When an American Multinational Company Moves Its Headquarters Abroad It Is Patriotic

Unlike Obama, I do not measure patriotism in terms of the amount of taxes paid to and the amount of paperwork prepared for an over-weaning government that uses its revenues and its ever mounting debt to suppress our individual rights.  No, I look at the issue of American multinational companies moving their domicile to other nations with lower internal taxes and which do not tax earnings in the U.S. as a very real act of patriotism. This is fully consistent with the American Principle of limited government whose only purpose is the protection of our equal, sovereign individual rights.  It is very patriotic to punish a malfeasant big government with a decrease in tax revenues.  The lower its revenues, the less mischief it can perform.  This includes a reduction in its anti-business agenda.

In most cases, changing a company's domicile does not actually mean it moves its headquarters.  This is usually very like the case in which hundreds of thousands of U.S. companies are incorporated in the state of Delaware, but have their actual headquarters in a different state.  The location of domicile is chosen for tax and legal reasons and does not imply that any or most of a company's activities will be at the location of domicile.

The federal tax rate on U.S. corporations is 35% and it applies that highest in the developed world rate to all profits made in the U.S. and to any profits a U.S. multinational corporation makes abroad.  So a U.S. multinational corporation pays the nation in which its profit is made the lower tax they levy on corporate taxes.  Then if the U.S. corporation decides to bring that profit back to the U.S. to invest it here in R&D, new facilities, new hires, or new manufacturing operations, the corporation has to pay the difference between the rate charged by the nation in which the profit was made and the higher U.S. tax rate of 35%.  This drastically reduces the amount of profits earned abroad which are brought back to the U.S.  This plays a big role in slowing down the growth of the U.S. economy, which means it slows down the growth in our standard of living.

U.S. multinational companies which do not bring back their profits from abroad also greatly reduce the burden of producing the tons of paperwork in the form of reports demanded by the IRS.  This is a very great reduction of expenses and consequently a boost to profits earned abroad relative to those earned in the uphill battle at home.

To be sure, U.S. corporations do not generally pay the full 35% tax rate on profits earned in the U.S.  There are many exemptions, tax credits, and deductions, though these come at the expense of the added paperwork to claim them.  Nonetheless, the average percentage paid on profits by American companies is about 30%, while their rivals headquartered in other countries pay an average of about 23% on their profits.  Consequently, American companies are paying about 30% more taxes on their profits than are foreign companies.  This is a very sizable competitive disadvantage.

The Burger King acquisition of Tim Horton's, a Canadian company, is a case given much attention in the news lately.  Moving the Burger King domicile to Canada, a nation with more economic freedom than the sorry present U.S., reduces its corporate income tax rate to 15%!  Canada will only tax the profit made in Canada and will not tax Burger King on its profits made in the U.S. or in any of the other many nations it operates in around the world.  This will actually allow Burger King to bring the profits it has made in those many nations back to the U.S. for investment here, because the U.S. government can no longer tax these profits made by a Canadian company.

It is essential that every American multinational company put as much pressure on the far too voracious American government to reduce its taxes on productive work and to reduce its power to coerce people in violation of their rights to earn a living and to generally pursue their happiness.  A great and patriotic way to do this is to move their headquarters abroad.  If that has the eventual effect of forcing the far too big and nasty federal government to lower its tax rates and to decrease its incredible paperwork burden, it will do much to allow Americans a future with a decent increase in our standard of living coupled with a much improved environment of economic freedoms.

Oil and Gas Industry Tax Breaks: Lies by Democrats

For decades, I have been hearing about the massive tax breaks and subsidies that the government gives the oil and gas industry.  Obama has recently been repeating this wild-eyed claim.  On 2 November 2011, in a reply to a comment claiming the oil and gas industry was subsidized by $2 billion a year to my post North Dakota Oil, Truckers, Railroads, Jobs, I said:

There are frequent claims that the government is subsidizing the oil industry, but rarely does anyone actually attempt to describe what the subsidy is and how it is given to the oil industry. The oil industry gets four tax breaks, the domestic manufacturing break of $1.7 billion, the oil depletion break of $1 billion, the foreign tax credit of $0.85 billion, and the intangible drilling costs break of $0.78 billion. The first three tax breaks are given to every manufacturing company whether in the oil and gas industry or not. The oil depletion allowance is the equivalent of the depreciation of capital equipment, which is reasonable. The intangible drilling cost write-off allows drilling costs to be written off in the first year rather than over the entire time of the investment. This is probably most important to the very many small drilling companies and it is the only tax break really unique to the oil and gas industry.

Merrill Matthews recently had an Opinion piece in the Wall Street Journal entitled About Those Tax Breaks for Big Oil... which notes how a bill submitted to the House of Representatives by the socialist Chris Van Hollen of Maryland is forced to insert special language aimed at the oil and gas industry to exclude that targeted industry from the same tax breaks or options held by and used by many other industries. Van Hollen's bill is the Stop the Sequester Job Loss Now Act and would increase tax rates on higher income individuals (soak the rich) and increase taxes on the oil and gas industry which has been doing yeoman work in keeping the economy from complete collapse.

In the best tradition of the Democrat Socialist Party the bill pretending to end job loss will actually increase job loss by depriving small business owners and investors of the money and incentive they need to hire people and by hobble the oil and gas industry which is one of the few job bright spots in our economy.  In Democrat Socialist logic, it is OK to blow away both feet as long as the bill that will do this has a title implying that it will put great shoes on both feet.  Upon passage of the bill and with its exercise, the people eventually have no feet and no great shoes.  The Democrat Socialists will then claim that is because of some fictional deregulation.

Matthews points out that the oil and gas industry reputed to be unfairly taxed (to Democrats this always means under-taxed) includes the two companies at the top of the company list of the biggest taxpayers, as well as the sixth biggest taxpayer.  Exxon Mobil paid $31 billion of U.S. income taxes in 2012.  Chevron paid $20 billion and ConocoPhillips paid $8 billion of U.S. income taxes in 2012.  These  three oil and gas companies paid more U.S. income taxes than did the remaining 7 companies in the top 10 list.  They did so using the same tax rules used by other industries.

So how does Van Hollen target the oil and gas industry?  His act

• limits the Section 199 deduction which sought to encourage domestic production activities in the American Job Creation Act of 2004.  This gave domestic manufacturers a 9% tax deduction from net income, except for the oil and gas industry, which only receives a 6% tax deduction because the Democrats have a vendetta against oil and gas.  So, the oil and gas industry gets less of a tax break than other U.S. manufacturers on this!
• denies the industry the use of the accounting method for inventory known as last-in, first-out or Lifo, which is widely used by all extraction industries.  It will remain an available choice for all industries except the oil and gas industry.
• denies only integrated oil and gas companies the deduction for many of the taxes they pay to foreign countries.  To avoid double taxation, all companies are allowed a credit for the taxes they pay to foreign countries.  Now, however, the integrated oil and gas companies would not be allowed to deduct the royalty payments they make to foreign countries, though other companies will continue to deduct royalties.

In other words, it is very clear that the van Hollen act discriminates against and targets the oil and gas industry.  This is just a case of a bloodsucking parasite looking for a host with plenty of blood to suck, just as is its soak the productive rich campaign.  Willie Horton is ogling other people's money in the bank and he will steal their money if he thinks he can get away with it.

Misleading Obama Claims About Romney's Effective Tax

Obama keeps claiming that most people pay more taxes than Romney does.  Actually, Romney's 14.1% effective tax rate is higher than that of 97% of Americans.  It is probably very similar to Obama's own effective tax rate, so Obama is being quite the hypocrite.  But Obama will make any claim if he thinks he can take advantage of people not thinking things through.

When pressed, Obama will claim that he is right because he will say the average person pays Social Security and Medicare taxes at such a high rate that their effective tax rate is higher than Romney's is.  This is perhaps true, since most of Romney's income exceeds the upper limit on income taxed by these payroll taxes.  But, these taxes are supposed to be rather like insurance premiums, or at least that is what Democrats have always told us.  It is not clear that they should be compared to income taxes.

If you insist on counting the Social Security and Medicare taxes, not reported on any 1040 tax forms, one might just as well include real estate taxes also.  I am sure that very few of Obama's average tax payers pay anywhere near as much real estate tax as Romney does.  In any case, Obama's claims that it is unfair that Romney does not pay a higher effective tax rate also ignores the fact that most of Romney's income is due to dividends and capital gains.  Consequently, this form of income is what is left after a corporation pays corporate income taxes.

You really have to hunt for a very peculiar viewpoint to make the claim that Romney does not pay his fair share of taxes. 

No Improvement in Employment, Recession Continues Unabated

Do not be encouraged by the announced falling unemployment rates.  These are only informing us that the prospects for finding a job have been so bad so long that the unemployed have either given up on hunting for a job or the government has decided to assume that they no longer want a job.

As I have done many times before, we can calculate the number of jobs that people would want if the economy were robust and offering plenty of good jobs.  It is not doing this due to the huge increases of wealth transfer from the private sector to the government sector throughout the first decade of this century and the many, many tens of thousands of federal, state, and local regulations which are strangulating businesses and preventing the formation of new businesses.  When the situation was better in the late 1990s after the supply-side economics efforts from 1981 on had time to work their magic, many people wanted to work in desired jobs and the unemployment rate was very low.  In January 2000, 67.49% of the total non-institutional working age population was either working, looking for work, or transitioning from one job to another.  Our working age population has grown since then by more than 30 million people.  We can estimate the number of jobs that would be desired now based on the 67.49% who wished to have a job in January 2000.  I know of no fundamental reason why people would not be as eager to work now, if only good jobs were available.

Once we determine how many jobs would be wanted by this criterion, we can subtract the number of jobs actually held by Americans now.  The resulting number is the number of missing jobs.  This number of missing jobs is a great measure for the health of the economy, just as the GDP is also.  The GDP has been improving somewhat for some time in this Great Socialist Recession thanks to productivity improvements per worker, but as we will see, job creation is more dismally deficient than we are led to believe.

Let me provide the job numbers for January and February employment and unemployment before we go on.  The numbers in the table below are from the latest Bureau of Labor Statistics report or earlier reports.  The table does not use seasonal adjustments.  These are the actual numbers of people employed and unemployed.

The unemployment rate, using numbers not adjusted seasonally, was 9.8% in January and 9.5% in February.  This is not as good as 8.9%, the seasonally adjusted unemployment rate.  The real story is much worse than this.  In December, we had 22.067 million missing jobs, which we can compare to only 5.689 million missing jobs in January 2000.  Some sizable fraction of the January 2000 unemployed were probably briefly between jobs as they switched from one job to another, so this actually slightly overstates the number of missing jobs then.  The job market was so good, people were then changing jobs frequently.  In January 2011, the missing jobs rose to 23.5 million and we saw a small improvement in February to a mere 23.1 million missing jobs.  The percentage of missing jobs is actually 14.3% now.  That is much worse than the 8.9% unemployment rate we are told by the government and the media.  Of course, we also know that many people are also underemployed in addition to this appalling number.

To get a better sense of what the progress has been on job creation as the economy measured by the GDP has begun to improve, let us examine a graph of the number of missing jobs (given in thousands, making 1,000 jobs in thousands equal to 1 million jobs).  This graph has a baseline of 20  million jobs, so no month in the time from November 2009 through February 2011 has as few as 20 million missing jobs:

We see that January and February of 2010 were awful months, but there was some job growth through July of 2010.  Then the jobs situation became worse through the end of the year into January 2011.  February 2011 shows a bit of improvement, but the economy is still missing more than 23 million jobs!  If the Democrats had increased taxes as they wanted to before the voters convinced them in November 2010 that that would be suicide for their political careers, this missing jobs situation would certainly be worse.  But, with the upcoming scheduled reduction of corporate tax rates in Japan, the U.S. will have the highest corporate tax rates in the developed world.

It is easy to make a huge difference in the number of jobs available to Americans.  Right now, it makes more sense for companies to expand their operations overseas, close to their non-American customers and where the taxes and the environmental regulations are often less onerous.  The Cato Institute just released a study entitled New Estimates of Effective Corporate Tax Rates on Business Investment.  The effective tax rate on U.S. corporations is 34.6%, but it is only 18.6% for the average OECD nation.  The average for 83 nations is even lower relative to the U.S. rate at 17.7%!  Only an idiot can fail to see that this is a strong negative factor for the creation of U.S. jobs.  Indeed, this is why major corporate tax rate reductions have been made in Canada, our largest trading partner.  Canadian business is booming compared to the U.S. and generating more tax receipts for government as a result, thereby reducing the Canadian deficits.  Over the last decade or a bit more, Austria, Bulgaria, the Czech Republic, Germany, Greece, Iceland, Ireland, Italy, Netherlands, Poland, Slovakia, Turkey, Egypt, Georgia, Kazakhstan, Lesotho, Mauritius, and Singapore have made large corporate tax rate reductions.  Australia, Belgium, China, Denmark, Finland, South Korea, Luxembourg, Mexico, New Zealand, Taiwan, and the United Kingdom made substantial corporate tax rate cuts also.  Many of these countries are going to make further tax rate cuts.

Only the U.S. has been too dumb to stop penalizing companies for providing the goods, services, and jobs we want!  The Democrats have actually raised the future effective corporate tax rate with provisions in ObamaCare and the Dodd-Frank financial reform bill.  They raised the rate with the imposition of mandates to use expensive and unreliable "green energy" and will raise it more with anti-carbon regulations out of the errant EPA.  On top of all that, before the November election, they wanted to raise the basic corporate tax rate.  The Obama budget proposal for 2012 and beyond calls for tax increases of $650 billion.  He wants to add $46 billion of taxes from oil companies, thereby preventing them from taking advantage of many new oil and gas finds in the U.S. to create new jobs and wealth.  Actually, they probably will not be able to extract much more oil and gas anyway while Obama occupies the office of the president since he is allowing no leases to be sold.  In addition, he plans to hit multinational corporations with an additional $129 billion of taxes.  Such an anti-business climate makes the avowedly socialist countries of Europe look like better bets for expansion in too many cases.  The Democrats talk about wanting to create jobs, but virtually every concrete proposal they make will kill jobs.

Investment in U.S. corporations is also blocked with high taxes on dividends.  The owners of a corporation pay an effective tax of 34.6% prior to any dividends being issued and then pay an amount on ordinary dividends equal to their individual income tax bracket.  Through 2012, that bracket may be 35%, making the total tax they pay on an ordinary dividend equal to an overall tax of 0.346 + (1 - 0.346)(0.35) = 0.5749 or 57.49%.  This leaves little incentive for such investors.  In 2013, the situation gets worse, since the Democrats want the highest income tax bracket rate to automatically go up to 39.6%, which will take the dividend rate along with it.  Dumb and dumber.

Job creation is mostly the business of small business.  The personal income tax rates strongly affect small businesses, since their profits are normally added to the income of individuals on their personal income tax returns.  The same is true for many angel investors and the family members who invest in a relative's business when he starts one up.  The risks in starting a small business are huge.  Most go out of business within ten years.  Those that succeed in generating profits, return less to their investors by virtue of the long-term capital gains tax.  Through 2012, this has just been set at 15%, but it is scheduled to go up to 20% in 2013, unless the more economically savvy Republicans can pass legislation opposed by Obama and the Democrat Senate before then.  Meanwhile, no one can undertake a long-term investment without assuming that any success will be taxed at the 20%, not the present 15%, capital gains tax.

One of the most important requirements of good tax laws is that businessmen should be able to count on their tax rates not going up.  When tax rates go up, they turn calculations that justify an investment of money and years of work into failures.  Wealth and jobs are lost as a result.  Even the threat of a tax increase causes proposed investments to be tossed out as excessively risky and it can cause somewhat marginal businesses to be closed down early.  Most businesses have a learning curve in which the owner messes up and has a number of close calls with failure and bankruptcy.  Many wildly successful businesses had such close calls in their infancy.  Every time a tax burden or a regulatory burden is added for a young business, that business may be pushed over the cliff.  We cannot calculate how many future successes are killed in this way.  But, we do see that countries with lower tax and regulatory burdens on businesses do tend to have higher growth rates, generate more wealth, improve the living standards of both the poor and the wealthy, people live longer, there is less pollution, and they have lower unemployment rates.

This picture is so clear that it is evidence of a strong idiocracy in academia, the political class, and most of the media.  Idiocracy is my word for persistent wrongheadedness in the face of a multitude of evidence to the contrary often subscribed to by otherwise intelligent people.  The word is applied most frequently to college indoctrinated Progressive Elitists.  They have worked very diligently to produce the Great Socialist Recession and to maintain our economy in a jobless state.

Allegiance to the American Principle, Not to Democracy

Today in the United States of America, most of the People believe that the laws and regulations of the federal government, or for that matter of the state and local governments, should be what they want them to be.  They recognize that these laws cannot be what everyone wants them to be, however, so they decide the impasse should be decided by a virtually unfettered democratic vote.  This is a viewpoint which is inconsistent with the great and original American Principle:  Legitimate government must have limited powers and have the sole purpose of protecting and defending the equal, sovereign right of the individual to life, liberty, property, the ownership of one's own body and mind, and the pursuit of happiness.

Our revolt against Great Britain was justified in our Declaration of Independence.  That great document, written by Thomas Jefferson, with some modifications by Ben Franklin and John Adams, defines legitimate government as that government instituted by the People to secure the unalienable rights of the individual to life, liberty, and the pursuit of happiness.  To this list, I explicitly add the right to property and the ownership of one's own body and mind, because though these rights are fully contained in the shorter list of the Declaration of Independence, modern Americans have largely rationalized them into oblivion.

The early citizens of the states freed from colonial rule by Great Britain, established an initial form of government which was exceedingly limited at the national level and found that it was incapable of sufficiently providing for the defense of the nation and allowing free trade between the states, that the government needed to be strengthened.  The result was a new government mandated by the People with the very highly limited powers carefully enumerated in our Constitution.  These few powers primarily dealt with defense and foreign relations and trade.  Some of the powers had internal consequences such as the maintenance of post offices and post roads, the establishment of patent rights and copyrights, the standardization of money, and the regulation of trade between the states.  The purpose of these internal powers was to strengthen the communications, interactions, and trade of Americans, each of whom had the right to associate with other individuals to establish a wide range of relationships with them and to trade with them.  The strengthened ties across state lines had immense consequences for the thinly populated American states for their defense of their extensive territory.

The Framer's of the Constitution did not at first think the Bill of Rights was necessary.  The federal government they had provided for in the Constitution did not have the power to violate the rights of the individual as they interpreted its provisions.  But, the People who had to ratify it had concerns about just that issue.  Many states would not ratify the Constitution without more explicit protections of individual rights, so the Bill of Rights was written to protect those rights which the People had seen damaged by earlier governments, including most prominently those violated by Great Britain in their recent memory.  Amendment IX made it clear that the listed protected rights were not a complete list of the individual rights of the People.  Amendment X made it clear that powers not explicitly given to the federal government were retained by the People and the states.  The entire structure of the Constitution and its purpose in promoting the tranquility, justice, general welfare, common defense, and the blessings of liberty to the People, clearly is an attempt to provide a government of highly limited powers consistent with the legitimate government defined by our own Declaration of Independence.

Today, Americans usually test a proposal for a new law or regulation by asking whether it would be good for them as an individual or as they imagine it might be good for some group of Americans they think are not capable of acting in their own self-interest.  Most Americans fail to test a law against the American Principle.  Rather than ask if the proposed law or regulation is supportive of every American's individual rights, they ask only that it be good for them or for some particular group of Americans, or in some cases, some particular group of illegal aliens.  In that process, the critical role of individual rights is lost.  The tyranny of the majority or a plurality of voters is made the gold standard of legislative priorities and political morality.  This is a huge mistake.

It is one that the Framers of the Constitution were very aware of and from which they tried very hard to protect us.  The American people thwarted the Framers great work by adopting the very creative expansive interpretations of the powers to regulate interstate commerce, to tax, and to provide for the General Welfare that they were indoctrinated in by the Progressive Elitists who have taken over education and most of the media in America.  The Progressive Elitists eviscerated Amendment IX, claiming that the People have no rights except those explicitly mentioned in the Constitution.  This is not even a creative interpretation of the Constitution - it is a very willful determination to ignore an amendment so basic and critical that it was put into the Bill of Rights.  They have also largely ignored Amendment X, reserving powers to the states and the People.  Amendment XVII, gave the people of each state the vote for their Senators and undermined the republican form of government and state powers, promoting the idea that the United States was a nationwide democracy, subject to the tyranny of the plurality of voters throughout the nation.

In the recent health care reform debate, we observed how the loss of the American Principle twisted the terms of debate.  American governments have actually made it more difficult for the People to provide for their own medical care by interfering with the rights of the individual to choose his own medical providers, his own health insurance policy, and his own standards of medical quality.  While minorities of the debaters were aware of this, the federal government and most state governments have ignored these arguments and plowed ahead with their programs to increase their control over the People.  They refused to take the liberty-enhancing arguments seriously and promoted those of the Progressive Elitists who argued that the governments must exercise still more control over our medical and health care insurance options.  They argued that some people did not buy health insurance and they counted on the People thinking this was unwise.  The Elitists said they must buy health insurance and because some of them will not buy complete enough coverage, we will tell them what must be covered in their insurance plans.  Some people have health problems already, which means their insurance costs will be high, so we must set up large pools in which the healthy will pay much more for their insurance so that the known unhealthy can be covered at as low a cost as the healthy can be.  Thus, the healthy will be heavily taxed to subsidize the health care of the unhealthy and this will be the case even if the unhealthy are unhealthy because they have made themselves unhealthy.

The staying hand of the American Principle was barely discussed.  It was rarely noted that the reform plan greatly reduced a man's right to control and promote his own life.  It was rarely noted that it represented a government claim that the government owns a large share of our very bodies.  It was rarely noted that the plan was a hugely confiscatory transfer of wealth from the young and the healthy to the old and the unhealthy, as well as from the middle class to the poor, making this bill one with very unequal impact upon the citizen's individual rights and their welfare.  It was not noted that if one is not free to provide for one's own medical care and seek protection from pain, then one cannot be said to be free to pursue one's own happiness.  The necessary government rationing of health care in ObamaCare will take the power to seek relief from pain out of our individual hands.

We have seen the destruction of the American discourse on the extension of the Bush tax cuts as well.  The Progressive Elitists wish to increase taxes on Americans making more than something over $200,000 per year, claiming that those people can afford it.  Of course, they do not know all of those people, so it is patently absurd for them to claim that those people can afford it.  It is even more absurd that they think that it is their right to make any decision on who can afford to be taxed more.  If we all have equal rights, then the government should not be taxing some of us more than others of us.  Also, in the midst of the Great Socialist Recession, these Progressive Elitists are recommending many increased taxes on business activities, such as an increase in the capital gains tax rates, the corporation tax rate, and the death tax.  This is a straight play on the weakness of a democracy in that it wants to place greater burdens on those with fewer votes, so the majority will be given as large a bribe as possible to reward the governing Progressive Elitists with more power.  The American Principle that every American individual's rights are paramount, including those in business, is stomped upon.

The intimate body searches of the TSA in airports is being discussed vigorously, but many are refusing to give due consideration to the American Principle.  Amendment IV, written when Americans believed in the American Principle, says

The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.

When Dagny passes through the TSA security check area, no Warrant has been issued based on probable cause that she is carrying explosives onto a plane, yet she is searched in the most intimate way.  It really could not be more clear that this is a fundamental violation of her individual rights. All the talk that people will feel safer from terrorist attack if they are searched and therefore if Dagny is searched, is completely irrelevant.  It is fine for anyone who wishes to volunteer to be searched intimately, but it is not within their rights to force someone else, for whom they have no Warrant based on probable cause, to be searched.  This matter is no different in principle from

•  a random search of anyone to check if they are under the influence of marijuana,
•  randomly forcing people to describe what they were doing throughout the last 24 hours just in case they might have been involved in a crime which the government knows nothing about,
• a random stop to see if you are on the list of people who filed a tax return with the IRS last year or not,
• or a random search to see if you can prove that you are a documented U.S. citizen, immigrant, or visitor. 

You may argue that this is a matter of life and death, but I would argue that giving up the American Principle is a much more critical matter of life and death.  Besides, the present policy means that we have ceded victory to the terrorists, whose goal is less to kill some of us, than it is to degrade the quality of most of our lives.  A life without our equal, sovereign individual rights is a very degraded life.

CATO Grades Governors on Tax and Spending Actions

Chris Edwards of the CATO Institute has put out the 2010 report card on governors.  He grades their performance on their taxation and spending actions and policies.  These state spending results are very important because one of the major reasons for slow job growth and standard of living increases since 2000 has been the 55% increase in state and local government spending from 2000 to 2008.  State spending in 2009 and 2010 is down due to the extended recession, but local government spending was up in those years enough that combined state and local spending in 2009 equaled that in 2008 and exceeded 2008 spending levels in 2010.  State government spending increases were especially steep in the years 2005 - 2008.  Aggregate state spending in 2008 was 31.4% higher than in 2004 and 46.8% higher than in 2000.  Local government spending increases were even faster than the state increases between 2000 and 2008.  These state and local government spending increases added to the federal government increase of 52.5% between 2000 and 2007 and the increase of 66.7% between 2000 and 2008.  These combined spending increases shifted huge amounts of wealth from the private sector to the government sector and greatly weakened the American economy.

The sharp increase in oil  prices in 2007 started the worldwide recession, which brought on our mortgage and loan crisis.  The heavily funded state and local governments had spent years meddling with land use and building restrictions which had driven up the cost of housing beyond belief.  In the extreme case of California, this caused 80% of new home buyers to become sub-prime borrowers!  Such pressures on home buyers helped to fuel support for Fanny Mae, Freddy Mac, the Federal Reserve, and private lending institutions to make mortgages more readily available.  The house of cards developed by the combined effects of huge local, state, and federal spending increases, the oil price shock, and the mortgage and loan crisis created the basis for a severe recession.  Of course, Obama's socialist and anti-business response to that crisis greatly extended and delayed the recovery.

Let's return our focus to the orgy of spending by local, state, and federal government since 2000 and concentrate on state and local spending and debt.  Between 2000 and 2010, state and local government debt increased by 205%!  This debt estimate is based on official, unrealistic projections of state and local pension funds, which estimates them to be underfunded by about $1 trillion.  Better estimates see them as underfunded by about $3.2 trillion.  We have a tendency to focus more on federal spending and debt, but the problem of local and state spending and debt is also huge.  We have a general government spending and debt problem. 

The Edwards report on governors scores them on

• The average annual percentage change in per capita general fund spending proposed by the governor
• The average annual percentage change in actual per capita general fund spending
• The average dollar value of proposed, enacted, and vetoed tax changes
• Changes in the top personal income tax rate
• Changes in the top corporate income tax rate
• Changes in the general sales tax
• Changes in the cigarette tax rate

The spending on the general fund is used because governors generally have more control on that spending than on other state spending.  After all, state legislatures share in the spending, tax, and debt orgy.  The scoring is based only on the time period 2008 - 2009 since the period covered by Edward's governor report in 2008.  This is important, since Maryland Governor Martin O'Folly, err..... O'Malley earned a grade of F in the 2008 report since he urged and received a $1.4 billion tax increase in 2007, yet in this report he is at the bottom of the grade B list.  There is a paragraph in the report on each governor giving more information on their actions and policies and you should look up your governor in the report.  The paragraphs are labeled alphabetically by state.

The scores and grades are [State, Governor (Party), Score, Grade]:

South Carolina, Mark Sanford (R), 74, A
Louisiana, Bobby Jindal (R), 71, A
Minnesota, Tim Pawlenty (R), 66, A
West Virginia, Joe Manchin (D), 66, A

Wyoming, Dave Feudenthal (D), 63, B
Rhode Island, Don Carcieri (D), 62, B
Oklahoma, Brad Henry (D), 62, B
Nevada, Jim Gibbons (R), 61, B
Texas, Rick Perry (R), 61, B
Alabama, Bob Riley (R), 61, B
Montana, Brian Schweitzer (D), 61, B
Georgia, Sonny Perdue (R), 60, B
Missouri, Jay Nixon (D), 59, B
Idaho, C. L. "Butch" Otter (R), 58, B
New Mexico, Bill Richardson (D), 57, B
Vermont, Jim Douglas (R), 56, B
Indiana, Mitch Daniels (R), 56, B
Maine, John Baldacci (D), 55, B
Maryland, Martin O'Malley (D), 55, B

Kentucky, Steven Beshear (D), 54, C
Michigan, Jennifer Granholm (D), 53, C
Mississippi, Haley Barbour (R), 53, C
South Dakota, Mike Rounds (R), 53, C
Tennessee, Phil Bredesen (D), 53, C
Nebraska, Dave Heineman (R), 51, C
North Dakota, John Hoeven (R), 51, C
Hawaii, Linda Lingle (R), 51, C

Florida, Charlie Crist (R), 49, D
Ohio, Ted Strickland (D), 49, D
California, Arnold Schwarzenegger (R), 47, D
Delaware, Jack Markell (D), 47, D
Arkansas, Mike Beebe (D), 47, D
Iowa, Chet Culver (D), 47, D
Massachusetts, Deval Patrick (D), 43, D
New Hampshire, John Lynch (D), 41, D
North Carolina, Beverly Perdue (D), 40, D
Arizona, Jan Brewer (R), 40, D
Pennsylvania, Edward Rendell (D), 40, D

Washington, Chris Gregoire (D), 39, F
Wisconsin, Jim Doyle (D), 35, F
Colorado, Bill Ritter (D), 35, F
Illinois, Pat Quinn (D), 30, F
Connecticut, Jodi Rell (R), 28, F
New York, David Paterson (D), 25, F
Oregon, Ted Kulongoski (D), 19, F

The average score of the 45 state governors scored was 50.  The governors of Kansas, New Jersey, Virginia, and Utah had not been in office sufficiently long to score them.  The governor of Alaska is not scored because its budget is so peculiar that it cannot be compared to that of other states.

The average score of Republicans was 55, while that for Democrats was 47.  Yet, Gov. Manchin (D) of West Virginia was tied for the 3rd best score with an A at a score of 66, while Gov. Jodi Rell (R) of Connecticut had the third worst score of only 28 with a grade of F.  Nonetheless, the Republicans in this report's time-frame and also that of the 2008 report ( R 55 - D 46) scored significantly higher than did the Democrats.

Edwards points out that some governors think businesses are simply cash cows to be milked for higher state spending.  Prime examples are Quinn of Illinois and Kulongoski of Oregon.  Others, such as Carcieri of Rhode Island, Manchin of West Virginia, and Pawlenty of Minnesota understand that lower state taxes on businesses help state businesses to compete with those in other states and with those in other countries.  Edwards advises that corporation income taxes be abolished because they decrease jobs, create huge compliance burdens, and raise relatively little revenue.

In the last two years, nine states increased their top income tax rates:  California, Connecticut, Delaware, Hawaii, New Jersey, New York, North Carolina, Oregon, and Wisconsin.  Three states have cut their top income tax rate:  North Dakota, Rhode Island, and Vermont.  Governor Carcieri of Rhode Island was outstanding in cutting the state's top income tax rate from 9.90% to 5.99%.

We need to pay attention to the assault on our liberties due to the growth of local and state governments as well as that from our voracious federal government.  This list also gives us a scorecard for the several governors who are running for the Senate in this election or who are being discussed as potential presidential candidates in 2012.  You might note that Charlie Crist of Florida has only a grade of D.  Among governors talked about as potential presidential candidates, Bobby Jindal had an A, Tim Pawlenty had an A, Rick Perry had a B, Mitch Daniels had a B, and Haley Barbour has a C.

Added Retiree Drug Benefit Costs to Business of ObamaCare

The 2003 Medicare prescription drug benefit threatened to induce companies who provided prescription drug benefits to retirees to substantially end that benefit.  The result would be that these retirees would wind up on the Medicare D prescription drug program and cost the taxpayers more than if the private companies continued their drug benefit programs for their retirees.  In order to give such companies an incentive to keep their retiree drug programs, the money the companies spent on the retiree drug benefit was entirely tax deductible, beginning in 2006.  Given a 35% corporate tax rate, this meant that for each dollar spent on the drug benefit, the company saved $0.35 of taxes.  In addition to this, the company was given a 28% subsidy, or $0.28 per dollar spent.  Thus, the company was effectively reimbursed $0.63 of every dollar spent to continue the retiree drug benefit plan.  But, one of the really odd things about this was that if the retiree paid a part of the cost himself, the company got to treat that money as though it was spent by the company for the sake of these tax benefits!  So, it is not necessarily the case that the company was paying $0.37 per drug cost dollar to keep the retiree from being switched over to Medicare D.

ObamaCare now has changed the rules on this subsidy/tax deduction.  The company still gets a 28% subsidy, but it cannot expense the 28% of the cost covered by the subsidy or any amounts paid by the retiree himself.  They now get to expense the remaining 72% of the cost minus the amount spent by the retiree himself.  For each dollar spent, including by the retiree personally, the company now gets $0.28 + 0.35 ($0.72 - x) = $0.532 -0.35x /dollar spent on the retiree drug benefit program, where x is the amount spent by the retiree himself.  The company has lost at least $0.098 per dollar of drug costs for each present and future retiree on the program.  This expense has to be written off, just as the future income expected from this source was added to the books of many companies in 2004.

The Democrats did not think the expensing of money not spent by the company was right, so they changed that.  Of course they were on a desperate quest to find ways to reduce the horrible costs of ObamaCare.  It was odd that the companies could deduct the variable amounts which were actually spent by the retirees out of their own pockets.  This means that it is possible that some companies were directly getting a windfall profit on the program, while others were providing a net benefit to the taxpayer by keeping people off of Medicare D at some expense to the company.

Since Medicare D offers many plans, but all require the retiree to pay part of the cost, there is no simple way to figure out if the old company subsidy/tax deduction actually saved the taxpayer any money or it cost the taxpayer money, except to look at the average cost figures.  Mark Steyn says that the old corporate retiree drug benefit subsidy plan was costing taxpayers about $665 per person covered, while the equivalent Medicare coverage cost is about $1,200 per person.  So the way that subsidy system worked was strange, but on balance, it was effective.

In any case, companies with retiree prescription drug plans now have a decrease in their expected tax asset and they must, under federal law, declare that decrease in the quarter they become aware of it.  Obama may not like the timing of the losses declared by many companies, but they have no choice but to do as they have done.  AT&T declared a loss of $1 billion, John Deere a loss of $150 million, Caterpillar a loss of $100 million, 3M $85 - 90 million, AK Steel $31 million, Valero Energy $15 million.  Verizon has announced that its health care benefits costs are going up, but not how much.  The Wall Street Journal on 26 March 2010 said 1400 companies are thought to still offer retiree prescription drug benefit plans.  But, Mark Steyn thinks about 3,500 businesses are and that they cover about 5 million retirees.  David Zion of Credit Suisse, is quoted in the 26 March 2010 Wall Street Journal as estimating that the S&P 500 will take a first quarter hit of $4.5 billion to earnings due to this ObamaCare change.

In many cases companies have dropped such plans for retirees, but it can be hard for those companies with many union retirees whose benefits are subject to union agreements to do so in any case.  Some of them will just have to suffer the higher expenses for some time.  These costs will be passed on to consumers and to those who own the companies' stocks.  American corporations already pay much higher corporate taxes than most other countries corporations do.  In fact, only Japanese corporations have it as bad as American corporations in the OECD.  These higher health care costs, and this is just the tip of the ice berg, will make American companies less competitive in the international markets.  John Deere, Caterpillar, 3M, AK Steel, and Valero Energy are certainly greatly affected by higher costs due to their substantial exports.

Another company which has announced that it is affected adversely by ObamaCare is Medtronic.  Medtronic makes medical devices, which are now to be hit with new taxes.  Medtronic says it may have to layoff 1,000 employees as a result.  In the interest of disclosure, Medtronic is a customer of my materials analysis laboratory.

The announcements by these companies of the adverse effects of ObamaCare on them, has made Representative Henry Waxman, D - CA and chairman of the House Committee on Energy and Commerce, furious.  He is claiming that these companies are exaggerating the effects on them.  He is also livid that their announcements are tarnishing the celebration of the socialist enthusiasts.  He is attempting to intimidate them with an order that they must explain their claims at a 12 April hearing before his investigative subcommittee.  They are to supply the subcommittee with masses of paperwork and all internal communications on their health care costs and their estimates of the effect of ObamaCare on them.  Note that Waxman is an accomplished extortionist of private sector companies and his committee chairmanship gives him great power to do selective harm to any company that does not bow low enough before him.