Month: June 2017

The Marshall Plan and China’s “belt and road”

Posted on by j.giglio

In 1945, Europe lay in ruins. Its cities were devastated, its industries destroyed, and millions of its people homeless. The key to the recovery of Western Europe lay with the Marshall Plan, a decisive tool for the United States to rebuild Europe after World War II.

Seventy years later, history may be repeating itself. Only this time it is China that is the strategic benefactor with the United States playing the role of the post-war Soviet Union, on the outside looking in as China strategically uses its largesse to develop lucrative new markets.

In June 1947, Secretary of State George C. Marshall, gave a speech at Harvard’s commencement announcing a plan to provide economic assistance to all European nations, including the Soviet Union. Although Russia and its Eastern satellites predictably rejected the plan, 16 Western European nations eagerly participated.

The Marshall Plan, the largest peacetime foreign aid program in U.S. history, channeled over $13 billion of American aid (some $150 billion in 2017 dollars) into 16 Western European countries between 1948 and 1952, to help them rebuild their economies and normalize their societies. The Congressional Research Service estimates the plan’s 1949 appropriation accounted for 12 percent of the entire federal budget.

But the Marshall Plan was more than economic and financial aid; it was a way for the United States to promote its anti-communist agenda, rebuild the economies of the recipient countries and make them prosperous enough to buy large quantities of American goods. By the end of 1950, European industrial production had risen 64 percent, communist strength was declining in Western Europe and opportunities for American trade had revived.

The Marshall Plan boosted American exports, manufacturing, and employment, and led to the economies of the participating countries surpassing pre-war levels. In the two decades that followed, Western Europe achieved unprecedented growth and prosperity.

American goods flooded eastward and political and economic ties with Western Europe grew even stronger. One unintended consequence is that it later made it possible for Western European companies to compete against American business in the automobile and other industries.

Some observers have compared China’s ambitious new endeavor, the so-called Belt and Road Initiative unveiled in 2013, to the Marshall Plan as a game-changing effort to revolutionize trade and recast many long- standing relationships. The multi-trillion-dollar proposal is China’s largest economic and foreign policy undertaking since the founding of the People’s Republic. The infrastructure plan that spans more than 60 countries, about 65 percent of the world’s population and about one-third of the global economy, would spread Chinese investment and influence across Asia, Europe, and Africa.

The “belt” refers to a land route from western China through Central Asia to Europe; the “road” links to Europe by sea, connecting the country with Southeast Asia, the Middle East, and North Africa. The initiative has gained momentum thanks to the decline of American influence in East Asia in the wake of withdrawing first from the Trans-Pacific Partnership and then the Paris climate agreement.

After World War II, the United States needed to export excess capacity. Today, China’s economic growth is slowing and it too is looking for new markets. And just as the Marshall Plan was a blueprint for undermining the influence of the Soviet Union, so can the Belt and Road Initiative marginalize U.S. influence by improving relations with traditional American allies.

As German Chancellor Angela Merkel, Europe’s most influential leader, said after three days of trans-Atlantic meetings, “The times in which we can fully count on others are somewhat over.” She was referring to America’s positions on NATO, Russia, climate change, trade and its apparent relinquishing of a leadership role in world affairs contributing to a post-hegemonic era in which no country has a dominate role.

If she’s right, it could mark the end of 70 years of American world leadership.

originally published: June 24, 2017

Tax code needs lower rates, broader base

Posted on by j.giglio

Washington is again engaged in a tax debate. Each year, lobbyists and political contributors persuade politicians to insert new loopholes. As a result, the four million-word, 74,000-page Internal Revenue tax code is riddled with special interest provisions.

The mind-boggling complexity of the tax code is a money machine for lawyers, accountants, and huge corporations. Americans spend six billion hours and $10 billion annually preparing and filing their income tax returns.

This is the exact opposite of the broad tax base with low rates that would best serve the American people. A broad-based income tax is one in which whatever you earn is taxable. Taxpayers lose their deductions but get a simpler and fairer code, and much lower rates. If the tax rate is low, economic decisions will be based on business and personal considerations, not tax implications.

In April, the Trump administration released a broad outline of proposed tax changes that would reduce the corporate tax rate from 35 percent to 15 percent and include a one-time tax of 10 percent on overseas profits designed to bring the estimated $2.6 trillion stashed abroad back to be invested in the United States.

The plan cuts individual tax rates and reduces seven brackets to three. The top rate falls to 35 percent from 39.6 percent and the lowest rate starts at 10 percent. The plan also doubles standard deductions. It does not specify to which income levels each bracket would apply. It also eliminates the federal income tax deduction for state and local taxes, except for mortgage interest and charitable contributions.

The Trump administration promises that 3 percent annual GDP growth would make up for potential revenue losses. On the other side, Democrats argue that the White House and Republicans would exacerbate income and wealth inequalities by throwing money at the rich at the expense of the middle class.

Republican deficit hawks argue the plan will add trillions to the national debt over the next decade. They argue that deficit-financed tax cuts usually impede growth. For example, increased government borrowing drives up interest rates and reduces the financing available to the private sector. They want revenue neutral reform under which tax cuts are offset by closing loopholes.

Among the risks is that Americans will not spend the money they get from tax breaks, instead saving it or using it to pay down debt. Corporations could also decide to use the money to increase dividends, juice up executive pay and generate a fresh wave of mergers and acquisitions. 

Tax cuts are often confused with tax reform, which restructures the code to make it simpler, fairer, and more efficient. Cuts are easier than reform, which is a tough sell because there are winners and losers.

The United States needs a completely new tax code; one that reduces rates; broadens the tax base; and eliminates back door spending in the form of exemptions, exclusions and tax credits.

This kind of reform was accomplished in the Tax Reform Act of 1986, which reduced the top marginal rate for individual taxpayers from 50 percent to 28 percent, eliminated about $100 billion in loopholes, and taxed labor and capital at the same rate. It also cut the basic corporate tax rate from 48 percent to 34 percent and eliminated many corporate deductions.

But since then lobbyists and political contributors have succeeded at restoring tax breaks, which narrowed the base. As a result, rates had to increase to generate the same amount of revenue.

What needs to happen is clear, but don’t hold your breath waiting for it to pass. Congress and the White House are distracted by the investigation into possible ties between former Trump aides and Russia, and the Senate healthcare debate could drag on through the summer.

Meanwhile, momentum for major tax cuts or major infrastructure investments has stalled. This time next year, leaders in Washington will likely still be arguing about tax reform.

Originally published: June 10, 2017