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Thursday, February 23, 2012

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Economic Events of the Week

Thursday – Jobless Claims, EIA Petroleum Status Report
Friday – Consumer Sentiment, New Home Sales

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Story of the Day
The President’s Buffett Rule is Vaporware (KeithHennessey.com)

Washington Update
Inside Obama’s Framework for Business Tax Reform (TaxVox)
SEC May Ticket Speeding Traders (Washington Post)

Market Talk
Housing Takes Another Step Out of the Cellar (Real Time Economics)
Tax Breaks: A Primer (Economix)

Editorials & Opinions
A Tax Reform to Restore America’s Prosperity (Mitt Romney in Wall Street Journal)
The Panic of 2008 Revisited (John Taylor’s Blog)
Fannie-Freddie Regulator Has Sober Plans (Washington Post Editorial)
Romney’s Tax Reboot (Wall Street Journal Editorial)
How to Tax US Companies’ Foreign Profits (Robert Pozen in Financial Times)

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Story of the Day

The President’s Buffett Rule is Vaporware (KeithHennessey.com)

The President has not actually proposed a tax policy that fits his Buffett Rule principle.  Neither his budget nor the tax proposals released by Treasury include any policy specifics to establish a new minimum 30% tax rate for those with income > $1M. Treasury released 200 pages of proposed tax policy changes, including obscure things like repealing the preferential dividend rule for Real Estate Investment Trusts. They did not release specifics to accompany the one tax policy change the President talks about almost every day (and twice yesterday). It’s OK to call on Congress to enact a policy that you describe only through broad-based principles. But when you do this you cannot also claim “We won’t be adding to the deficit.”  The only way you can legitimately make such a claim is if you offer a specific proposal to back it up.


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Washington Update

Inside Obama’s Framework for Business Tax Reform (TaxVox)

Here’s what I love about President Obama’s Framework for Business Tax Reform: His diagnosis of the problem is spot on. In just a few pages, the Treasury Department does a marvelous job describing what’s wrong with the way the U.S. taxes business. Anybody interested in understanding why the tax code is such a mess should read this. Here’s what I don’t like: After doing a great job explaining the problem, Obama often flops when it comes to a cure. Sure, he proposes cutting the corporate rate. These days, who doesn’t?  But when it comes to which tax preferences he’d dump, Obama often ducks the tough choices. More troubling, some of his proposed cures may make the disease worse.

SEC May Ticket Speeding Traders (Washington Post)

The Securities and Exchange Commission is looking to curb high-frequency traders' huge influence on stock trading and is considering charging fees for the myriad buy and sell orders that are later canceled, among other options. SEC Chairman Mary Schapiro said a large portion of equities trading has little to do with "the fundamentals of the company that's being traded." She said it had more to do with "the minuscule aberrational price move" that computer-assisted traders with direct connections to the exchange can "jump on" in fractions of a second. Such activity "worries me," Ms. Schapiro said in a breakfast meeting Wednesday with reporters. One solution would be forcing high-frequency traders to pay for the canceled trades that make up nine-tenths of all orders, she said.


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Market Talk

Housing Takes Another Step Out of the Cellar (Real Time Economics)

Wednesday brought further evidence that housing has climbed out of the sub-basement. But it’s a long way from heading up the stairs to expansion. Existing home sales increased 4.3% to an annual rate of 4.57 million in January. But the gain came only because the National Association of Realtors sharply lowered December sales to 4.38 million. If December sales had stayed at their original 4.61 million, January sales would have been down slightly. Even so, the home sales report joins other data that point to a stabilization in housing. The most positive sign was the reduction in excess supply of homes for sale.

Tax Breaks: A Primer (Economix)

On Wednesday the Obama administration released its proposal to revamp corporate taxes, partly by cutting “loopholes and subsidies” that enable so many savvy companies to pay so little. The proposal also happens to add its own new loopholes and subsidies, most prominently for manufacturing companies. Such “loopholes and subsidies” are formally called tax expenditures. The name comes from the fact that they are arithmetically equivalent to spending government money. Tax expenditures can come in many forms, including deferrals, special tax rates and tax credits, and inhabit both the personal and corporate income tax codes. Economists generally discourage the use of tax expenditures, for three basic reasons.


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Editorials & Opinions

A Tax Reform to Restore America’s Prosperity (Mitt Romney in Wall Street Journal)

My plan is conservative in a way that stands out not only from President Obama's failed approach of higher taxes and runaway deficit spending, but also from the say-anything-to-get-elected fiscal recklessness of some of my Republican rivals. Offering gimmicky proposals that rely on implausible levels of economic growth and blow huge holes in the budget is easy. Fixing our very serious problems is not. I am prepared to make the difficult decisions our nation needs. I favor deep cuts in federal spending, and I've previously outlined exactly where I would cut and how I would reform entitlements to strengthen them for future generations. But we can't look at spending in isolation. I believe we must make the tax code simpler and fairer. We must reduce tax rates for job creators to promote economic growth. And we must still raise enough revenue to stop the endless borrowing that threatens American prosperity. First, I will make an across-the-board, 20% reduction in marginal individual income tax rates.

The Panic of 2008 Revisited (John Taylor’s Blog)

I first wrote about the panic of 2008 (including the Lehman bankruptcy, the AIG bailout, and the rollout of the TARP) in my book Getting Off Track: How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis. If you look at the charts in that book you will see a detailed consideration of the daily data. I focused on the spread between Libor and the overnight index swap (OIS), and showed that the major upward movements in this measure of stress occurred at the time of the TARP rollout. Moreover, this measure of risk peaked as soon as it was clarified that the TARP would be used for equity injections, suggesting that confusion about the TARP was a large source of the uncertainty and panic.

Fannie-Freddie Regulator Has Sober Plans (Washington Post Editorial)

It has been 42 months since the Bush administration placed Fannie Mae and Freddie Mac under the control of their regulator, the Federal Housing Finance Agency, and began pouring in cash to cover the mortgage-finance giants’ mounting losses. This has enabled Fannie and Freddie to continue propping up a housing market that otherwise would have crashed: They currently back two-thirds of all mortgages made. Taxpayer cost: $180 billion. Though the worst of the losses are probably over for Fannie and Freddie, there is bipartisan consensus that their de facto nationalization is not a sustainable solution. There is no consensus, however, on what should replace these entities, whose fatal flaw was the combination of private, profit-motivated ownership and perceived government backing.

Romney’s Tax Reboot (Wall Street Journal Editorial)

One oddity of this Republican Presidential primary season is that front-runner Mitt Romney has had by far the least inspiring tax plan. That changed yesterday when the former Massachusetts Governor took a dive into the deep end of the tax reform debate with a proposal that includes a 20% across-the-board cut in income tax rates. Now we're getting somewhere. The rate cut follows the Reagan formula of applying to anyone who pays income taxes. The current 35% tax rate (set to rise to 41% in 2013 including deduction and exemption phase-outs) would fall to 28%, the 33% rate to 26.4%, the 28% rate to 22.4%, the 25% rate to 20%, the 15% rate to 12%, and the 10% rate to 8%. As an economic matter, this is the most effective kind of tax cut because it applies at the margin, meaning the next dollar of income earned. A mountain of economic research shows that a marginal-rate cut does far more than tax holidays or targeted tax credits to change the incentives to invest and hire workers, and thus provides the most economic lift.

How to Tax US Companies’ Foreign Profits (Robert Pozen in Financial Times)

On Wednesday the Obama administration proposed a long-awaited cut in the top rate of US corporate tax from 35 per cent to 28 per cent. But the White House also disclosed something more contentious. The administration is suggesting US companies’ foreign earnings should be subject to a “minimum tax”. The current system for taxing earnings of foreign subsidiaries controlled by US companies is controversial and counterproductive. Such foreign earnings are theoretically taxed at a 35 per cent rate if brought back to the US, but not taxed at all by the US as long as these earnings are kept abroad. Faced with this choice, US companies are unsurprisingly holding abroad more than $1.5tn in foreign profits. The current tax system thus discourages US companies from using their foreign profits to build facilities in the US or buy American companies. It also generates almost no tax revenues for the US Treasury.


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