Friday, September 28, 2007

Blame China for High Food Prices

Over the past year the price of a bushel of wheat has almost doubled, from $4.79 to $9.50. American wheat farmers are delighted with this state of affairs, along with seed and herbicide producers and manufacturers of farm equipment. The downside is that it comes at the expense of higher bread, pasta, and tortilla prices. The average retail price of a pound loaf of whole-wheat bread and milk in U.S. cities was up 24 and 26 percent respectively over a year ago.

Americans blame China for hazardous lead-laden products, an undervalued currency, rising military expenditures, pollution, and a host of other problems. To this list we can also blame China for higher food prices. China’s 10 percent annual real growth is transforming its population into a middle-class society. Several hundred million Chinese, members of the burgeoning middle class, no long make do with a bowl of rice, salt fish, and a sprig of vegetables. Like their counterparts in the West, they want meat and milk, whose production requires more grain to feed livestock. Soaring demand for milk has tripled China’s stock of dairy cattle over the past decade. Global wheat inventories are the lowest they have been since 1960, and global corn stocks are approaching their lows of the early 1970s.

Wednesday, September 26, 2007

The Business Climate and Economic Growth

The World Bank recently issued its annual report on the global business climate, Doing Business 2008, ranking countries on the ease of doing business. Eight of the top ten are Western democracies, with Singapore and Hong Kong rounding out the list. Twenty-six of the bottom 30, ranked 149 through 178 are in Sub-Saharan Africa.

The ease of doing business should be a factor in economic growth. However, the relationship is not so straightforward. While the top ten are performing much better than the bottom thirty, none in the top ten lead the world in growth. The two fastest-growing economies are China and India, which received rankings of 83 and 130 respectively, followed closely by Vietnam at 91. While India and Vietnam’s high growth is a relatively recent phenomenon, China has averaged 9-10 percent real economic growth for the past twenty-five years. China moved up ten spots this year, from 93 to 83. Still, to be ranked so low with such spectacular growth calls into question the World Bank’s definition and measurement of the business climate, or its relevance to growth. Countries ranked ahead of China, including Jamaica, Kenya, Kazakhstan, El Salvador, Belize, Peru, Romania, Bulgaria, and Namibia, have not come close to achieving China’s sustained growth over the past twenty-five years.

Tobacco Politics

Study after study has confirmed the danger to public health from smoking. The American Heart Association reports that 440,000, the largest number, of the 2.4 million annual deaths in the United States are due to cigarette smoking. The Surgeon General has called it the leading cause of disease and preventable death in the United States. In light of these facts, it seems hard to understand that any tobacco is still grown in the United States.

Or so you would think. The Democratic Party is trying to push through Congress an expansion of the State Children’s Health Insurance Program. To help pay for the expansion, the bill includes raising the federal cigarette tax by 61¢ a pack from its current rate of 39¢ to $1, in addition to state taxes that range from a low of 17¢ in Missouri to a high of $2.57 in New Jersey. Projected revenue from the federal tax hike comes to $36 billion. Although the House of Representatives voted 265-159 to approve the bill, eight Democrats opposed the bill, either because they were from tobacco-growing districts or because they objected to the tax increase on cigarettes.

More than four years after the United States brought down the repressive Taliban government in Afghanistan, it has made no progress in reducing the cultivation of the poppy plant. The extract from the seed pods in poppies are used to produce opium, which is converted into heroin, morphine, and other deadly drugs. Afghanistan has increased its production to the point where it supplies 93 percent of the world’s output.

If members of Congress vote to protect tobacco growers in the United States, it borders on hypocrisy to complain about the inability to curtail poppy cultivation in Afghanistan.

American Manufacturing

The National Association of Manufacturers (NAM) took out a four-page ad in the September 26, 2007, edition of the Wall Street Journal, pointing to the great success of American manufacturing. However, it noted that America’s ability to compete with foreign manufacturers required several immediate steps to maintain its world leadership.

The list includes modernizing road, rail, and barge infrastructure to reduce transportation costs, developing more low-cost sources of energy (especially natural gas), improving American education in science and math and graduating more scientists and engineers to compete with China, India, and Russia, pursuing fair trade agreements, ending currency manipulation (meaning China should revalue its currency), reducing the corporate tax rate, and ending double taxation. The likelihood of achieving any these measures in the near future is slim. If the NAM is correct, American manufacturing faces a bumpy road ahead.

Tuesday, September 25, 2007

Arab Socialist Takeovers of Private Western Businesses

Abu Dhabi National Energy Company, a state-owned company in the Middle East known as TAQA, agreed on September 24, 2007, to buy Prime West Energy Trust of Calgary, Canada, which manages oil and gas properties. It agreed to pay $2.4 billion plus assumption of Prime West’s debt. Since Prime West owns oil and gas properties in the United States, the deal may be subject to a national security review by the Committee on Foreign Investment in the U.S. that investigates the transfer of U.S. assets to foreign entities.

This acquisition is TAQA’s third in Canada, bringing its investment in Canada’s energy’s sector to $7.5 billion, with the goal of reaching $20 billion by 2012. TAQA plans to acquire oil and gas pipelines and power generation and distribution facilities. TAQA’s purchase in Canada is part of a growing pattern of Middle Eastern state-owned companies acquiring Western resources and other assets. Bourse Dubai, a state-owned entity in Dubai, is seeking a 20 percent stake in Nasdaq, the second leading U.S. securities exchange.

Two points merit discussion. The first is that TAQA’s acquisition of private Western enterprises is not one private enterprise buying another. Rather, it is a government-owned entity in the volatile Middle East buy private Western businesses. This can be loosely construed as nationalizing private Western firms, placing them under the control of foreign state entities. This is not free-market capitalism.

The second point is that these are Arab state-owned entities. Not all Arab regimes are friendly to the United States. Those that are friendly today may change their allegiance tomorrow. The question can be asked if the accumulation of vital Western energy resources by Arab state-owned entities poses a potential security risk to the United States, given its heavy dependence on imported oil.

China and Russia Rising

Each year Freedom House compiles reports on the state of political freedom and civil liberties around the world. It has just released the 2007 edition of Countries at the Crossroads, analyzing the current state of governance in 60 strategic countries. The report pointed to the diminution of human rights and governance in Russia and Iran, political repression in Libya, Tunisia, and Algeria, and military coups in Thailand and Bangladesh.

Several of the countries that are retreating from democracy have been successful economically, notably Russia, Libya, Tunisia, and Algeria. The report further noted that states around the world are choosing to follow the models of growth over democracy of China and Russia. The leaders of many developing and middle income countries may be moving away from democracy in favor of stern rule that emphasizes growth over political freedom and civil liberties.

Monday, September 24, 2007

The Golden Rule

Throughout the centuries, philosophers have put forth their interpretation of "the golden rule." Perhaps the best known is "do unto others as you would have them do unto you." In the global economy of the twenty-first century, a more relevant interpretation is "he who has the gold rules." The best comment I encountered this past weekend (September 21-23) was stated by Hugh Young, a money manager in Singapore. "Asia has the cash and the west the debt." In contrast with the Asian financial crisis of a decade ago, the risk now appears to be greater in the West. The huge trade and budget deficits of the United States during the past few years has made the U.S. a large debtor nation, in which foreign claims are piling up at some $800 billion dollars a year. The cash is in the hands of Asian and Middle East central banks and sovereign wealth funds, with the debts issued by U.S. government agencies and enterprises. Something to worry about?

Speaking of Debt

In a speech on September 24, 2007, President Bush again threatened to veto Congressional appropriations bills that exceed his budget request for fiscal year 2008 (October 1, 2007, to September 30, 2008). Congressional spending bills propose $22 billion in expenditures beyond the president’s budget.

It is interesting to place the costs of continued operations in Iraq and Afghanistan against Bush’s veto threat. The Congress has appropriated $147 billion for military activities in Iraq and Afghanistan for fiscal year 2008. Defense Secretary Robert Gates proposes to request an additional $45 billion, bringing supplemental defense expenditures to $192 billion. This is an increase over fiscal year 2007s total of $165 billion. There is no immediate end in sight.

This is not to say that the $22 billion would be well spent. But one can raise similar doubts about the $192 billion achieving its objective of stability in Iraq and Afghanistan, or the total of $500 billion thus far spent with little to show for the cost in lives and treasure.

Saving the Planet

As apart of opening of the United National General Assembly, member states are holding a summit on greenhouse gas emissions in order to fight global warming. Melting glaciers and shrinking Arctic ice have pushed the issue to the forefront of global diplomacy. There is a growing scientific consensus, though not yet universal, that man-made emissions are a primary source of global warming. Some fifteen countries, the major industrial nations along with Indonesia, Brazil, China, and India, are responsible for the bulk of emissions.

Reducing emissions is a worthwhile objective. However, it is hard to see how the level of investment in research on alternate energy sources will have much impact on the near- and medium-term growth of emissions. Here are some trends that are unlikely to be slowed or halted, much less reversed. China, India, Brazil, Indonesia, and other fast-developing countries are adding several million polluting vehicles each year on their roads. Airline expansion will fill the skies with hundreds of additional polluting planes each year. China alone is adding one coal-fired power plant to its stock of generating plants each week. Each new house, filled with a wide variety of electronic appliances and entertainment features, consumes more electricity that must be generated from non-nuclear sources. If global warming is a serious problem, the U.N. summit is barely a baby’s first step in the solution. Only a precipitous decline in the use of petroleum can achieve a significant reduction in emissions. To date, the world continues to increase, not decrease, its appetite for petroleum.

Why it is so Difficult to Reduce Emissions

The American Council for an Energy Efficient Economy has compiled a list of the top 12 "green" cars. To increase fuel economy, the Department of Health and Human Services advised its 67,000 employees to purchase one of these "green" cars. The problem with this recommendation, which appeared in the department’s newsletter, is that all 12 are Japanese or Korean models. Following complaints from Detroit’s big three, HHS issued a statement saying that it regretted offending anyone. So much for this one small step to reduce oil consumption.

Negotiating with Syria

Mitchell Reiss, President Bush’s director of policy planning at the U.S. State Department during 2003-05, is advising in the September 24, 2007, issue of the Financial Times that President Bush attempt to achieve a diplomatic breakthrough with Syria. Citing the administration’s success with Libya, which agreed to abandon its nuclear program, a successful engagement with Syria would counter Iran’s growing influence in the region, reduce its interference in Lebanon, slow the movement of suicide bombers into Iraq, strengthen the Palestinian authority against Hamas, and reduce its support of Hezbollah.

Reiss cites secret talks held between Israel and Syria during the past summer in pursuit of some of these goals. If the talks went well, why did Israel bomb a Syrian target that some believe represented an early stage of nuclear weapons development with the cooperation of North Korea. Moreover, the Syrians have seemingly assassinated another anti-Syrian Lebanese politician. These are not encouraging events.

Friday, September 21, 2007

Fluorescent Lights: A Partial Solution to Global Warming?

Saving energy and reducing man-made emissions to curtail global warming have become major priorities for the United States. Inefficient incandescent bulbs, of which some four billion are installed in U.S. buildings and which convert only 5 percent of the electricity they use into light with the rest lost as heat, constitute a third of the world market. A switch to compact fluorescent bulbs would substantially cut energy use and, after paying the higher initial cost of fluorescent bulbs, save consumers $6 billion a year. If all the incandescent bulbs in the world were replaced with fluorescent bulbs, the reduction in carbon-dioxide emissions would achieve almost three-quarters of the reductions that industrial nations have pledged to curb global warning under the Kyoto Protocol. The U.S. by itself would achieve one-quarter of the reductions.

Congress is working on legislation to phase out conventional incandescent bulbs over the next seven years. Domestic U.S. manufacturers want a later phase-out date to avoid having to scrap large investments in producing more efficient incandescent bulbs.

A bigger obstacle to phasing out incandescent bulbs is an unpleasant political fact: nearly all compact fluorescent bulbs are made in China. The widening trade deficit with China has been a hot political issue in the United States for the past several years. Despite numerous official trips between Beijing and Washington, D.C., to address this issue, the U.S. trade deficit with China continues to rise. A mandated shift to fluorescent bulbs in the U.S. over a short period means that China will remain the principal supplier of fluorescent bulbs, thus undercutting U.S. efforts to narrow the trade gap. Given China’s head start in producing compact fluorescent bulbs, it is likely that China will be the world’s least-cost producer for the foreseeable future.

More on China

China is taking advantage of the U.S. preoccupation with Iraq and the Middle East by extending its political and economic influence in Africa, Latin America, and Asia. A recent deal about to be completed in the Democratic Republic of the Congo will give China access to mineral resources in exchange for $5 billion of Chinese funds to construct infrastructure projects. So long as the U.S. is tied up in the Middle East, China will continue to gain greater access to natural resources.

Russia and the European Union

European Union countries import 80 percent of their natural gas requirements and a substantial portion of their oil. A large share is imported from Russia, which gives that nation great leverage in European affairs. Shutting of the pipelines in winter for any length of time poses a major risk to Europeans. Moreover, the high price of energy means that Russia is rapidly accumulating funds that it can use to purchase European and other assets. A revived Russia under Putin is restoring a sense of pride and nationalism in Russia that may not be to the long-run benefit of Americans and Europeans. Globalization means different things to different nations. To the Western industrial democracies it means increasing trade and investment across national borders. To China, Russia, and the oil-producing countries it may also include the use of natural resources and the accumulation of foreign exchange reserves that can be deployed to achieve political ends. The West must be careful not to assume a mirror image of all its trading partners.

More on China, Russia, and Oil-Producing Nations

Congress must approve a rise in the current U.S. debt ceiling of $8.965 trillion for the U.S. government to pay its bill come October 2007. Treasury Secretary Henry Paulson has asked Congress to raise the debt ceiling by another $850 million. A considerable portion of this extra debt is likely to be purchased by foreign nations that may not have the long-term interests of the U.S. at heart. As foreigners acquire ever-greater U.S. assets, they correspondingly gain greater influence on both U.S. domestic and foreign policy. The U.S. does not allow foreign companies to buy airlines, shipping firms, television networks, and some security-related businesses. Some in the government have raised concerns about state-owned Chinese and Middle Eastern countries acquiring U.S. firms and assets.

Wednesday, September 19, 2007


Tax Reform

The leading Democratic candidates for president have begun to spell out their plans for tax reform. Charles Rangel, chairman of the tax-writing House Ways and Means Committee, is also at the forefront of tax reform. Since the Tax Reform Act of 1986, which reduced marginal rates and simplified the tax code, every tax act has further complicated the system and lengthened the code. For the past twenty years, tax reform has come to mean the exact opposite of the word. It is likely that the next administration will be no different. There will be no flat tax on a postcard or national retail sales tax to replace the current code. There will be no real simplification. At most there will be some small changes in rates, deductions, exemptions, and other features of the tax code. This amounts to rearranging the deck chairs on the Titanic.

Bread or Gasoline: Take your Pick

The recent emphasis on biofuels has driven up the price of food staples. A bushel of wheat has shot up as high as $9.00. The price of tortillas in Mexico has risen 50 percent and pasta prices in Italy have skyrocketed. Farmers are switching to corn production to profit from the demand for ethanol. Declining wheat production means higher prices for wheat foodstuffs, which most hurts the poor. Cleaner air in the West may come at the expense of a good diet in developing countries.


The fastest growing serious disability in the U.S. is autism, which has increased 600 percent in the past few decades. Studies show that a mother’s and father’s risk of delivering a child with autism steadily rises as they get older. Women ages 40 and over show a 30 percent increase compared with moms between the ages of 25 and 29. Men ages 40 and older have up to a 50 percent increased risk compared with their 25 to 29 year-old-peers. Early marriage in the 1950s and 1960s has given way to much later marriage, after women have completed their college education, professional school, and several years experience in the workplace. The feminist movement, coupled with a strong economy, has given this generation of women opportunities that their mothers lacked. But one price of later child bearing is a rise in autism.
To Consume or to Save: That is the Question

The U.S. economy depends on consumption. Whenever the economy slows, as is the case in late 2007, market analysts ask if consumers will tighten their wallets and purses, or keep spending. Reduced consumer spending can lead to slower growth. If the cutbacks are substantial, recourse to the "R" word, recession, will begin to appear in print and television.

In the same breath, economists and market analysts warn that Americans consume too much and do not save enough. The U.S. runs a current account deficit, its international trade in goods and services, of around $800 billion a year. This sum represents an increase in foreign claims on U.S. assets. The current account deficit has risen sharply over the past decade. The two leading culprits are oil imports and goods from China. The current account deficit is the flip side of a capital account surplus, which means that foreigners are lending the U.S. money or buying U.S. assets to the tune of $800 billion a year. This an imbalance between domestic saving and investment. Americans do not save enough money to finance investment in the U.S. Foreign capital buys U.S. government securities and a wide variety of other real and financial assets. Foreigners now own more than two-fifths of publicly-held U.S. Treasury bonds, up from 15 percent a few short years ago.

This deficit cannot continue indefinitely without severe repercussions. One is a fall in the value of the dollar against other currencies. Between 2002 and 2007, the Canadian dollar has risen from C$1.58 to US$1.01. The euro has risen from 88 cents to $1.39. The same holds for other currencies. Sustained large deficits could precipitate a run on the dollar. Another repercussion is the prospect of inflation from higher prices of imported goods and services. Another is the potential influence foreigners will have on U.S. foreign policy as they continue to accumulate U.S. Treasury securities and other assets.
Many argue that Americans should save more, both for their own well-being and that of the U.S. economy. The rate of return on saving influences the incentive to save. High real interest rates encourage savings. Low rates discourage saving. When Ben Bernanke and the Federal Reserve Board reduced the federal funds rate from 5.25 to 4.75 percent on September 18, 2007, they reduced the return to savers. Recall that former fed chairman Greenspan held interest rates at a low 1 percent for several years, which resulted in savers receiving a zero, or negative depending on inflation, rate on their bank deposits. The biggest losers in this low-interest world were the elderly, whose interest earnings supplement Social Security. The reduction from 6.5 to 1 percent on deposits during Greenspan’s later years at the helm of the fed cut the interest earnings of the elderly by as much as 85 percent. The September 18 reduction reduced the return on saving by nearly 10 percent, again penalizing savers. Investment bankers, home builders, financial analysts, and others are calling for further cuts in interest rates. Who will speak for savers and the elderly?

Wednesday, September 5, 2007

Does Rising Foreign Ownership of U.S. Assets Pose a Geopolitical Problem?

The August 2007 sell off in U.S. financial markets, which was triggered by the crisis in sub-prime mortgage lending and borrowing, is one illustration of a potentially larger problem. The U.S. government and the American people have been borrowing vast sums to finance spending and consumption. The federal government borrows several hundred billion dollars every year to pay its bills. The Congress periodically raises the federal debt ceiling for the government to remain in business. As of mid-August 2007, total federal debt stood at $8.97 trillion. Of this, the outstanding marketable debt of the federal government in the hands of the public, which excludes non-marketable securities held in the Social Security and Medicare Trust Funds, was $5.34 trillion, up from $346 billion at the end of 1973. Foreign ownership of marketable debt has almost tripled, from 15 percent in 1986 to about 42 percent in mid-2007, of which Asian central banks hold the lion’s share. The large share of foreign ownership of U.S. debt gives other nations, not all of whom are always friendly, the potential to influence U.S. monetary policy, interest rates, economic growth, and, perhaps more worrisome, U.S. foreign policy and national security.

Foreign ownership of federal debt is only part of the picture. A broader indicator is net foreign claims on U.S. assets. It changes with net acquisitions by foreign residents in the U.S. less net acquisitions abroad by U.S. residents. The change is largely driven by the current account deficit, the difference in U.S. purchases of goods and services over sales to foreigners, a deficit which is financed with foreign capital inflows. Largely in surplus during 1946-1981, the current account has since been in deficit since 1981. The deficit passed $100 billion in 1985, reached $214 billion in 1998, $415 billion in 2000, to about $800 billion in 2006. During the ten years 1998-2007 (which includes an estimated $800 billion in 2007), the cumulative deficit comes to about $5.4 trillion.

Economists and demographers project future trends to estimate the need for revenue to support a growing elderly population, the viability of Social Security and Medicare, and other topics. Assume that the U.S. continues to accrue a current account deficit at the present rate, or higher, for years to come. That would transfer $800 billion or more a year in U.S. assets to foreigners, disproportionately to China and oil exporting nations, especially in the volatile Middle East, home to radical Islam. Ten years would add $8 trillion, or more, to foreign claims; twenty $16 trillion, and so on. Saudi Arabia enjoys a $100 billion annual current account surplus, China, $250 billion, Russia, $80 billion, and so on.

The growth in foreign ownership of U.S. assets can be compared with the net wealth of U.S. households. Excluding real estate, the value of all U.S. household net wealth in 2006 was around $29 trillion, of which equities constituted about $16 trillion (household, pension, and insurance company holdings of corporate equities and mutual funds). Within a generation, foreign ownership of U.S. federal debt and equities will skyrocket.

A part of this ownership takes the form of an increasingly important phenomenon, sovereign wealth funds (SWF), which have captured the attention of economists and investment analysts. SWF are directly or indirectly controlled government investment vehicles funded by foreign currency assets which are managed separately from the official reserves of central banks. SWF are currently estimated at $2.2-2.5 trillion dollars, close to half of the $5.1 trillion in official foreign exchange reserves. Morgan Stanley has estimated that SWF will increase to $5 trillion by 2010 and $12 trillion by 2015. About two-thirds have derived from commodity exports (oil, gas) and one third from transfers from official foreign exchange reserves. Examples include Abu Dhabi’s Investment Authority ($875 million), Singapore’s Government Investment Corporation ($330 billion), Norway’s Petroleum Fund ($300 billion), and Russia’s stabilization Fund ($100 billion). The investments of private Saudi residents and Arab sheiks are akin to SWF. Some SWF have been and are seeking to acquire strategic foreign enterprises (banks, energy, airlines, ports, and publishing companies). Examples include the Dubai Ports Authority, CNOOC (a Chinese oil company), and Russia’s Gazprom, to name a few.

China has announced plans to create a SWF of $200 billion out of its foreign reserves of more than $1.3 trillion, which are increasing by $250 billion a year. During 1995-2006, China’s foreign reserves rose at an average annual rate of 20 percent. It is likely that China will inject additional billions into its SWF as its reserves continue to grow. In contrast with regulated private investment funds, SWF are not required to disclose governance or their portfolios.

Most economists argue that capital inflows are good for the U.S. economy, supporting investment that creates jobs and growth. Indeed, some claim that the portion of the trillions of dollars of SWF that will be invested on U.S. equity markets will help to prop up the market. The question is whether the increasing foreign ownership of U.S. assets poses economic and political risks.
Prospects for Tax Reform in the Next Administration

In November 2008, Americans will elect a new president, a new House of Representatives, and a third of the Senate. A new administration provides an opportunity to review, renew, modify, or repeal existing legislation. Taxes are always on the minds of voters, politicians, investors, businesses, and workers. What will the next administration bring? Key items on the political agenda include expiration of President Bush’s tax cuts—cuts in marginal rates, capital gains, and dividends— that were enacted in June 2001, but are due to expire at the end of 2010, addressing the alternative minimum tax (AMT), the parallel income tax that imposes a minimum level of taxes on high-income individuals but which is ensnaring millions of middle-income taxpayers in its net, and the campaign promises of the next president.

Since President Reagan signed the Tax Reform Act of 1986, subsequent legislation has proliferated new provisions and added thousands of additional pages of explanation and interpretation. Federal income tax forms for individuals number in the hundreds and the explanations for completing many of them are lengthy and often unintelligible. The tax gap, the difference between what is owed in law and collected is estimated around $300 billion. Compliance costs exceed $100 billion. Thousands earn their living assisting individuals with tax planning and reporting. Although politicians rail against the complexity of the tax code, they rarely enact real simplification.

What do the Democratic and Republican candidates for president propose? Most political analysts expect Democrats to retain control of both houses of Congress. A Democratic president is thus more likely to succeed than a Republican in enacting her/his campaign promises. The candidates’ official web sites, statements made on the campaign trail, and past votes provide sources of information.

The three leading Democratic candidates are Hillary Clinton, Barack Obama, and John Edwards (which assumes that Al Gore will not enter the race). Hillary Clinton, the prospective nominee, has not offered any details on her income tax policy in speeches, press releases, or web site. She suggests reducing, but not repealing, the AMT. She voted against repeal of and raising the estate tax exemption to $5 million. She objected to the Bush tax cuts on income, dividends, and capital gains, but has not yet said if she would allow its provisions to expire, in whole or in part. On a separate matter, Social Security, she has questioned the $100,000 income limit subject to payroll tax.

Barack Obama is more specific in his statements, though taxation is not an issue topic on his web site. Having voted against Bush’s tax cuts, Obama propose unspecified reductions to pay for health and other programs. He objects to repeal, and a higher exemption, of the estate tax. He supports unspecified tax incentives to create jobs in the U.S. instead of offshore.
Edwards, alone among the first tier, includes the issue of taxation on his web site. He advocates repealing the Bush tax cuts to pay for universal health care, supports tax preferences for the middle class (savings tax credit, expanded child care credit, increase in the earned income tax credit, reduction in the marriage penalty, and tax deductions for college tuition). The unlikely remaining candidates, Joe Biden, Chris Dodd, Mike Gravel, Dennis Kucinich, and Bill Richardson, agree on retaining the estate tax, raising rates on income, capital gains, and dividends, and favoring middle class cuts.

Among leading Republicans, none has posted their positions on taxation. Rudy Giuliani favors unspecified low rates, a lower AMT, and repealing the estate tax. Romney supports the elimination of tax on capital gains, interest, and dividends for an unspecified middle class, and has pledged no new taxes. Thompson speaks about unspecified low rates and reform to keep the U.S. economy competitive. Despite having voted against the Bush tax cuts in the first instance, John McCain, whose campaign has faltered, now supports their extension and favors repeal of the estate tax. Among second tier candidates, only Tom Tancredo and Mike Huckabee have posted details on their sites. Both support the "Fair Tax," a 34 percent retail sales tax in place of both income and payroll taxes. Sam Brownback supports an alternative flat tax.

What can we surmise from this review about the prospects for broad tax reform in the next administration? A Democratic president is likely to claw back some or all of the Bush tax cuts, especially for upper-income households, retain the estate tax will be retained, perhaps with a several million dollar exemption and slightly lower rates. If the AMT is reduced or repealed, the lost revenue will have to be replaced with higher taxes on income. A Democratic administration and Congress are likely to increases rates on capital income and earnings of high-income persons. Should a Democratic president address Social Security, she/he may propose increasing the level of income subject to payroll tax.

A Republican president will emphasize extending the Bush tax cuts. A compliant Congress could compromise on this, retaining some, but not all, of the reductions. That no top-tier candidate is proposing bold reform means that a Republican administration would tinker with, but not overhaul, the tax code. From the vantage of just over a year before the election, prospects for the next administration suggest higher rates and more complexity. Real reform and simplification will remain a will-o’-the-wisp for some years to come.