Phil Castle, The Business Times
The stalemate in Washington could continue regardless of the outcome of mid-term elections, predicts an attorney considered an expert on politics and policies.
Only a serious triggering event could change the partisan gridlock, although higher interest rates ultimately could force cuts in entitlement spending and corporate tax reforms could be possible, said Andy Friedman. The best chance for compromise could come on energy policy, Friedman said. “It might be the only thing we see compromise on over the next two years.”
Formerly a tax attorney and senior partner with a Washington, D.C., law firm whose clients included the National Football League and Major League Baseball, Friedman has become a sought after speaker on Washington policies and politics as well as their ramifications for investors. He’s appeared on CNBC and Fox Business Channel and been quoted in the Wall Street Journal and USA Today.
Friedman spoke in Grand Junction in a presentation sponsored by Wells Fargo Advisors and American Funds. His fast-paced talk covered a range of subjects that included the federal fiscal situation, so-called corporate inversions, tax reform and elections.
Friedman said partisanship in the nation’s capital is at the highest level he’s ever observed — a situation he attributed in large part to changes in congressional districts that followed the 2010 census. State legislatures redrew congressional districts to keep them safe for candidates from whatever political parties controlled the legislature — a process called “gerrymandering.” The result has been incumbents who have little to fear in general elections, but worry that moderate positions could make them vulnerable in primary elections. “You have no incentive to compromise on legislation,” Friedman said.
The situation could well persist until congressional districts are redrawn again after the 2020 census, he said.
Speaking only days before mid-term elections, Friedman said it wasn’t yet certain whether or not Republicans would gain control of the U.S. Senate.
But even if enough Republicans are elected to gain the majority in the Senate and the party holds onto the House, President Barack Obama, a Democrat, still retains the power to veto legislation, Friedman said. “We’re going to have two more years of partisanship in Washington.”
Meanwhile, Obama could attempt to push through his agenda for his remaining two years in office — immigration reforms in particular — through executive orders and similar actions, Friedman said.
At the same time, though, serious events also trigger action, Friedman said. He cited as one example efforts to avoid defaulting on government debt. Other events could prompt changes in military involvement, including terrorist attacks in the United States, Israel or a NATO country.
Rising interest rates could force changes in federal spending, Friedman said.
While cuts have been made in the discretionary spending that accounts for about a third of the federal budget, no such cuts have been made in the mandatory spending that accounts for two-thirds of the budget, he said. That includes spending on Medicaid, Medicare and Social Security programs as well as interest in debt. Mandatory spending is expected to increase as a growing proportion of the baby boom generation retires and pulls Social Security and health care benefits, he added.
Ultimately, though, the ability of the United States to continue paying interest on growing debt could come into question and lenders could demand higher interest rates, he said. That, in turn, could finally force changes in entitlement spending.
There’s also a possibility Congress could push for tax reform, especially in light of the growing number of corporations moving their headquarters overseas to take advantage of lower taxes.
The practice, known as corporate inversion, occurs when a large U.S. company merges with a smaller, foreign company and locates the headquarters of the combined operation in the foreign country.
While the corporation still pays U.S. taxes on income generated in the U.S., it no longer has to pay U.S. taxes on income from aboard, Friedman said. The United States is the only country in the world to impose corporate taxes on income from abroad.
With lower taxes, publicly traded companies can experience higher earnings and higher stock prices as well as pay dividends and buy back stocks, Friedman said. Financial performance also depends on the merger, though, he said. With good mergers, the lower taxes associated with a merger constitute “icing on the cake.” The effects of a bad merger can more than offset the tax advantages.
While reforms have been proposed to simplify individual and corporate taxes, the effort is a difficult one involving such issues as whether or not government revenues are affected and tax burdens shifted between various groups of people, Friedman said. “Tax simplification is complicated stuff.”
Individual tax reform could prove “too heavy a lift for Congress,” he said. “There’s some hope for corporate tax reform.”
There’s also a possibility of compromise on federal energy policy, Friedman said.
Republicans want construction to go through on the proposed Keystone XL pipeline to carry crude oil from Canada to refineries on the U.S. Gulf Coast as well as more drilling in the U.S. for oil and natural gas. Obama has pushed for tax breaks promoting the additional development of solar and wind energy.
The president’s not likely to change his position on proposed Environmental Protection Agency rules to reduce emissions from power plants, however, Friedman said.
As for the presidential election in 2016, Friedman said it’s likely Hillary Clinton will run again and win the nomination as the Democratic candidate.
Friedman, noted, however, that the last Democrat to win election as president following two terms of service by a Democrat was Martin Van Buren, who succeeded Andrew Jackson as president in 1837.
The potential candidates for the Republican presidential nomination in 2016 include New Jersey Gov. Chris Christie, U.S. Sens. Marco Rubio and Rand Paul and former Florida governor Jeb Bush.