Sunday, July 10, 2011

Economically illiterate Obama, re: Corporate Jets

Obama has called for taxing corporate jet owners to help offset government spending and balance the federal budget. It is just the latest example of the president's economic illiteracy. A business airplane is just another tool for making a company more efficient and profitable, just like computers, software, telecommunications equipment, copiers and other machines. No one would suggest that the economy would be better off without these items; and the more they are taxed, the more their use would be discouraged, slowing the growth of companies and the economy. Why should airplanes be any different?

Far from being an extravagance as Obama derides, the use of an airplane is a sign of a well-managed company. A host of measurements show companies using business aviation outperform those without aircraft across every key financial and non-financial measure of success. Michael Dyment is the lead author of a study that found companies using business aircraft superior to those that don't:

     Average annual revenue growth on a market-cap weighted basis was 116 % higher

     Average annual earnings growth was 434% higher

     Total stock and dividend growth was 252% higher

     Total share price growth was 156% higher

      Market capitalization growth measured by market value growth was 496% higher

There are also many non-financial ways in which companies benefit from business aviation. In 2009 these included the following achievements:

      95% of the S & P 500 companies in Business Week's “50 Most Innovative Companies”

     90% of the S & P 500 companies in Business Week's “25 Best Customer Service companies”

     86% of Fortune magazines “100 Best Places to Work”

     95% of the S & P 500 companies in Fortune's “World's Most Admired Companies”

     90% of S & P 500 companies in CRO (corporate responsibility) magazine's “100 Best Corporate Citizens”

The void in Obama's economic knowledge is filled by his collectivist ideology. In place of fact-based economic arguments, he is resorting to Marxist “class warfare,” portraying the rich as “enemies of the people,” inspiring envy and resentment against those wealthy enough to have corporate jets. In this manner, he sets the stage for popular acceptance of increasing taxes on “millionaires and billionaires” and, he hopes, popular support for his reelection.

Leaving aside Obama's previous definition of the wealthy whose taxes he would raise as anyone making over $250,000 per year, let's consider the economic effects of raising taxes on “millionaires and “billionaires.” There is an excellent historical example of just what Obama is proposing, but he is as ignorant of history as he is of economics. If not, he would realize how such a policy destroys jobs—just the opposite of what he wants in this time of high unemployment.

Two decades ago the U.S. instituted a ten percent tax on yachts, luxury airplanes, jewelry, furs and expensive cars. “Fairness” was a major justification for the tax. It was viewed as a relatively harmless way to raise revenue by penalizing the rich without hurting lower- and middle-classes, who seldom buy such luxuries. The intent was to “soak the rich”—in order to obtain tax money for politically-preferred purposes—but the effect was to deprive the working class of jobs and wages.

Within eight months after the law took effect, Viking Yachts, the largest company in the industry, laid off 1,140 of its 1,400 employees and closed one of its two manufacturing plants. In the first year, one-third of all yacht building companies in the U.S. stopped production, and according to a Congressional Joint Economic Committee, the industry lost 7,600 jobs. Before it was over, 25,000 workers had lost their jobs building yachts, and 75,000 more jobs were lost from the indirect effect on companies supplying parts and materials to the yacht companies. Ocean Yachts trimmed its workforce from 350 to 50. Egg Harbor Yachts went from 200 employees to five and filed bankruptcy. Viking Yachts was down to 68 employees.

The U.S., which had been a net exporter of yachts, became a net importer as U.S. companies closed. Jobs shifted to companies in Europe and the Bahamas, and the U.S. tax law collected zero revenue from the sales it had driven overseas.

Congress estimated the luxury tax on boats, aircraft and jewelry would raise $5 million in revenue a year. The Congressional committee concluded the value of jobs lost in just the first six months was $159.6 million. Overall, the Treasury lost $24 million through lost income tax revenue, higher unemployment and welfare payments. In 1993, realizing the cost of just administering the program was higher than the revenue being collected, Congress repealed the tax.

Beech Aircraft says it lost 39 airplane sales in the first quarter following imposition of the tax on January 1, 1991. It had planned to add 500 new jobs in the following year but ended up laying off 20 workers.

Is the effect of taxing corporate jets as Obama espouses likely to be any different than the effect of the tax on luxury yachts and planes from the 1990 law? Again, it would not be just the effects on the companies that manufacture the jets but on those workers in other companies that manufacture wheels, tires, avionics, hydraulics, metals, upholstery fabrics, fasteners, glass, plastic components etc. for the airplane companies.

Several years ago I wrote The Trojan Project, a novel of intrigue about restoring America. The characters and storyline are fiction, but the laws, historical references to the Constitution, and quotations from the Founding Fathers are nonfiction, as are the reforms proposed in the book. The crux of the book is a conversation by the two principal characters with opposing views on the future of America. One of the issues they discuss briefly is the 1991 luxury tax I have described above. The conversation on this subject concludes with this statement by the hero: “If there weren't any really rich people, there wouldn't be any demand for luxury boats, planes, furs, jewelry or expensive cars. If no one could afford these luxury items, there would be no jobs in those industries or the related parts suppliers by which working-class people could buy the bare necessities for themselves. Once again, when people are free to make their own selfish desires—even for extravagant luxuries—the cause of their actions in the marketplace, the effect is beneficial for others and for society. Act against the cause, and you deprive others of those beneficial effects.”

Charles Krauthammer has calculated the revenue that would be collected from Obama's proposed tax levy on corporate jets—even if it did not push jobs and sales overseas, as the luxury tax on yachts did. Krauthammer writes: “If you collect that tax for the next 5,000 years — that is not a typo — it would equal the new debt Obama racked up last year alone. To put it another way, if we had levied this tax at the time of John the Baptist and collected it every year since — first in shekels, then in dollars — we would have 500 years to go before we could offset half of the debt added by Obama last year alone.

“Obama's other favorite debt reduction refrain is canceling an oil company tax break. Well, if you collect that oil tax and the corporate jet tax for the next 50 years, you will not yet have offset Obama's deficit spending for February 2011.”