“Uncertainty” Trotted Out in the Journal

Business code for "we may not get our way"

If there’s one thing our titans of industry can’t stand, it’s uncertainty.

We’ve seen that excuse trotted out over and over again to explain why they’re not hiring and why they ought get their way politically.

The Journal goes page one today with a story on the hash that our increasingly sclerotic political system has made of the tax code, which is now packed with temporary provisions at more than twelve times the rate of the late 1990s.

This is oviously inefficient and causes uncertainty for businesses and individuals. But it seems to me that the Journal overplays the case somewhat. For instance:

Now Congress, taking up a deal worked out between the Obama administration and Republican leaders, is poised to turn the whole personal income-tax system into something of a temporary structure. The plan embraces a broad range of provisions—an extension of Bush-era rates, a new estate-tax formula—but for only two years. A payroll-tax cut in the bill is for a single year.

This depends on how temporary “temporary” is. The Bush tax cuts were temporary from the get-go, too—planned to sunset in a decade or less. Moreover: Even if one Congress passes a permanent tax change, the next one can overwrite it if the political winds shift. Remember when Ronald Reagan passed the biggest tax cut in history and then had to scramble the next year to pass the biggest tax hike in history?

The bigger problem here is that the uncertainty thing is something of a Republican trope that gets trotted out by U.S. Chamber of Commerce types to oppose any sort of Democratic policy, including tax issues. Remember all the carping about how financial reform was supposedly killing the economy because of the “uncertainty” the debate caused?

Here’s the Chamber’s house organ in September:

Uncertainty over taxes and regulations is stalling a strong economic recovery and a faster pace of job growth, U.S. Chamber officials said during an annual Labor Day briefing.

Chamber Chief Economist Marty Regalia said that Congress should extend the tax cuts adopted during the Bush administration to calm jittery businesses.

The only uncertainty Big Business had during the Bush administration was just how far the government could bend over backwards for them.

Watch the anti-tax basis of the uncertainty trope reveal itself in consecutive paragraphs of the Journal piece, first implicitly and then explicitly (emphasis mine):

For smaller companies, tax uncertainty could be an incentive to expand overseas rather than in the U.S., according to Tom Duesterberg, president of the Manufacturers Alliance, a group representing medium-size firms. Companies “can’t wait until all these [tax] questions are resolved,” he says. “They are not going to wait until all that definitively happens. They have to deploy cash, please their shareholders and expand and grow.”

Billy Hoffpauir, a developer in Lafayette, La., says he has been trying to sell some real estate because “with the current uncertainty, I am unable to quantify the risk to make long-term investment decisions.” If he finds buyers, he says, he would be likely to plow the cash into “other interests, probably overseas,” because some foreign countries have more favorable taxes and regulations. The tax situation is the overwhelming driver in his business decisions, Mr. Hoffpauir says.

Hmm, my BS detector is flashing red here with Mr. Hoffpauir. It seems much more likely that the market and the down economy are the real issues for just about anybody looking to unload real estate these days—not taxes.

It’s funny that when it comes down it, the uncertainty mask falls completely off. Here Exxon Mobil is cool with totally scrapping the system and starting from scratch, but is “apprehensive” about the uncertainty a “hunt for revenue” would cause:

Large multinationals are only marginally affected directly by income-tax provisions on the table this year. Yet the stakes might be high for these companies. Executives worry about becoming a target for lawmakers seeking revenue to narrow deficits. If a broad revision “is a true ‘step back, let’s take a fresh look,’ we would not be frightened by that,” says Ken Cohen, a vice president at Exxon Mobil Corp. But if it pits industry versus industry or becomes a hunt for revenue, “that’s the process we would have much more apprehension about.”

At least the Journal is good to point out that there are problems with its thesis (emphasis mine):

Some call the worries exaggerated. “I truly do believe the concerns expressed over tax uncertainty are truly overblown,” says Martin Sullivan, an economist with Tax Analysts, a nonprofit tax publisher, who sees today’s situation as quite manageable compared with the profound business uncertainty companies faced during the financial crisis.

“We’re used to [uncertainty] in the tax world,” he says. “What’s changed in the last few years is the size of the temporary extensions.”

Don’t get me wrong. These issues do indeed have an impact on business decisions:

This means that if the compromise passes largely intact, the U.S. will have no permanent regime governing levies on salaries, capital gains and dividends, the Social Security tax, as well as a slew of targeted breaks for families, students and other groups. This on top of dozens of corporate-tax provisions that already were subject to annual renewal.

Nobody but tax lawyers and accountants is going to argue that the current tax system makes much sense.

And the paper is good at describing why the current system is the way it is (emphasis mine):

Political division contributes because of the daunting task of mustering a filibuster-proof 60 votes in the Senate. Legislative shepherds of the Bush cuts resorted to passage under what is called “budget reconciliation,” requiring only a majority vote. But a measure passed this way can’t be for longer than the budget that authorizes it, in this case 10 years. Hence the provisions expire in 2010.
Such an outcome is less likely in countries with parliamentary systems because these leave the government less subject to having its will thwarted by a large minority. “Very few countries have tax provisions that expire unless legislative action is taken,” says Jeffrey Owens, head of tax at the Organization for Economic Cooperation and Development in Paris. “Also, in most OECD countries, it’s the government that initiates new legislation, and once proposed the legislation generally passes.”

But the uncertainty meme is all too often PR in businesses anti-tax quiver. The real uncertainty that’s causing corporations to sit on that $2 trillion cash pile, rather than investing it and hiring people, is the terrible economy. It’s unclear where demand is going to come from as the economy deleverages.

Taxes are an issue, but a relatively minor one in comparison.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum. Tags: , , , ,