Tags: denis | kleinfeld | obama

Obamacare Puts Economic Recovery in Critical Condition

Tuesday, 24 Aug 2010 09:28 AM

By Denis Kleinfeld

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I have noticed that nobody doubts that more capital is needed by U.S. businesses to help create new jobs. With that being the case, then the focus should be on what are the sources of capital investment and why have they dried up. 

As I see it, the impact of the tax provisions of Obamacare is one of the significant reasons that halted the flow of investment capital.

Listening to the business newspaper and television commentators, political strategists, editorial pundits and a host of economic experts and academicians, I can see why people are totally confused by discussions of the recession and the state of the economy.  Constantly, the so-called experts talk about a jobless recovery.

I can just hear my brother’s comment on that one. He would say something like, “Hey, sports fans, without jobs there is no economic recovery.’

Real financial recovery requires more capital investment for private sector jobs that create economic productivity.

Government spending, whether on infrastructure or more bureaucrats, is a cost. Government creates only two things: expense and debt. Obviously, going into debt to spend $1.3 trillion more than the tax revenues collected has not stimulated the ending of the recession.

So if government debt isn’t creating private sector capital, and it’s not coming enough from investors in the United States, then from where does the extra needed cash flow come? 

The answer is that foreign investors could, in the past, be relied upon to place massive amounts of additional private job-creating capital into the United States.

Why is this no longer the case?

Foreign investors now have to factor a significant investment risk in investing in U.S. securities and investments or dealing with U.S. related people or companies. This new risk is the possible increase in civil and possible criminal exposures under the tax provisions (The HIRE Act provisions) enacted to pay for “healthcare reform.”

I think there were two miscalculations by Congress. First, the amount of projected revenue that will come from offshore accounts to pay for Obamacare. Second, the reaction by foreign financial businesses facing the reality of complex, penalty ridden and heavy-handed reporting requirements to the IRS and, potentially, other U.S. government agencies.

The foreign investors reacted much the same as you and I would have when faced with this situation.

Basically, they followed the classic strategy of, “If you don’t like the rules of the game, then don’t play in that ballpark.”

One way to manage risk is to simply avoid the risky behavior. Some have just dropped Americans as clients, others have limited their U.S. investments, and some have just said “Farewell, America” altogether.

The stock markets and other investment indicators clearly reflect this loss of capital infusion. And the recession continues.

The fault is with Congress and the president who created this monstrous situation. 

You would think that somebody in Congress, or a lobbyist, or Wall Street would have realized that not only are U.S. taxpayers scared stiff of  entanglements with the IRS, but so are foreign investors, banks, financial institutions, funds, family offices, insurance companies, and private equity managers. .

Why do we care if foreign investors are afraid of any kind of U.S. involvement?

Because the foreign investors help expand our economy with additional capital that the U.S. businesses use. Without capital, there is no capitalism.

Getting a high level of tax compliance has always been a difficult thing for government to do.  That would be a lot easier to achieve in the United States with a consumption tax system. But since that is not happening anytime soon, then Congress and the president need to find a way to encourage, rather than undermining, the investment of foreign capital into U.S. businesses and securities.

With more capital for private industry, productive job creation would occur, tax revenues would go way up, the rate of the government’s budget deficit increase would decrease, and the recession would be over.  

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