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Questions for McCain and Obama on the economic carnage

ASK THIS | September 16, 2008

The candidates talk about protecting the middle class; how would they follow up? Would they, for example, continue to let multinational corporations shift their profits to tax havens abroad? Keep taxing income from labor at a higher rate than income from capital? Eliminate corporate subsidies?

By Martin Lobel

Now that the long foretold carnage on Wall Street is finally being covered by the mainstream media, its time to ask Barack Obama and John McCain what they would do as President to resolve these underlying problems. Here are a few:

The Congressional Budget Office predicts that our budget deficit this year is approaching $500 billion. That is without taking into account the additional costs of putting Fannie Mae and Freddie Mac under a Federal “conservatorship.”

At the same time, IRS statistics show that corporate taxes are declining significantly, in part because multinational corporations use globalization to shift their profits to tax havens abroad. The effective tax rate for those earnings is 4 percent, rather than the nominal 35 percent. And the IRS lacks the resources to effectively police those corporations, let alone the individuals who have set up unreported bank accounts in various tax havens. The global financial company UBS recently admitted to having 19,000 of those accounts in Switzerland. In short, for the rich and powerful we have an honor system but for those who live off wages, we have a very effective tax collection system.

Q. Are you prepared to change our tax system so that the multinational corporations are required to pay taxes on their world wide income?

Q. Would you consider eliminating the complex corporate taxes and imposing a flat tax on the profits these corporations report to their shareholders?

Q. Would you be willing to eliminate the transfer price system that allows multinational corporations to shift profits to tax havens and substitute a formulary apportionment system that would collect taxes without regard to where the multinational corporations said they earned their money?

Q. Are you prepared to change the taxation of carried interest (the profit hedge fund managers get) so that taxes would be collected on it at ordinary income rates, not when the income was “repatriated” from foreign countries at capital gains rates?

Q. Do you think income from labor should be taxed at a higher rate than income from capital?

Q. Would you be willing to eliminate corporate subsidies to lower tax rates and simplify the tax code?

Q. On average, middle-class people have lost about 7 percent of their real income since 2000 and the very rich have seen their income soar. Most of the growth in GDP from 2000 has gone to the top 1/10 of 1 percent of the population. Do you think the tax code should impose higher taxes on the very rich?

The carnage on Wall Street was primarily caused by derivatives, securities which derive their value from some other financial instrument. They generated large fees while the market was rising, but became so complicated and non-transparent that no one could say for sure what they were worth or how solvent those who held them were. To raise cash, Merrill Lynch recently dumped a bunch of derivatives at a whopping 78 percent discount. The Bush Administration exacerbated the problem by allowing Citibank, for example, to hide $81 billion of derivatives in an off-the-books operation, the kind of action that caused the demise of Enron.

Q. Do you believe it is the role of government to make sure that sufficient information is available to investors so they have a clear idea about the investments they make?

Q. Do you believe derivatives should be required to be publicly traded on a market where they are valued every day?

Q. Do you believe that the regulatory agencies (Fed, SEC, FDIC, etc) need to be revamped to better regulate the new forms of financial institutions and instruments? If so, how would you revamp them?

Q. What else would you do to foster investor confidence in the market?

Middle class families have been hurting economically for years. Many have had to work harder and longer and borrow against the equity in their houses to get by. Despite all this, the middle class has lost about 7 percent of its real income since 2000. What is unexplained is how productivity could have increased over that span of time while the benefits only went to the top 1/10 of 1 percent. Each candidate promises to help the middle class, yet almost all economists who have looked at Medicare, Medicaid, Social Security, etc., have concluded that we cannot afford the current systems, particularly with a deficit that is almost certain to rise above $500 billion.

Q. You have promised to help the middle class. Where is the money to come from? Are you prepared to cut military spending? Spending to prevent AIDs in Africa? Spending to develop alternative energy sources? Spending to cut global warming?

Q. Are you willing to change the tax system to help meet middle class needs?

Q. How specifically are you going to cut the budget deficit without hurting the middle class?

Q. How specifically are you going to cut the trade deficit without hurting the middle class?

For more information on these topics, click here for articles from Tax Notes.

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