Thoughts on the political programme of Senator Barack Obama (D-IL) - Dr. Klaus Günter Deutsch Berlin, June 20, 2008
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Thoughts on the political programme of
Senator Barack Obama (D-IL)
Dr. Klaus Günter Deutsch
Berlin, June 20, 2008DB Research The evolving programme… Barack Obama still has no all-encompassing concept for each and every policy field in respect of the US economy, finance, social security and the environment. His programme and public statements do, however, already reveal insights into very important underlying principles and a great number of details. Overall, it can be seen as a programme that contrasts starkly with that of the Bush Administration, although no prominent reform issue is really addressed at length. However: as there are Democratic majorities in both houses of Congress extensive preliminary work has already been done in certain policy fields … The focal points of the proposed measures are: a fiscal policy geared to a fairer distribution of wealth, a new healthcare programme covering a broader cross-section of the population and a very ambitious energy and climate policy. Dr. Klaus Günter Deutsch 2
DB Research
Overcoming the economic crisis
With a view to overcoming the subprime and financial crises in the US,
Obama pursues a selective approach comprising limited regulatory changes,
support for bankruptcy victims and some Keynesian demand stimulus.
– Tax breaks for debtors in arrears
– Legal measures to combat fraud on the part of financial intermediaries and
creditors
– Special taxes on mortgage lenders
– Changes to bankruptcy rules for mortgage debtors
Dr. Klaus Günter Deutsch 3DB Research
Fiscal policy
America‘s federal budget position (incl. the social security system) has
deteriorated since 2000 by around 7 percentage points of GDP.
Brookings: Given unchanged policy and normal trends, the budget would
remain in deficit over the next ten years to the tune of 2-3% of GDP.
The overall fiscal implications of Obama’s policy proposals cannot be captured
correctly yet, but the medium-term development of public-sector revenues
would be weakened further in comparison with current law and would
presumably decline by 5-10%, while on the expenditure side we could expect
new programmes but also less military spending abroad.
Tax Policy Center: Revenues would fall by around USD 270 bn p.a. (-7%)
relative to current law, but relative to plausible status quo policy they would
increase by USD 70 bn p.a.
– Not captured: profits yielded by auctions of emission allowances
In any case, this won’t be enough to achieve budget consolidation.
Dr. Klaus Günter Deutsch 4DB Research
Tax policy
Tax policy is geared especially to the redistribution of income to households
with low to medium incomes. Most of the proposed measures would raise
work incentives for the low-skilled, provide tax relief for the middle class and
heavily increase the tax burden on wealthy families. Only a few initial items
have been specified for the corporate segment, but no overall concept has
been tabled yet.
– Reinstitution of the 36% and 39.6% income tax brackets: USD 60 bn p.a.
– Tax exemption to neutralise contributions to social security: USD 80 bn
– Reduction of the Alternative Minimum Tax: USD 80 bn
– For households with annual incomes of over USD 200,000, increase in capital
gains tax to 25%; over USD 250,000, to income tax rate
– Corporate tax reform
– Reintroduction of estate tax (2011: 45%; exemption ceiling: USD 3.5 m)
– Tax breaks for pensioners, students, low-skilled workers ...
– Tax rebates for R&D expenditures and production
– Special tax on oil companies
Dr. Klaus Günter Deutsch 5DB Research
Healthcare policy
In the healthcare debate, which plays a pivotal role politically, Obama favours
fundamental reforms.
– Mandatory coverage of children (approx. 7 m children)
– Transfer payments (income-related subsidies) to non-insured adults (approx.
40 m people), but no mandatory coverage!
– Creation of a public healthcare plan which must offer everyone a policy
(compulsory participation)
– Co-financing by employers that do not offer health coverage
– Increased competition among suppliers thanks to new National Health Insurance
Exchange
– Expansion of public programmes
– Reduction of prescription drug costs (liberalisation of re-imports, boosting the
purchasing power/clout of the public programmes Medicare and Medicaid)
– Quality control (Prof. Cutler!)
Dr. Klaus Günter Deutsch 6DB Research
Energy and climate policy
Obama takes a stance that is very radical, geared to the environment and
emphasises structural change, but steers around several delicate subjects
(coal, nuclear power, use of (cap-and-trade) auction proceeds). So far, at
least, his programme has displayed a very pragmatic mixture of items.
Introduction of a very sophisticated cap-and-trade (emissions trading) system
– Obama supports the Lieberman-Warner bill on the introduction of emissions
trading (72% reduction of the emissions covered by 2050) and Boxer amendments
– Full auctioning! Auction proceeds to flow back primarily to electricity consumers
and private households
– Promotion of low-emission technologies with a total volume of USD 15 bn p.a. (10
years)
– Diverse quotas for renewables in power generation, fuels etc.
– Focus on second generation of biomass
– Numerous measures for individual sectors
Dr. Klaus Günter Deutsch 7DB Research Social security On the issue of social security, Obama has so far adopted the traditional stance of the Democratic Party and stressed the long-term sustainability of social security (and other pay-as-you-go programmes such as Medicaid, Medicare and SCHIP). As the baby-boomer generation is approaching retirement age he is considering substantially increasing the income ceiling for social security (currently at USD 102,000 and 6.2%) in particular in order to bridge the long- term funding gaps. Moreover, he also advocates a quasi-obligatory occupational pension system. Employees would thus participate in 401(k) plans unless they deliberately opted out. His programme also embraces the idea of exempting pensioners with an income of up to USD 50,000 from contributions and taxes, which would provide them with extra money averaging USD 1,400 p.a., but this would trigger substantial fiscal shortfalls. Dr. Klaus Günter Deutsch 8
DB Research Other policy areas Increase in the minimum wage with indexation to inflation Strengthening of workers’ rights Expansion of early childhood education and child care programmes Higher tax deductions for college and university fees Increasing and indexing of negative income tax and reduction of the disincentives (e.g. transfer withdrawal rate) for low-income groups to take up employment Prospects for the legalisation of immigrants if they pay a penalty, learn English and are in good standing (approx. 12 million people) Substantial public investment in infrastructure projects to be financed from the proceeds of auctioning emissions trading allowances Dr. Klaus Günter Deutsch 9
DB Research Outlook Initial participants in his inner circle of advisers show that Obama seeks counsel from a few highly qualified economists from the centre of the political spectrum who presumably will gradually start to help plug some of the holes in his programme. The biggest difficulties will probably not be related to plugging the gaps in the programmes but deciding on the scale of the measures to be implemented considering the scope of funding that would realistically be available. To come closer to balancing the budget over the medium term, however, Obama must still make major changes to key items of the programme. So far, the programme has remained focused on quite a few special interest groups. At a time when the costs of climate protection are escalating and voters are expecting an economic recovery, the funding of a sophisticated healthcare reform in particular is likely to test the nerves of Obama’s team for four years to come. Dr. Klaus Günter Deutsch 10
DB Research
Contact
Dr. Klaus Günter Deutsch
Deutsche Bank Research – Berlin Office
Unter den Linden 13-15
10117 Berlin
T.: +49 30 3407 3682
F.: +49 30 3407 3680
Email: klaus.deutsch@db.com
Dr. Klaus Günter Deutsch 11DB Research © Copyright 2008. Deutsche Bank AG, DB Research, D-60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite “Deutsche Bank Research”. The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the author, which do not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates. Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by Deutsche Bank. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made. In Germany this information is approved and/or communicated by Deutsche Bank AG Frankfurt, authorised by Bundesanstalt für Finanz- dienstleistungsaufsicht. In the United Kingdom this information is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange regulated by the Financial Services Authority for the conduct of investment business in the UK. This information is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. and in Singapore by Deutsche Bank AG, Singapore Branch. In Japan this information is approved and/or distributed by Deutsche Securities Limited, Tokyo Branch. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product. Dr. Klaus Günter Deutsch 12
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