 2011. However, the Federal Government may face funding problems by late July if there is no expansion of the debt limit.

Three Sets of Negotiations

Facing a serious economic problem if the debt limit is not expanded, there are at least three sets of negotiations underway in Washington.

  • First, the “Gang of Six” Senators from both parties are still attempting to move forward with a bill that implements the recommended solution by the 2010 Presidential Fiscal Commission.
  • Second, at the request of President Obama, Vice President Joseph Biden is meeting with House and Senate leaders of both parties.
  • Finally, Senate Majority Leader Harry Reid (D-NV) disclosed this week that Senate Budget Chair Kent Conrad (D-ND) has prepared a new proposed compromise plan. The proposal by Sen. Conrad is to increase taxes in an amount equal to the budget cuts. In effect, the proposal is 50% tax increases and 50% budget reductions.

The Skeptics

Minority Leader Mitch McConnell (R-KY) was skeptical that the “Gang of Six” plan would succeed. He stated, “With all due respect to the Gang of Six or any other bipartisan discussion going on in this issue, the discussions that can lead to a result between now and August are the talks being led by Vice President Biden.”

House Speaker John Boehner (R-OH) spoke May 9th to the Economic Club of New York. He indicated that tax increases were not acceptable and that the deficit plan should instead focus on spending reductions.

In response to the comments by Boehner, White House Press Secretary Jay Carney suggested that the Speaker is “holding the US economy hostage.” Press Secretary Carney indicated that there needs to be flexibility in order to produce compromise.

Assessment

Majority Leader Reid continued the discussion later in the week and noted that it would be essential to have some tax increases. He stated that it “can’t all be done with spending cuts.

“House Majority Leader Eric Cantor (R-VA) is part of the discussion group with Vice President Biden. He indicated that he cannot disclose the specifics of the negotiations. However, in his view, House Republicans continue to support the spending reduction plan introduced by Rep. Paul Ryan (R-WI).

Editors Note: Your editor and this organization take no specific position on these comments. It is widely expected that the discussions on increasing the federal debt limit will lead to a compromise before the August deadline. The Republican negotiators continue to seek a solution that involves spending cuts. It now appears that Democratic negotiators are moving to a proposal with 50% tax increases and 50% budget reductions. Final negotiations are likely to produce a result that reduces federal spending and may include tax increases.

Conclusion

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Tim Geithner and Harry Reid Support Top Tax Rate Increases

Posted on August 5, 2010 by Dr. David Edward Marcinko MBA MEd CMP™

Obama Plans to Increase Top Two Tax Brackets

By Children’s Home Society of Florida Foundation

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On a national media program on July 25, 2010, Treasury Secretary Timothy Geithner emphasized that the Obama administration plans to increase the tax rates for the top two brackets. When asked whether the 2001/2003 tax reductions should be extended for all brackets, Secretary Geithner stated, “I don’t believe they should and I don’t believe they will.”

New Top Rates

In the view of Secretary Geithner, the increase of the top two rates to 36% and 39.6% affects only “2% to 3% of Americans, the highest-earning Americans in the country.” He suggested that the increased rates on top earners will not have a “negative effect on growth.”

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Steny Speaks

House Majority Leader Steny Hoyer (D-MD) agreed with Secretary Geithner. He advocated extending the tax cuts for middle-income taxpayers and remarked that their taxes are “lower than they were in any single year” when compared to prior administrations. However, in his view, the increase in the top two brackets is necessary to keep America from going “deeper into debt.”

So Does Orrin

Sen. Orrin Hatch (R-UT) is a member of the Senate Finance Committee. He spoke on the floor of the Senate and expressed frustration over the decision by Majority Leader Harry Reid (D-NV) to refuse to allow a vote on the Hatch proposal to extend all of the tax cuts. Sen. Hatch offered a motion to commit the pending small business bill back to the Finance Committee in order to amend it and extend all of the tax cuts.

Sen. Hatch indicated that this “largest tax increase in history” will dramatically impact small businesses. These businesses, with between 20 to 500 workers, are owned by individuals who face substantial tax increases.

In the view of Sen. Hatch, the top bracket tax increases will reduce the ability of small business to perform its normal function during an economic recovery of generating 70% of new jobs. Sen. Hatch noted that new jobs typically have three components.

Assessment

First, there must be entrepreneurs who are willing to take risks. Second, there must be adequate access to capital. He indicated that the banks and large companies currently hold record amounts of cash reserves, so there certainly is cash available. Third, there must be “reasonable economic certainly” so that the businesses are willing to expand. With the prospect of higher taxes and greater regulations, Sen. Hatch indicates that there is a high level of uncertainly that is directly reducing job growth in America.

Conclusion

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Should the Government Mandate 401(k) Annuities?

Posted on May 10, 2010 by Dr. David Edward Marcinko MBA MEd CMP™

About the Guaranteed Retirement Accounts Proposal
By Robert Giese
bob.giese@chsfl.org

Recent hearings in the House and Senate have focused on the need for 401(k) and IRA accounts to provide better retirement income. Vice President Joe Biden referred to these discussions in the White House Task Force on the Middle Class. He suggested creating “Guaranteed Retirement Accounts [GRAs].”

The guaranteed retirement accounts may replace conventional 401(k)s and could eventually provide annuity income to individuals.

Response to GAO Report

In response to a White House request, the General Accounting Office (GAO) released a report on April 28, 2010 that discussed some of these retirement issues. The GAO noted that a couple age 62 has at least a 47% probability that one of the two spouses will live to age 90. While life expectancy is in the mid-to-late 70s when one is born, the age at maturity increases as we grow older. Therefore, the average retirement age couple in America has a reasonable prospect that the survivor will live to be age 90.

GAO reports that Social Security is the primary support for lower income retired Americans. For the median retired person, Social Security is expected to provide approximately 47% of retirement income. The balance will come from savings or investments, a qualified plan such as a 401(k) or IRA and retirement earnings from employment.

Better than Conservative Investments?

The GAO report notes that an annuity may provide more income than a conservative investment, such as a bond or CD.

Assessment

Republican lawmakers this week wrote a letter to Treasury Secretary Timothy Geithner and expressed concern about the guaranteed retirement accounts. They noted that a number of the witnesses before the various committees would “dismantle the present private-sector 401(k) system” and replace it with the GRA.
Their letter expressed concern and opposition to any effort to “nationalize” the 401(k) system. The Republican lawmakers continued by noting that over 90% of households have a favorable opinion of 401(k) or IRA accounts.

Conclusion

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Behind the Financial Reform Push

Posted on April 18, 2010 by Dr. David Edward Marcinko MBA MEd CMP™

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Of Worries on Warring Regulators

By Jeff Gerth, ProPublica – April 14, 2010 12:07 pm EDT

Backers of financial regulatory reform are gearing up for the final stretch in a yearlong effort to construct a new, streamlined architecture. But, recent reports and testimony about the financial crisis suggest a crucial ingredient in any new structure is in short supply: cooperation among the watchdogs.

Office of Thrift Supervision

A proposal to eliminate one regulator seen by many as particularly weak—the Office of Thrift Supervision—could alleviate some friction. A soon-to-be-released federal examination of the Washington Mutual collapse found that OTS resisted efforts by a more skeptical regulator, the Federal Deposit Insurance Corporation, to take a closer look at WaMu, according to an account in The New York Times [1].

Reform legislation pending in the Senate [2] (PDF) would also create new agencies, including a financial stability council to assess risk and a consumer protection watchdog. To work as envisioned, the agencies would need new levels of information sharing and decision making. By contrast, history suggests agencies can be stingy with what they know and eager to point blame at sister regulators.

Fall of the House of Lehman

Lehman Brothers, the investment bank that collapsed in September 2008, presents a case in point.

A lengthy examiner’s report [3] for the judge overseeing Lehman’s bankruptcy found that the Federal Reserve Board and the Securities and Exchange Commission kept crucial data from each other even though they had “overlapping” functions. The heads of the Federal Reserve and the SEC reached a formal sharing agreement in July 2008, but the two regulators “did not share all material information that each collected about Lehman’s liquidity.”

SEC Queries

The SEC, asked by the Federal Reserve Bank of New York to provide data on Lehman’s commercial real estate exposure and liquidity, “affirmatively declined to share” the information because it was still in draft form, the bankruptcy report found. The reserve bank never turned down an information request from the SEC, but bank officials “did not perceive any duty to volunteer” information about a $7 billion shortfall in Lehman’s liquidity they uncovered in August 2008.

The reason? The report says it was “because the SEC did not always share information” with them. One official at the Federal Reserve Bank of New York told the examiner “there was not a warm audience” for information sharing between the New York Fed and the SEC.

Lehman fell under the scrutiny of the Fed after it was allowed to tap Fed lending facilities, normally reserved for banks, in the spring of 2008.

Oh … the Irony

Ironically, examiners at the Office of Thrift Supervision, which regulated Lehman’s bank subsidiary, concluded in July 2008 that Lehman had violated its own risk limits by placing an “outsized bet” on commercial real estate. But, the OTS appears as a bit player in the autopsy of Lehman’s collapse; top Federal Reserve officials “considered the SEC to be Lehman’s regulator,” the bankruptcy report found.

One of those officials, Timothy Geithner, was president of the Federal Reserve Bank of New York from 2003 until early 2009, when he became secretary of the Treasury. Shortly after he joined the cabinet, Geithner was asked by a senator about the Fed’s supervisory responsibility [4] in connection with the collapse of institutions like Lehman and the insurance giant AIG.

“I just want to point out,” Geithner told the Senate Finance Committee, “the Federal Reserve was not given responsibility for overseeing investment banks, insurance companies, hedge funds, non-bank financial systems that were a critical part of making this crisis so intense.”

networking_0

Fed Responsibilities

The Fed is responsible for supervising bank holding companies, such as Citigroup. Those holding companies include investment banks and, as a sister regulator quietly pointed out last week, the Fed shared responsibility with the SEC for overseeing the risky practices of Citigroup’s broker dealer.

John C. Dugan, who oversees nationally chartered banks as comptroller of the currency, told the Financial Crisis Inquiry Commission [5] (PDF) last week that most of the problems that led to a massive bailout for Citigroup took place under the umbrella of the weaker holding company regulated by the Fed—not at Citibank, the banking subsidiary under Dugan’s authority.

Most of the losses, Dugan said at the end of a lengthy report to the commission, were in subprime lending, leveraged loans and the structuring and warehousing of CDOs (collateralized debt obligations) that are supervised, either all or in part, “by the Federal Reserve.”

Geithner has acknowledged [6] that he could have done a better job of supervising Citigroup during his tenure at the New York Fed.

Assessment

If the Senate bill becomes law, Geithner would sit atop the new financial stability council, whose members will include representatives of several different agencies—including the Fed, the SEC and the Office of the Comptroller of the Currency.

Conclusion

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