The Tax Deal Muddles Long-term Outlook

Michael Franc National Review December 21, 2010

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Michael G. Franc

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December 21, 2010 4:00 A.M.

Entrepreneurs fret daily over economic uncertainty. Case in point: Even with passage of the lame-duck tax deal, they still don’t know what their tax burden will be two years from now.

Approval of that deal lifted what the Wall Street Journal dubs the “world of the temporary tax code” to unprecedented heights. The Journal explains:

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.

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All this uncertainty “complicates planning and discourages hiring and investment” because “businesses tend to be more reluctant to invest when they perceive high levels of uncertainty about various things, including taxes.”

One bitter fruit of all this uncertainty can be gleaned from a recent Federal Reserve study. The Fed calculated that skittish companies are now sitting on nearly $2 trillion of cash reserves rather than deploying those resources to expand payrolls, build new plants, or purchase new equipment. This is not only $130 billion higher than it was at the end of June but, as a percentage of total assets, the highest cash-reserve level in over half a century.

Two recent court decisions exemplify the full extent of the uncertainty created by the current administration. On December 10, the U.S. Court of Appeals for the District of Columbia rejected a plea from the nation’s manufacturers to scuttle a regulatory initiative by the Environmental Protection Agency that would subject them to new regulatory burdens in a quixotic effort to reduce carbon-dioxide emissions. “The EPA’s agenda,” the National Association of Manufacturers said in a statement, “places unnecessary burdens on manufacturers, drives up energy costs and imposes even more uncertainty on the nation’s job creators.”

The second court decision concerned the new health-care law. A federal judge in Virginia ruled that a crucial provision in Obamacare — the mandate that individuals purchase governmentally approved health insurance — violates the Constitution. “An individual’s personal decision to [purchase or decline to purchase] health insurance from a private provider,” District Court Judge Henry Hudson wrote, “is beyond the historical reach of the U.S. Constitution.” The fate of the policy now depends on the Supreme Court.

And regardless of the ultimate fate of the mandate, the statuary language of Obamacare bestows unprecedented discretionary power upon the federal bureaucrats charged with its implementation. John Hoff, a former assistant secretary at the Department of Health and Human Services, explained:

While it is detailed in some instances, [the new health law] is largely aspirational; it directs the Administration to achieve various universally desired goals — better quality of health care, improved access to care, and increased efficiency of delivery. It constructs the scaffolding of federal control and gives the Administration very broad authority to achieve these aspirations. Each of the many actions taken to implement it will determine the shape of that control. Implementation will be technically difficult and politically charged.

This high degree of bureaucratic discretion, it is important to point out, affects the entire health-care sector, which now constitutes fully one-sixth of the economy.

At this stage, business executives or ordinary citizens trying to comprehend the implications of the new law might as well flip a coin or hire a fortune teller. How will the bureaucrats interpret this “aspirational” language? Will Judge Hudson’s decision be upheld on appeal? And what consequences will flow from all these unknowns? Will insurance rates skyrocket, encouraging consumers to forgo coverage until they need it, which in turn will cause insurers to increase premiums further in a never-ending insurance death spiral? Should employers maintain their current health plans under the law’s “grandfather” clause, or just dump their employees into the new health exchanges where the cost of coverage might be prohibitive? And if the cost of coverage skyrockets, what about all those rosy projections of manageable subsidy costs from the Congressional Budget Office? Those dollar figures might jump by a few hundred billion — or more. Where will that money come from?

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