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What Tax Cuts Can and Cannot Do for the Economy

July 12th, 2011 . by economistmom

(This entry is cross-posted on the Concord Coalition’s “Tabulation” blog here.  An elaboration of these points will appear in my next column in Tax Notes, next Monday, 7/18.)

The biggest sticking point in the debt-limit talks has been the disagreement over tax policy. President Obama has been encouraged by his fiscal commission to insist that higher revenues be part of any major deficit-reduction deal — and to recommend that much of the revenue increase should come from broadening the tax base by reducing “tax expenditures.” Although Republicans are coming around to the idea that tax expenditures are just subsidies run through the tax code, many of their leaders stand firm on the position that revenues as a share of the economy not rise from current policy.

While President Obama and other Democrats want revenue increases, they don’t want any changes that would raise taxes on middle class or lower-income households, arguing that such taxes would be overly burdensome and would harm the economic recovery. Meanwhile, Republicans only want reduced tax expenditures to pay for cuts in marginal tax rates, asserting that they would be the path to stronger economic growth and in turn higher revenues.

So both sides are reluctant to change their tax-cutting ways, and they continue to have their own great expectations for tax cuts. But tax cuts don’t always live up to such expectations, because often the form of a tax cut is ill-suited for its touted economic purpose. The effectiveness of any particular tax cut in addressing the economy’s needs depends upon three factors:

  1. How strong is the economy? In a downturn when the economy has idle capacity (unemployed workers, shuttered factories, vacant offices), the only way to increase GDP is by increasing demand for goods and services. Tax cuts steered toward the households and businesses most likely to spend the extra cash are more effective than tax cuts that benefit mostly higher-income households that save more of their income. (Tax cuts in general, however, are less effective than direct government purchases of goods and services, which pay off dollar for dollar.) In a full-employment economy, in contrast, growing the economy requires increasing the productive capacity or “supply side” — which means finding tax policies that encourage labor supply and saving.
  2. How is the tax cut structured? In a full-employment economy, tax cuts that reduce marginal tax rates encourage increases in labor supply and saving, and hence longer-term economic growth via the “supply side.” In a recessionary economy, however, any kind of tax cut can stimulate demand for goods and services simply by steering dollars toward households and businesses likely to spend them quickly. Tax cuts that emphasize rate reduction and supply-side growth in times of full employment are likely to go disproportionately to high-income households, while those for the purpose of demand-side stimulus are typically designed to go more broadly to lower- and middle-income households.
  3. How is the tax cut paid for? If a tax cut is intended to encourage supply-side, longer-term economic growth, deficit financing is like starting from standing in a hole and counting on the tax cut being effective enough to propel one not just back to ground level but beyond. The tax cut must encourage private-sector activity by more than enough to offset the negative economic effects of more government borrowing. A more reliable way to encourage economic growth is for the government to pay for beneficial tax cuts with spending cuts or revenue increases that have comparably little effect on economic decisions. In a recessionary economy, however, this approach may weaken the stimulative effect of the tax cut on the demand for goods and services, unless the combined policies shift dollars away from households and businesses that do more saving to those that spend most of their income.

So whether any particular tax cut is good for the economy really depends on how the tax cut is structured and what the economy needs at the time. Tax cuts aren’t the “be-all and end-all” of economic policy that they’re often claimed to be, no matter how attractive they might be politically.

38 Responses to “What Tax Cuts Can and Cannot Do for the Economy”

  1. comment number 1 by: Vivian Darkbloom

    “While President Obama and other Democrats want revenue increases, they don’t want any changes that would raise taxes on middle class or lower-income households, arguing that such taxes would be overly burdensome and would harm the economic recovery. Meanwhile, Republicans only want reduced tax expenditures to pay for cuts in marginal tax rates, asserting that they would be the path to stronger economic growth and in turn higher revenues.”

    I’m sorry Economist Mom, but this is a distortion of the facts. The first part of the above paragraph is certainly true: President Obama has consistently argued that the “Obama tax cuts” (formerly known as the Bush tax cuts”) should be preserved for middle and lower-income taxpayers but eliminated for high-income taxpayers (roughly those married couples earning more than $250,000 per year). To put this in perspective, he wants to keep tax cuts that would reduce revenues by $1.35 trillion and eliminate those that would, if continued, reduce revenues by $678 billion (both over a 10 year period).

    http://www.fas.org/sgp/crs/misc/R41393.pdf

    The second sentence (”the Republicans only want reduced tax expenditures to pay cuts in marginal tax rates”) is certainly not true, but it perfectly mimics the administration rhetoric on this subject. You have suggested, quite incorrectly, that the Republican position is to pay for those reduced tax expenditures *only* by retaining the tax cuts for the highest income taxpayers (there is no other interpretation that would be consistent with what you wrote). In fact, the Republican position, as I have followed it in the media, is that those reduced tax expenditures would pay for tax cuts for everyone. In the context of the Obama tax cuts, this means $1.34 trillion in tax cuts for lower and middle income taxpayers and not just the $678 billion for high income taxpayers.

    I won’t quibble too much over your “factors’ with respect to tax cuts and “what the economy needs’; however, here, once again, you are perfectly mimicking the administration’s rhetorical strategy. What the administration is arguing is what the economy needs *right now* are tax cuts for middle and lower income citizens. That parallels the other argument that what the economy needs *right now* is higher spending on lower and middle income taxpayers. This is a perfectly logical strategy for an administration which is less concerned about our long-term fiscal and economic health than it is about the distributional effects of its taxing and spending policies. This is driven purely by ideology, not fiscal prudence.

    Do you really believe that the administration’s policy is that the tax cuts for those earning under $250,000 are only a temporary measure because that is “what the economy needs *right now*” and that, once the economy has recovered, those cuts will be reversed? Or, is it simply a ploy to use a short-term argument for long-term political gain? I think you are smart enough to know it’s the latter, but what I think you sometimes fail to appreciate is that some of your readers are smart enough to recognize the same thing about your posts here, including the one above.

  2. comment number 2 by: AMTbuff

    Republicans only want reduced tax expenditures to pay for cuts in marginal tax rates

    Republicans would most certainly accept reduced tax expenditures in exchange for repeal of ObamaCare and substantial reductions in promised entitlements to the non-poor. Democrats have taken those spending cuts off the table, so there will be no grand deal this year unless the bond market forces one.

    Absent fundamental reduction in the spending trajectory, tax increases would be a waste of resources that we will need to close the gap after the bond market crash.

    Here’s another analogy. We are in an overloaded hot air balloon and it’s starting to descend. Democrats want us to jettison our ballast now. Republicans want to jettison our baggage instead and save the ballast to slow our landing. If we jettison our ballast now, we will have to jettison the baggage later anyway, and in addition we will crash land. Democrats are hoping for a miracle so that the baggage can be saved, but it cannot.

  3. comment number 3 by: Unsympathetic

    AMT, by “baggage” do you mean “all non-white Americans who earn under $250,000 annually?”

    Besides, your analogy is flawed: In the hot-air balloon, Republicans want to add weight rather than jettison anything. Medicare Part D, TARP, and the Bush taxcuts are all Republican bills, not Democrat ones.

    Keep lying - that’s what makes you Republican!

  4. comment number 4 by: SteveinCH

    Unsymp,

    Let’s take them 1 at a time.

    1. Medicare Part D — bad plan I agree but costs $50 billion a year and was just extended rather than repealed as part of the ACA. There was a chance to repeal and all we did was fill the donut hole (e.g., make the program more expensive). Who did that?

    2. TARP (ex-Fannie and Freddie) made money. It’s net budgetary impact is zero.

    3. Bush tax cuts ended in 2010.

    You really need to get a clue.

  5. comment number 5 by: AMTbuff

    Baggage means promised entitlements to the non-poor, as I said. Social Security and Medicare for people making more than $100k for example. Drop those as Australia did. I don’t see what race has to do with anything here, unless you were just trolling.

    I did not support Part D, I was undecided on TARP, and I believe the Bush tax cuts should have been structured very differently, along tax reform lines. Yes, the Republicans have added much of the weight in the balloon. All kinds of baggage, including Bush-initiated tax rates, need to be jettisoned as part of a comprehensive plan to reach neutral buoyancy. Do these opinions make me Democrat, a Republican, or neither?

  6. comment number 6 by: Vivian Darkbloom

    Medicare Part D was indeed a fiscally irresponsible measure, not doubt about that. But, I find the criticism here coming from a rather strange quarter. Bush pushed Medicare D for the following reason: He needed to pre-empt the Democrats from using Medicare as an issue against him in the 2004 election and thereby win the votes of seniors. Democrats at the time were pushing their own version of Medicare D, a version which was far more costly and generous in scope, and one that would be solely administered by the federal government. An early Senate version got widespread bipartisan support; however, the bill that eventually passed narrowly got through on an almost party line vote. Here’s a typical reaction as reported in the New York Times:

    “Though to many Americans Mrs. Clinton embodies the efforts to expand government-sponsored health coverage, she was one of just 11 Democrats to vote against the Medicare drug bill that the Senate passed in June. She said on Friday that she would oppose any bill that emerged from a House-Senate conference committee, unless the committee came up with a bill more generous than the ones already passed.”

    http://www.nytimes.com/2003/10/11/nyregion/medicare-drug-bills-assailed-by-clinton.html?scp=13&sq=medicare+prescription+drug&st=nyt

    Again, the Bush Medicare D legislation was fiscally irresponsible. But, it’s very clear that the Medicare D baggage he put on that balloon was far lighter than the one proposed by Hillary Clinton and most of her party colleagues.

  7. comment number 7 by: Brooks

    Vivian,

    Indeed, I too have pushed back occasionally in the blogosphere when I see folks on the left offering up Medicare Part D as an example of Republican fiscal irresponsibility. It’s something they do often, I guess b/c it’s a talking point that gets repeated so much in hyperpartisan echo chambers that they don’t bother to fact-check (or memory-check) or even really think about it (same thing that happens on the right with other stuff like the myth that “tax cuts pay for themselves”).

    On the specifics, IIRC the genesis (or at least part of it) of what became Medicare Part D was actually candidate W. Bush fighting defending against candidate Gore’s policy proposal for a much more expensive program, and over the next couple of years Democrats were indeed pushing for a more expensive program, and I think it’s fair to say Republicans were playing defense on the issue.

    The only (but significant) exception I’d note is that Republicans fought off the idea of letting Medicare negotiate drug prices (or something along those lines) and also excluded importation, something that came to look particularly shady after Rep. Billy Tauzin, a Republican leader in getting the Part D legislation passed, immediately thereafter took a high-paying job as president of PhRMA http://www.usatoday.com/money/industries/health/drugs/2004-12-15-drugs-usat_x.htm Whether or not those provisions were in the best interest of the public or not, they probably did raise the cost. That said, I believe the alternative legislation Democrats were seeking would still have cost substantially more.

    As a note, there was that funny business of Tom Scully apparently deliberately misleading everyone about projected cost of Part D, but I don’t think that invalidates the basic premise here that Democrats wanted to provide more generous benefits and spend more than did Republicans.

  8. comment number 8 by: Vivian Darkbloom

    Brooks,

    It’s difficult to argue against your counterfactual, but consider the following:

    “The most famous example of a federal health program coming in below estimates is Medicare’s Part D prescription-drug program, which Congress enacted in 2003. Part D’s actual costs have been lower than CBO’s estimates.

    A major reason for this trend “is likely a reflection of the competition that’s occurring in the private market,” said CBO Director Peter Orszag, who is now the White House budget director.

    The Medicare drug program “represents the one time Congress almost entirely relied on private competition to hold down costs,” said James Capretta, a fellow at the Ethics and Public Policy Center who was the lead official at the White House Office of Management and Budget when Medicare’s drug program was created.”

    http://www.washingtontimes.com/news/2009/nov/18/health-programs-have-history-of-cost-overruns/print/

  9. comment number 9 by: AMTbuff

    Back to Diane’s post:
    The biggest sticking point in the debt-limit talks has been the disagreement over tax policy.

    No, the disagreement is over long-term spending. At http://keithhennessey.com/2011/07/12/left-of-bowles-simpson/ Keith Hennessey has an excellent new post that refutes Diane’s claim:

    President Obama has been unwilling to make any of these [Bowles-Simpson] changes, and yet suggests Republicans are being unreasonable for not agreeing to net tax increases. The President refuses to discuss changes to the trillion dollar new health entitlement he and Congress created last year. He refuses to discuss changes to Social Security beyond a CPI correction. He insists that top tax rates go up. He attacked Paul Ryan for his long-term Medicare reform and refuses to consider it.

    At least as important, Bowles & Simpson offered a long-term fiscal solution in exchange for this net tax increase, under which spending would never have exceeded 22% of GDP and deficits would have quickly dropped below 2% of GDP and eventually reached balance. That’s too much spending (and too high taxes) for my taste, but it’s qualitatively different from and far superior to the President’s proposal, which is to trade permanent tax increases for only a temporary slowdown in government spending growth and budget deficits.

    I agree with Hennessey that the lack of a long-term solution is the deal-breaker. I’d go for almost any deal that guarantees balance in the long run, since that’s what the bond market needs to see. We’ve had more than enough temporary patches. It makes no sense to use our remaining revenue slack without getting permanent balance in return.

  10. comment number 10 by: Underwriterguy

    Wasn’t there a time when Mom responded to some of the comments here? This set of arguments begs for her to engage. Thank you to all of the above for educating folks like me.

  11. comment number 11 by: Unsympathetic

    Medicare Part D was bad then and continues to be a horrible bill today. More fun facts for Republican liars: Obama’s healthcare plan is budget-neutral. Deal with it. Hillary’s plan didn’t pass - just like many Republican plans much worse than Medicare part D.

    TARP is not repaid - when you get your facts from Fox, you’ll always be wrong. But keep trying! Any idea HOW those loans were repaid? BoA handed worthless MBS to the Fed, got a loan for a half a billion at 0% interest, gave the half a billion back to the Fed, and declared their TARP loan repaid. If BoA tried to sell that MBS to the private market they receive literally zero. That’s not paying back - that’s the key part of TARP.. mark-to-fantasy.

    The problem with saying that TARP has been repaid is that it is meaningless. The Fed handed the Primary Dealers 2.2 trillion dollars between QE1 and QE2. That was the bailout. TARP was just a bridge loan until the ACTUAL bailout (again, QE1 and QE2), could be complicated and obfuscated enough that J6P doesn’t understand the nature of the true bailout. Sort of a “watch my right hand with a pickle while I violate you with the Chrysler building with the left one” scheme.

  12. comment number 12 by: economistmom

    Underwriterguy said:

    Wasn’t there a time when Mom responded to some of the comments here? This set of arguments begs for her to engage.

    Indeed — there once was such a time. Where did it go?! I’m hoping to find it again and “engage” with you all more here, it’s just that these days I can’t even keep up with reading all your comments, let alone thoughtfully responding to them. I promise to catch up and make up for it soon!

  13. comment number 13 by: SteveinCH

    Unsymp

    And the reason Medicare Part D was expanded rather than repealed by the Dems if it’s such a bad bill?

    TARP absolutely is repaid but for $25 billion as of the latest estimate.

    http://articles.latimes.com/2010/nov/30/business/la-fi-tarp-20101130

    As for QE, isn’t it a bit hard to blame Bush for that when (a) it was a Fed action and (b) it happened after he left office.

    Partisans hack jobs are nothing more than that.

    Diane, look forward to your response. Like Vivian, I believe you are being less than neutral in your description of positions and like the administration, abandoning the notion of killing tax breaks in favor of limiting them and making them more complex because of your overriding sense that the tax code should become more progressive.

  14. comment number 14 by: Vivian Darkbloom

    Sorry to have to digress here, but I think it’s necessary to correct the following:

    ‘TARP is not repaid - when you get your facts from Fox, you’ll always be wrong. But keep trying! Any idea HOW those loans were repaid? BoA handed worthless MBS to the Fed, got a loan for a half a billion at 0% interest, gave the half a billion back to the Fed, and declared their TARP loan repaid. If BoA tried to sell that MBS to the private market they receive literally zero. That’s not paying back - that’s the key part of TARP.. mark-to-fantasy.”

    I’m not sure where Unsymp is getting his or her facts, but BofA got two TARP loans (actually, investments in preferred stock). The first was for $20 billion and the second, as a result of BofA taking the Merrill Lynch “problem” off the hands of the government and at their urging, for $25 billion. The entire $45 billion was redeemed (in addition to the $2.54 billion in dividends paid) in December 2009.

    http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-newsArticle_pf&ID=1361144

    I’d like to given Unsymp an opportunity to share with us where his or her information has been obtained, but in the meantime, I’m left wondering how $45 billion in preferred stock (and $2.54 in dividends) could have been acheived by giving the government a half billion in worthless securities, as alleged.

    BTW, the current estimate of the TARP cost is now $19 billion, none of which has anything to do with BofA. In fact, the capital purchase program, which involved the preferred stock investments in various banks, has made the government $14 billion to date. Overall, the loss on TARP is almost exclusively due to investments to the auto industry (i.e., union payoffs) and assistance to homeowners and AIG.

    http://stimulus.org/

  15. comment number 15 by: Jim Glass

    Medicare Part D was bad then and continues to be a horrible bill today

    Then the Democrats shouldn’t have so damned it originally for not being as expensive as what they wanted, nor have expanded it since.

    TARP is not repaid - when you get your facts from Fox…

    “Treasury announces $10 billion in TARP profit from banks … All told, the government has received about $255 billion from banks under TARP, having lent out just $245 billion. Treasury now estimates that when all is said and done, the section of TARP devoted to banks will net taxpayers a $20 billion profit.” 7/5/11/.

    CBO’s April report on TARP says it will produce a gain of $23 billion for taxpayers from the bank support program, the bulk of which has already been repaid.

    Eagerness to namecall while disregarding such facts and authorities only reveals in you the blind political prejudice you project upon others.

    OTOH, CBO says that of course TARP’s bailouts of GM, Chrysler and the UAW will cost billions, as will its support program for mortgaged homeowners.

    Final net expected result as these outweight the gain from the bank support program: loss of $19 billion.

    And of course the *huge* bailout cost that will be a real loss is the non-TARP bailout of the government’s own Freddie and Fannie.

    As for QE being a “bank bailout”, nooo, it was monetary stimulus for the entire economy, strongly endorsed by Paul Krugman — and criticized by Krugman only for being far too meek and small, as he pleads for/demands more and bigger of same. Those on the left side of the political spectrum should address their complaints about QE to him.

  16. comment number 16 by: SteveinCH

    Jim,

    I think you forgot AIG on the negative side of the TARP balance sheet. Otherwise, excellent post.

  17. comment number 17 by: Jim Glass

    Steve, the CBO report said the final result for AIG will depend on its future stock price.

    Nobody knows what that will be, but at the March price it would be $12b net subsidy for AIG/loss to taxpayers.

    Another reason for taxpayers to support QE3: Get that stock price up!

    BTW, after all the political trauma of getting that full $700 billion for TARP right away “or else”, they used only $432 billion — only just over 60%.

  18. comment number 18 by: Brooks

    Jim,

    Re: CBO says that of course TARP’s bailouts of GM, Chrysler and the UAW will cost billions

    Presumably if we hadn’t bailed out the auto companies there likely would have been adverse economic impact (from failed companies, lost business/failure of supplier companies, ditto for effects from lost employment income, etc.), all of which would have reduced the tax base and thus revenue.

    Is that “cost” to which you refer net of any estimate of avoidance of that revenue loss (avoidance of that counterfactual scenario), or simply net of incremental tax revenue from the auto companies or some other excessively limited measure if our objective is to gauge the net revenue impact of auto bailout vs. no auto bailout?

  19. comment number 19 by: SteveinCH

    Brooks,

    That’s nonsense. The auto companies could have gone through a standard Ch 11 filing with the government guaranteeing the financing.

  20. comment number 20 by: Brooks

    Steve,

    I’m pretty ignorant of what the possibilities were and related likely scenarios, but my recollection (correct or not) was that without a bailout a lot of suppliers would have suffered badly, and presumably there would have been a lot more layoffs at the car companies vs. the bailout scenario. Is it your contention that that premise is incorrect? Are you saying the non-bailout scenario would not have included significantly lower of tax revenue due to lower auto company and supplier profits, laid off workers, and the negative multiplier on other businesses from the loss of company and worker income?

    Put differently, are you rejecting the premise of positive revenue feedback effects from the bailout?

    If not, what are you calling “nonsense”? Just my assumption of failed auto companies, which was just one element surrounding my main point/question?

  21. comment number 21 by: Vivian Darkbloom

    The auto companies certainly could have gone through a standard Ch 11 financing as Steve suggested with government financing. This scenario need not have entailed any shutdowns of the auto companies or their suppliers. What the government did was pre-package bankruptcy deals and arrange a purchase of Chrysler stock by Fiat (giving a new meaning to the phrase “Government by Fiat”). In essence, the government, that is, the Executive Branch, stepped in and overrode normal bankruptcy law and the Constitution.

    There is, in my mind, nothing wrong with the government stepping in to accommodate and accelerate normal Chapter 11 proceedings in extraordinary circumstances such as this. But, in this instance what the Executive branch did was blatantly ignore bankruptcy law (and the Constitution, which reserves power to establish such laws expressly to the legislative branch and prohibits taking of wealth without due process). Not only was it blatant—it was blatant and politically motivated and should be considered one of the most serious political scandals in modern American history.

    In structuring these deals, the Executive branch stepped in to dictate terms that re-ordered the normal rights of creditors. Essentially, the rights of the United Auto Workers and their pension funds were given not only a greater return on the dollar for their investments, but also stock in the reorganized entities. Secured bond holders, on the other hand, were placed behind the UAW and got only a few cents on the dollar. Those who attempted to object to this were threatened with retribution by the administration. For a very brief overview, see here:

    http://www.economist.com/node/13610871?story_id=13610871

    Who were those secured creditors? A lot of that secured debt was held by banks–the very ones the government invested in through TARP. While those TARP investments have been repaid (with a profit) those banks have never been compensated for the illegal taking of their secured claims on the auto companies. So, I think Unsymp and others should, in putting together their scorecards, add a significant contribution by those banks to the UAW via the government. More appropriately, you could book an additional credit from the banks to the government and deem the government interference in this process as a bailout of the UAW. But, actually, the UAW didn’t need a bailout, so the only way to view it is an illegal purchase of union votes by the current administration.

    Ironically, some of those secured creditors were other pension funds, such as the Indiana State Police Pension fund. They tried to stop the Chrysler deal in the courts. The government, represented by Elena Kagan, got the Supreme Court to issue a per curiam decision not to stay the deal (although the court expressly did not rule on the merits).

    Nevertheless, I’m sure that via via, according to whatever political exigency needs to be met, those pension funds will be somehow be made whole, too, in this smoke and mirrors system employed by our crooked politicians ostensibly to set our economy straight.

  22. comment number 22 by: SteveinCH

    Vivian said it perfectly. A Ch11 filing under the normal rules was entirely possible. The government intervention set aside those rules in an entirely political way.

    It was never a choice between the deal we had and liquidation. That was government (executive brand) spin. The only thing required for GM and Chrysler to go through Ch 11 was guaranteed financing. At the time, there may not have been a bank willing to finance the restructuring; however, with a government guarantee, there most certainly would have been.

    It is also highly likely (though not certain) that a standard Ch11 proceeding would have left the US auto makers better positioned competitively and more profitable than they are today (although maybe with fewer asset and fewer employees than they currently have). It would also not have cost the US taxpayer $12 billion or so.

  23. comment number 23 by: Brooks

    Steve,

    All I was asking Jim essentially was whether or not he was factoring in whatever revenue feedback effects there may have been.

    You responded “Nonsense”.

    So I’ll ask again you again my simple question: Are you saying you don’t think there have been any revenue feedback effects from the auto bailout?

  24. comment number 24 by: SteveinCH

    Brooks,

    The nonsense is in the first sentence, “Presumably if we hadn’t bailed out the auto companies, there would likely have been adverse economic impact from [various things related to a liquidation]”

    We did not need to bail out the auto companies to avoid a liquidation. There is no counterfactual that says in the absence of bailing out the auto companies horrible things would have happened. That’s the part that is nonsense, not that liquidation, if it had happened would have feedback effects.

    There were multiple policy choices available. Choosing to only compare two (what we did and do nothing) is a bad form of analysis.

  25. comment number 25 by: Vivian Darkbloom

    Oh, I forgot one detail. In addition to ignoring the bankruptcy code, the administration also ran roughshod over the tax code. Normally, when there is a “change of control” (technical term under section 382) a company loses its net operating losses. GM happened to have about $45 billion worth. Contrary to the clear text of the Code and precedent, Treasury issued a notice that the rules would not apply in the case of GM (or Citigroup or AIG). Thus, the NOL’s were preserved at potentially great expense to taxpayers.

    It’s a complicated issue, but it is possible that had GM undergone normal Chapter 11 bankruptcy proceedings the NOL’s would have been preserved (this depends on who the post bankruptcy shareholders would be and how long some of the creditors that would have gotten stock in the process had held their claims prior to bankruptcy). The bigger point is that those NOL’s would have been preserved for the benefit of different shareholders (that is, not disproportionately the UAW).

    There’s a good Harvard publication on this, which, I think, basically concludes that Obama would be a “Bad Man” under the Oliver Wendell Holmes definition for what he did here. They also noted in the conclusion:

    “Having the authority to issue tax regulations is a power of the President that is
    peculiarly tempting for abuse. I.R.S. Notice 2010-2 and its predecessors illustrate the
    problem. There, Treasury exempted companies partly owned by the government from taxes they would have had to pay had their owners been entirely private. The politics involved is clearest with GM. There, the bailout transferred enormous wealth to labor union closely allied to the party in power.”

    http://www.law.harvard.edu/programs/olin_center/papers/pdf/Ramseyer_et%20al_690.pdf

  26. comment number 26 by: Brooks

    Steve,

    If all you’re saying is that I implied more adverse consequences than you think were likely, I’ve acknowledged that I could be wrong.

    But that’s a matter of degree, albeit an important one. My main point/question to Jim was still essentially whether or not his view of the magnitude of the cost (even net direction) factored in revenue feedback effects. You still haven’t answered my question (at least not explicitly) as to whether or not you think there were likely substantial revenue feedback effects of bailout vs. non-bailout (under whatever non-bailout scenario you choose as a hypothetical — your preferred approach). Do you want to answer, or should I just not bother repeating my question?

  27. comment number 27 by: AMTbuff

    Brooks, assuming that GM and its suppliers remained in business post-Chapter 11 rather than liquidating, the revenue effects would have been minimal. Losses by banks would have been lower, meaning lower spending there. Overall I believe the alternate scenario could easily have resulted in a higher value of revenue minus spending and, if it matters to you, revenue virtually identical to the actual UAW bail-out scenario.

    The main difference between UAW bail-out and Chapter 11 is that UAW pensions and medical benefits were preserved. Those don’t generate significant revenue. In fact they may do the opposite to the extent that businesses can deduct the costs.

  28. comment number 28 by: Brooks

    AMT,

    Thanks. I don’t know enough about it to know if what you’re saying is valid or not, but it’s nice to get an answer from someone.

  29. comment number 29 by: Vivian Darkbloom

    My reaction to the sort of the question posed by Brooks is similar to my reaction to questions about the cost/benefits of stimulus spending or tax cuts: what’s your time frame?

  30. comment number 30 by: Jim Glass

    Fiscal reform I could support, via the Economist:

    Mr Santos — much better known as “Zeca of the PT” — became governor early in 1999 and, at first, behaved as you might expect of a former trade unionist whose party is the main opposition to Brazil’s government and its “fiscal adjustment” programme. He promised to “govern for the workers” and gave big pay rises to teachers, health workers and police, taking the state’s already precarious finances closer to the brink.

    Then, suddenly, he did an about-face, launching a programme to reduce spending while boosting tax collection. The number of political appointees in the state government has been cut in half, to 1,600, and thousands of permanent staff are being offered voluntary retirement.

    Loss-making state firms have been shut. Tax-dodgers are being pursued more assiduously, over-generous tax breaks to the state’s big meat-processing industry are being scaled back, state workers’ pension contributions are being raised.

    As a result, the state’s finances have swung from a primary deficit (ie, a deficit even before paying debt interest) to a primary surplus.

    Mr Santos … claims, improbably, that he has always believed in sound finances.

    But what seems to have forced his conversion is Brazil’s new fiscal-responsibility law, which came into force last May. This bans the federal government from bailing out debt-ridden states and cities, as it has done repeatedly in the past; it limits federal, state and municipal borrowing and payroll costs; and it bans politicians from leaving their successors a stack of unpaid bills. Offenders may be banned from office or even jailed.

    Let’s see the negotiators in DC come up with this idea!

  31. comment number 31 by: Patrick R. Sullivan

    This piece by Andrew Biggs would seem to be relevant here:

    http://www.american.com/archive/2011/july/yes-you-really-can-cut-your-way-to-prosperity

    Essentially arguing that spending cuts are the only thing that have worked in the past, especially if they’re entitlement cuts.

  32. comment number 32 by: Jeffrey

    Sigh,
    Unfortunately this blog regurgitates the failed Keyesnian econmics of the last 70 years. Look at what happened after a particularly nasty recession after World War I. Compare that to the ’30s under Roosevelt and compare that to what we are doing now. Therein lies the key. If you really want to understand the basis of our problems read some Mises. Check out the MarketTicker by Denninger. Check out ZeroHedge or Vox Day. They have been calling what will happen for the last several years. They understand what is driving it. Our insistence of spending beyond our means and contiually blowing credit bubbles via the Fed. You can raise taxes to 100% for everyone and still not the problem. It is and always has been a spending problem.

  33. comment number 33 by: Vivian Darkbloom

    Patrick Sullivan,

    Thanks for the link. Andrew Biggs is normally a voice of sanity and reason, and this is no exception. He also seems to be in good company with Romer, et al. Although I enjoyed the digression over TARP, etc, it’s probably a good thing that you try to get us back on topic.

    Frankly, this did get me to thinking about the title of this column “What Tax Cuts Can and Cannot Do for an Economy”. I find the title, as well as the content of this article, pretty strange given the nature of the current negotiations over solving our debt problem. EM argues that both Democrats and Republicans now advocate, in their own respective fashions, for “tax cuts”, but I think that’s very inaccurate and does not reflect current reality.

    First, the Democrats. Are they arguing for “tax cuts”? Not as I see it and I don’t think they see it that way, either. As I see it, they are arguing for extension of current policy for low and medium income taxpayers (i.e., the status quo) and for discontinuation of that policy for upper income taxpayers (on top of the tax increases already imposed via ACA). Dems are also arguing for elimination of certain “tax expenditures”, but only for those high and medium income folks. OK, one could argue this is decreasing spending, but it does raise net revenues. On the whole, its pretty hard to argue, as EM does here, that the Dems are arguing for “tax cuts”.

    If there are Republicans arguing for tax cuts, as such, there may be one or two out there, but on the whole I don’t view them as advocating tax cuts either. What I hear Republicans arguing, above all, is that the deficit should be reduced through spending cuts and spending cuts only. That is not to say they advocate cutting taxes. There is very little, if any, talk about “tax cuts”. To the extent there is talk of reducing marginal tax rates there appears to be the acknowledgement that this should be “paid for” by offsetting reductions in other items run through the tax code ( tax expenditures) and this is fully consistent with Bowles Simpson. The mainstream Republican argument seems to be that those tax rate reductions should be revenue neutral–this is not advocating a tax cut, it is opposing a tax increase. Where Republicans do seem to differ is on how those offsetting adjustments should be distributed. As I see it, Republicans are arguing that distribution of those adjustments should be more or less proportionate to the current tax burdens. Democrats, on the other hand, seem to be obsessed with the idea that any increase in taxes and any reduction of tax expenditures should be disproportionately borne by higher-income tax payers. In this respect it is certainly not a “balanced” approach because the Democrats wish to use this opportunity to make the tax code more progressive than it currently is. The dogged pursuit of this ideological goal has nothing to do with reduction of the deficit, per se. EM’s column here, while it ostensibly focuses on “tax cuts” strikes me as just another (rather stealthy) means of making the argument for a more progressive distribution of tax burdens. That doesn’t have anything to do with reducing the deficit and it really doesn’t reflect what is going on in the current debate over how to solve the deficit.

    OK, there is one way to reconcile the idea of “tax cuts” with the current debate. That would be to argue that current law, with the Obama tax cuts due to expire in 2013, rather than current policy, is the proper “baseline”. Here, I think Brooks is right: after 10 years of a given policy, I think the public pretty much is in the frame of mind that any change from the policy is the baseline and nothing else.

  34. comment number 34 by: SteveinCH

    Vivian

    To your last para, you could reconcile it that way and I think Diane would which is why, in her view, Dems are advocating tax cuts, namely the taxes that would go up in 2013 on the “nonrich.” Having said that, the dominant Dem theme at the moment (based on approach not rhetoric) is tax distribution rather than tax level.

    I proposed on another cite that Reps simply propose eliminating the deduction for state and local taxes. That wouldn’t sell on either side of the aisle but for different reasons. Reps would hate that it was a tax increase. Dems would hate that it was a tax increase on the wrong people.

    Both sides are defending a campaign position, nothing more.

  35. comment number 35 by: Vivian Darkbloom

    “To your last para, you could reconcile it that way and I think Diane would which is why, in her view, Dems are advocating tax cuts, namely the taxes that would go up in 2013 on the “nonrich.””

    Well, you see, here is the problem. Of course, it’s one way to look at it, but as I wrote, not the way that fits with current reality. Steve, if you re-read the sentence you just wrote, you’ll see how, even with your conscious attempt to see things that way, you’ve gotten it wrong. If that were the way to view things, taxes would not “go up in 2013 on the “non-rich”. They would stay the same.

  36. comment number 36 by: Vivian Darkbloom

    OK, Steve, nix the last post. It’s late here, and I’m tired. If you view current law as the baseline, then keeping rates the same after 2013 for the “non-rich” would be a tax cut. But, again, I think that’s an un-realistic point of view after 10 years of tax policy,

  37. comment number 37 by: SteveinCH

    Vivian, I agree with you on the baseline but I know that Diane sees it the other way. It’s part of the reason why the whole baseline discussion is a bit part of the confusion on any discussion of US fiscal policy.

    Get some rest. Sounds like you need it.

  38. comment number 38 by: Steve Thompson

    Have you ever wondered how America’s tax levels compare to those of other nations? Here’s an examination of the tax levels of the OECD nations showing which are paying the highest levels of personal taxes:

    http://viableopposition.blogspot.com/2011/05/how-big-is-your-tax-wedge.html

    The United States, despite its massive and growing deficit, has among the lowest taxation level on earned income among all OECD nations and at a rate that is substantially less than most Eurozone nations.