Considering Better Alternatives to Extension of the Bush Tax Cuts for More Stimulus
September 5th, 2010 . by economistmomThe key word in the title of this post, from my perspective, is “alternatives”–not “additions.” The Obama Administration is reportedly considering some new proposals for a variety of business tax cuts that they believe would be particularly effective in creating jobs quickly. As the AP’s Julie Pace reports:
WASHINGTON — Seeking ways to spur economic growth ahead of the November elections, President Barack Obama will ask Congress to increase and permanently extend research and development tax credits for businesses, a White House official said Sunday.
Obama will outline the $100 billion proposal during a speech on the economy Wednesday in Cleveland, the official said. The announcement is expected to be the first in a series of new measures Obama will propose this fall as the administration looks to jump-start an economy that the president himself has said isn’t growing fast enough.
The motivation for this longer-term cut in business taxes is probably largely political, because while there are other types of tax cuts or spending that would be more effective as true “stimulus” in increasing aggregate demand immediately, these types of permanent business-side tax cuts are less likely to be opposed by Republicans, even if they are deficit-financed (or maybe even especially if they are deficit-financed). Again from the AP story (emphasis added):
“I don’t think this is something that has … as immediate a job impact as, say, movement on the current tax credits for the unemployed or extending a payroll tax holiday of some sort. But I think it’s very important in terms of job creation over the longer term,” [Laura] Tyson [,a member of the President's Economic Recovery Advisory Board,] said.
While the idea is popular in Congress, coming up with offsetting tax increases or spending cuts has been a stumbling block. Obama will ask lawmakers to close corporate tax breaks for multinational corporations and oil and gas companies.
Congress has previously passed research tax credits on a temporary basis. The credits expired last year and a proposal for renewal is pending in the Senate.
While research credits generally have bipartisan support, Washington’s contentious political atmosphere means the White House isn’t taking anything for granted. Officials have watched other proposals they deem necessary to economic growth, including a bill to extend credit and cut taxes for small businesses, languish on Capitol Hill.
My first complaint about these new ideas for tax cuts is that they’re not really new at all; they’re repeats of essentially permanent (only technically temporary) tax cuts that are repeatedly renewed. The Obama Administration seems to have adopted the mindset that many policymakers in Congress (and not exclusively those from one side of the aisle) have long had–that the prescription for any kind of economic ailment is more deficit-financed tax cuts. But given the fiscal and economic outlook and how the CBO explains they interact over the longer term (large deficits reducing economic growth), there’s no justification for deficit financing permanent tax cuts–even tax cuts that may be good for longer-term economic growth (via the supply side of the economy) like the research tax credit. Deficit-financing is only justified for policies that are designed to effectively and immediately boost economic activity where idle capacity exists–that is, policies designed to stimulate aggregate demand.
But let’s set aside that complaint and assume that the Administration thinks they have some good new ideas, better ideas, for effectively and immediately jump-starting the economy. My suggestion: If these types of tax cuts (or spending increases) have greater bipartisan support than other current proposals for additional stimulus, and if economists believe some of these ideas would be more stimulative than any portions of the expiring Bush tax cuts, why don’t we start considering these proposals as substitutes for the (already presumed to be) deficit-financed extensions of the Bush tax cuts? (Why consider these proposals only in addition to the deficit-financed Bush tax cuts, which continue to get a “free pass” in this town?) Substituting policies that are better at boosting the short-term economy (i.e., policies better at the “three Ts” in being “timely, targeted, and temporary”) would maximize the stimulative “bang per buck” while avoiding an additional, more permanent increase in the deficit that could undermine the longer-term economic effects.
Policymakers need to put together a list that ranks fiscal policies (tax cuts and spending increases) from most effective to least effective–and I mean including the various elements of the Bush tax cuts that are scheduled to expire at the end of this year–settle on how much of a short-term increase in the deficit they are willing to put up with (and that our economy can tolerate), and only “accept” the proposals (and the deficit financing of such proposals) that fall above the cut-off line. And I mean regardless of the low bar they have already set for the full complement of the Bush tax cuts via the Administration’s policy baseline and the exemptions under statutory PAYGO rules. In my mind we should be “leveling the policy playing field” and letting the Bush tax cuts “compete” with the rest of these proposals under fair terms.
Complete reform! Here’s my take; reply with yours:
THE TAX AND TRANSFER PAYMENT PLAN
1. All persons residing in the U.S. shall come together in units for the purpose of reporting all income from any source, each item to be identified by payer’s and payee’s tax number. Members of a unit need not be related, need not reside together, and a unit may consist of as few as one person. With equality as the primary goal, this act established units to be taxed, so that all persons, whether related or not, legally here or not, are taxed equally.
2. Each year congress shall set by legislation a “minimum wage” and a “tax rate”.
3. The following income shall not be subject to taxation:
• An amount equal to a year’s earnings at the minimum wage rate, for each adult (age 20-65) member of the unit, decreasing 10% per year to 50% at age 15 and increasing 10% per year to 150% at age 70. (Family of two adults and two young children would receive exemptions equaling 100% + 100% + 50% + 50% = 300% minimum wage, currently about $42,000)
• All payments for what is classified as necessary health care for all members of the unit including medical care, any pharmaceuticals prescribed by a recognized health care professional, vision and hearing aids, and membership fees for health-enhancing entities such as gyms or other exercise facilities. Health care insurance premiums may be deducted but not health care expense paid for by such insurance.
• All educational expenses including day care for young children or legally incompetent persons, that portion of state and local taxes identified as spent on education, that portion of parochial school tuition, fees and other expenses identified as going for non-sectarian education, tuition, fees and educational materials for private school education at any level, and a per-diem allowance for students traveling more than 50 miles from primary residence for education.
• All income saved into an identified account from which investments may be made.
This encourages growth of the tax base, thus growth of the government’s ability to pay for its responsibilities, by fostering health care, education and investment, all of which contribute to growth of income, taxable to support legitimate government purposes.
4. The “tax rate” shall be applied to any income over and above the deductions listed above, regardless of amount. It seeks the elusive concept of fairness by taxing at the same rate all “disposable” income.
5. There shall be no federal tax on corporations or other business entities. August 20th was declared the point at which we, on average, end working for government and start working for ourselves. This suggests a tax rate of 63%, which would create a backlash against big government that no amount of campaigning could evoke.
6. The Office of Management and Budget shall compute revenues to be expected using the newly set tax rate and minimum wage, applied to the previous year’s reported incomes. No expenses in excess of that amount may be authorized or made by the federal government without approval by 75% of each house of Congress. It sets the Federal budget to produce a surplus in times of economic expansion and a deficit in times of contraction to promote economic stability.
7. At the request, by legislation duly enacted by a municipality having greater than 100,000 inhabitants or a state, a surtax may be imposed on citizens of that municipality or state which shall be applied in a manner exactly as applied for the Federal tax. It recognizes disparity in cost of living among various locations. It facilitates sufficient sources of revenue for states and municipalities.
8. For units whose deductions exceed total income, the Federal Government shall make payment equal to the tax rate multiplied by the shortfall in income, as shall municipalities and states. This addresses aid to the truly needy.
I would expect a tax rate in the neighborhood of 35-40%. Consider how it would affect your behavior, motivating you to save for retirement, and how it would, by exempting from this high rate, encourage spending on health care and education.
David Henderson has an idea to increase revenue while preserving the incentive benefits of the lower tax rates of the Bush tax cuts, that being:
Policymakers need to put together a list that ranks fiscal policies … from most effective to least effective…
As a start, CBO has a paper that ranks various stimulus policy options by effectiveness, Policies for Increasing Economic Growth and Employment in 2010 and 2011 (pdf).
For instance, from the table on p.18:
Cumulative effect on GDP 2010-2015 per dollar of budget cost
Reducing employers’ payroll taxes … 0.40 to 1.20
Reducing employees’ payroll taxes … 0.30 to 0.90
Expensing investment costs … 0.20 to 1.00
Refundable tax credit for middle income families … 0.30 to 0.90
etc., etc.
FWIW
Why does it have to be one or another? Why not STOP the TAX CUTS and find $700 billion in spending cuts?
Economistmom,
Wait a second! I thought that supply-side policies based on tax cuts are ineffective at combating demand driven weakness in the economy? Is Obama violating keynesian principles for the sake of ……….politics?
It’s really getting desperate for the Keynesians when Paul Krugman conveniently re-writes economic history by trying to pass off the lie that the 1938 second-dip during the Great Depression resulted from insufficient demand stimulation. In fact, it resulted from the Federal Reserve’s innane decision to raise reserve requirements on the banking system.
The hackery and buffoonery on the part of the Dems is stunning. Michelle Obama travelling to Spain was the cherry on top of the ice cream for the Republicans.
Because Keynesians believe microeconomic theory can be suspended at the macro level, we’ll continue to see weak employment figures as long as they insist on prolonging the unemployment benefits. The Dems are making things far too easy for the Republicans this November.
It’s a big world, and there are many ways used to close a fiscal gap…