TARP Again?

TARP Again?
Larry Kudlow
Tue, Sep, 28, 2010

President Obama is crowing about his small-business bill, signed into law on Monday. “It was critical that we cut taxes and made more loans available to entrepreneurs,” he said. Trouble is, small businesses and community banks don’t want Obama’s $30 billion program. That’s right. They don’t want it.

An AP story quotes community bankers who do not want the Treasury Department or other federal agencies to own stock in their banks. They know the regulatory takeover risk that will come with this program. Next thing you know, the government will order banks to make unaffordable mortgages available to low-income folks, or perhaps force business loans on the basis of race or gender.

“We have taken a strategic decision not to have our primary regulator, the government, also be a partner in our bank,” said William Chase Jr., CEO of Triumph Bank in Memphis, Tenn. The upshot is that Obama’s whacky $30 billion mini-TARP is likely to be rejected by the vast majority of small banks. They took a look at the TARPed-up regulation overhanging the big banks, and they don’t want any part of it.

Triumph’s Chase also said that his “business customers are mired in uncertainty and are reluctant to invest in their businesses.” Chase is onto something. According to the National Federation of Independent Business (NFIB), only 4 percent of small-business owners surveyed in August cited a lack of financing as their top business problem. And a full 91 percent say all their credit needs are met.

So what’s the real problem? It’s the economy, stupid. And it will get worse should the entire Bush tax-cut plan, including the alternative minimum tax, wind up in flames at year-end. If the Bush rates expire, an already sluggish recovery will be doomed. That’s the real issue.

But Obama thinks his $30 billion mini-TARP will do the trick. Most folks may not know it, but as part of this plan, the Treasury would buy stock in the community banks that qualify, with those banks having to pay an annual dividend of 5 percent to the government. If those banks make loans to small businesses, the dividend payment might drop to 4 percent. But if they don’t use the money for loans, the dividend payment becomes a penalty at 7 percent. That amounts to Treasury control of the small banks that play this silly game.

Who in their right mind would sign up for this? This is government-planning intervention almost beyond belief.

Now, the Obama plan includes some tiny targeted tax cuts for capital gains and faster business depreciation. But why not universalize those ideas for all businesses on a permanent basis, instead of just small-ball targeting? If you believe those investment-related tax cuts will work for a year for small businesses, why not believe they will work permanently for all businesses?

Just lower the cost of capital and raise the investment return permanently to reignite sagging animal spirits in the economy. Then let markets -- not government planners -- make the final decisions.

Another business-tax point: In the Pledge to America, the GOP House leadership unnecessarily plays small ball with its own small-business tax plan. The Republicans want a tax deduction equal to 20 percent of small-business income. But they would be much better advised to take a big-bang approach that would lower the marginal tax rate on all business profits, large, medium, and small. Take the top rate of 35 percent down to 15 or 20 percent. Better yet, replace the corporate-profits tax for all businesses with a sales tax net of all investment expenses. This would end the double tax on business capital and provide new tax-rate incentives.

And one other bee in my bonnet: Republicans should support a 5.25 percent tax holiday on the repatriation of $1 trillion in U.S. corporate profits that reside overseas. This Bush-era idea worked in 2005 by bringing about $350 billion of new investment into the United States. And the stakes are even higher now. At the lower tax rate, American firms will bring their money home. Since some portion of that new money will go into new investment and job hires, this plan will pay for itself.

So I encourage the GOP to think big on business taxes, not small. And also to think big on major flat-tax reform to radically simplify the crazy IRS system, slash the marginal rate, and broaden the base to get rid of all special-interest tax subsidies.

Let free-enterprise know that change is really coming.