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Category: tax policy

Published on Leave a comment on This Is Rich

From the Real Time Economics Blog:

Huckabee and Paulson Spar over Stimulus Plan
Republican presidential hopeful Mike Huckabee accused President Bush and the House of Representatives of missing the point with their new emergency anti-recession plan, including $100 billion in payments to individuals and $50 billion in tax breaks to get businesses to invest.

“The problem I have is that what we are really doing is borrowing about $150 billion from the Chinese, which is where this money has got to end up coming from,” Huckabee said on CNN’s “Late Edition” Sunday.

“Then we’re going to give rebates to taxpayers, and that’s great. - I’m glad,” Huckabee continued. “But what will most of them do with it? They’re going to buy things that were imported from China.”

“So I have to ask,” he added, “whose economy is being stimulated the most?”

The former Arkansas governor said a better plan would be to provide an infusion of federal dollars to repair and replace crumbling bridges, airports and other infrastructure.

Huckabee has a reasonable argument, to a point. If the purpose of the stimulus package is to prevent GDP growth from turning negative by boosting consumption, then the import share of the incremental consumption (relative to total consumption) has to be considered. And as I've argued before, he is right in noting that this deficit spending on simple consumption when public infrastructure might be a more sensible addition to the budget.

Published on Leave a comment on It’s Not a Stimulus, It’s Deficit Spending

Commentary based on this recent post aired this evening on NPR's marketplace. The teaser:

The proposal for the $150 billion stimulus package has Washington basking in bipartisanship. But commentator Andrew Samwick says the pricetag for all that collegiality might be too high.

Enjoy!

Published on Leave a comment on Len Burman Pokes a Finger in the Eye of the Stimulus

I enjoyed Len Burman's op-ed in today's New York Times for reaching this conclusion, in "Make the Tax Cuts Work:"

There’s bipartisan agreement that something along these lines should be done, but the president has also argued for an extension of his tax cuts, now scheduled to expire at the end of 2010. This idea has met with less support. It would accomplish nothing in the short run, and most of the benefits would go to the very rich — the group least likely to spend a tax windfall.

But if they were repealed in a year, the Bush tax cuts could spur a burst of economic activity in 2008. If people knew that their tax rates were going up next year, they’d work to make sure that more of their income is taxed at this year’s lower rates. Investors would likewise have a giant incentive to cash out their capital gains now to avoid paying higher taxes later. In 1986, stock sales doubled as taxpayers rushed to avoid the capital gains tax rate increase scheduled for 1987. If people pour their stock gains into yachts and fast cars, that’s pure fiscal stimulus.

The money involved could be considerable. Capital gains in 2007 were something like $700 billion, representing well over $1 trillion in asset sales. It looks as if gains will be much lower in 2008, but a looming tax increase could easily spur an additional $500 billion in sales. If only 20 percent of that translated into extra spending, we’d have as much or more short-term stimulus as we could get from the package Congress and the president are considering.

Best of all, this is one stimulus proposal that would reduce the deficit — the single largest threat to the economy’s long-term health. And that long-term benefit wouldn’t depend on our getting the timing and amount of stimulus right, something policymakers are notoriously inept at.

UPDATE: Len responds to some of his fan mail at the TaxVox blog.

Published on Leave a comment on Fiscal Stimulus? We Don’t Need No …

All of the recent discussion of fiscal stimulus is very disappointing to an economist and deficit hawk like me. I'll ask two questions in this post and highlight them in bold.

Over the past few years, cheap credit and imprudent lending policies by some bad actors generated excessive consumption and investment in the real estate sector. This boosted economic activity beyond the level that would have prevailed with policies that we now wish, with hindsight, had been in place. That level of economic activity is the starting point for discussion of a recession, defined as two consecutive quarters of negative growth in real GDP. If we acknowledge that bad loans fueled the activity, why is it now a widely shared policy objective to maintain that level of activity?

The buzzwords for the stimulus discussion are that whatever the government does, it should be "timely, targeted, and temporary." Much of the discussion centers on a tax rebate, which would primarily boost consumption. Treasury Secretary Paulson is quoted as follows:

Asked if tax rebates to individuals - reportedly one of the cornerstones to the stimulus plan - is an effective course, Paulson said, “the evidence from [the] 2001 [rebate] was that people spent between a third and two-thirds of the money and spent it quickly, so the lesson here is we need to move quickly and do something in enough size.”

Forget the "stimulus" label, this is merely additional deficit spending. There is no discussion of repaying the money through higher taxes in the near term. Based on the President's remarks this morning, the deficit bill will be for about $150 billion. So this proposal is just another $150 billion of some future generations' resources that we will be using for our own consumption today. Why are we entitled to pass them this additional debt?

My views of how the government should conduct fiscal policy are presented here. We should expect some cyclical widening of the deficit with no change in policy. But if we have no intention of balancing the budget over the business cycle (i.e., of running an additional $150 billion surplus when the economy turns around), then we have no business pushing this deficit bill forward now.

UPDATE: Bruce Bartlett provides some background on tax rebates at the WSJ online and concludes:

A new rebate probably won't do much harm. But anyone who thinks it will prevent a recession -- if one is actually in the pipeline, which is not at all certain -- is dreaming. It's an insult to Keynes even to call a tax rebate Keynesian economics. It should be called "feel good economics" because its only real effect is to make politicians feel good about themselves and buy re-election with the public purse.

Published on Leave a comment on Social Security in the Democratic Candidates’ Debate

There was a portion of the debate on Wednesday night focused on Social Security, and, in particular, raising the maximum taxable earnings as a way to collect more revenue and improve projected solvency. You can watch the segment here. The issue at hand is whether solvency can be restored by removing the cap on taxable earnings, so that all earnings are subject to the 12.4% combined (employer plus employee) tax for Social Security. This is currently the case for the 2.9% combined payroll tax for Medicare Part A.

There are two ways in which this might be done. In the first, workers who pay this additional tax would have the earnings on which they were taxed included in the calculation of their subsequent benefits. In the second, workers who pay this additional tax would not have these incremental earnings included in the calculation of their benefits. The Office of the Chief Actuary at the Social Security Administration has made it very easy to assess the effect of changes of this sort on projected solvency. The first case is shown here, and the second case is shown here.

In the first case, the system can pay full benefits for almost all of the 75-year projection period. You can see this in two ways. First, the second to last column is -0.10, meaning that over the 75-year period, full benefits could be paid entirely if this provision were enacted and the combined payroll tax rate were increased (on the old base) from 12.4 to 12.5 percent. Second, you can see that the new path of the trust fund crosses zero just at the end of the projection period.

In the second case, the system can pay full benefits for the full 75-year projection period. The second to last column is now +0.28, and the trust fund has a balance of about 3.5 years worth of benefits at the end of the period. Is this enough to say that the system is solvent? I don't think so. Even in this case, the balance in the trust fund is declining and will cross zero at some point after the 75-year projection period ends. The last column of numbers shows that annual deficits are equal to almost 3 percent of (the old base) taxable payroll. More would need to be done here to ensure that the trust fund is never projected to cross zero.

It is not clear which provision the candidates meant, but I am going to assert that it was the second one. If the problem is that there is not enough money to pay currently projected benefits, then it seems odd to now increase the claims that will be made on the system by the very wealthiest recipients. (Very roughly, if I pay these taxes on another million dollars of earnings each year over the course of a career, my benefits will go up by $150,000 per year during retirement.)

This is a large increase in top marginal tax rates on incomes where the supply-side response could be relevant. When Jeff, Maya, and I were developing the LMS plan, we decided that we didn't want to do this all on the revenue side and didn't want to get all of our revenue via increases in the cap. Instead, we borrowed the idea from the Diamond-Orszag plan to lift the cap to a point where 90% of all earnings were taxed (with no incremental benefits for the additional earnings subject to taxation). This was roughly the amount subject to the tax at the time of the last big reform in 1983. (Since a lot of the increase in average earnings has been at the high end, over time, a lower share of total earnings have been below the cap.) We also added an increase in the payroll tax rate for 1.5 percent of (the old base) taxable payroll, and made up the rest of the financial shortfall with changes on the benefit side.

More importantly, we required that all new revenues go into a system of personal accounts. This was my deal-breaker. If we were to raise this much additional revenue, without channeling it to personal accounts, we would simply be compounding a budget problem that is already severe. When the government runs a Social Security surplus, it treats those monies as available to spend on things other than Social Security. We know this because it targets the unified budget deficit, and has done so pretty routinely over the last several decades. (See here and here.) If these government inflows are matched by offsetting outflows (into the personal accounts), then there is no danger that they will be used to finance current expenditures, and the additional revenues will actually raise saving rates to help prefund future obligations.

Published on Leave a comment on Senator Obama Lays Out His Tax Policy Ideas

This afternoon, the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute, hosted Senator Barack Obama for a speech on "the economy, opportunity, and tax policy." You can view the webcast here, read the transcript here, and read some news coverage here.

There are a lot of good ideas in the speech. Were this 30 years ago, both the Democratic Party and the Republican Party would be eager to provide a rebuttal.

Enjoy!

Published on Leave a comment on Alan Greenspan, Meet Irony

There have been a number of posts about the morsels of revisionist history in Alan Greenspan's new memoir, The Age of Turbulence. I think Brad DeLong gets the indictment exactly right toward the end of his book review:

One piece of this third book is worth noting: Greenspan's defense of his tenure as Fed chief. Why does he need a defense? Thirty-five out of 36 decisions is a very good batting average. But one could indict him on four counts: that he should not have, but did, support the Bush tax cut of 2001; that he should not have, but did, encourage new U.S. homeowners to get adjustable-rate mortgages -- ARMs -- in the early 2000s; that he should have done something to abort the dot-com bubble of the late 1990s; and that he should have done something to prevent the real estate bubble of the 2000s.

The first two counts are misdemeanors, and Greenspan pleads guilty. He says that he was warned that his testimony on the proposed 2001 tax cut would send a different message than he intended and that he ignored those warnings, which proved correct. Greenspan says his support for a tax cut was nuanced and partial, provided there were triggers to prevent budget deficits but that his statements were interpreted by the news media and politicians as a blanket endorsement. He adds that he did not understand how institutionally corrupt and thus unconcerned about good budget policy his Republican Party had become by early 2001. He says he did not properly understand in the early 2000s the large effect low teaser interest rates and prepayment penalties would have in leading new and financially strapped homeowners into deals that were not in their best interest.

The other two counts could be considered economic felonies, and here Greenspan stands his ground. Given the state of investor psychology, he says, he could have aborted the stock market and housing bubbles of the late 1990s and the early 2000s but only by paying an unacceptable price in idled factories and unemployed workers. He may be right and he may be wrong in this judgment -- I don't know. I do know that this is a judgment call, a difficult aspect of monetary policy.

I find it fascinating that someone whose tenure as Fed Chair was aptly characterized by the paraphrase, "If you understood what I said, then I must have misspoken," would now be complaining that his statements in support of the President's tax cuts in 2001 were misconstrued.

Published on Leave a comment on Some Good Ideas on Energy Tax Policy

Kevin Hassett and Gib Metcalf outline "An Energy Policy for the Twenty-First Century" in a recent AEI short publication. The policy prescription:

  1. An end to energy supply subsidies
  2. A green tax swap
  3. An end to the gas guzzler loophole and possible use of "feebates"
  4. Conservation incentive programs

I consider #2 to be by far the the most important element. I've got a higher tolerance for the carbon tax than most, I suspect, and don't particularly feel the need to make all of it revenue neutral. In particular, I'd make the carbon tax large enough to not just eliminate the gas guzzler loophole in #3 but the entire program of which it is part. Beyond that, I like #1 for making the government smaller (a hint to you conservatives out there) and, for the same reason, would wait for the first three to take hold to see how much of a need there is for #4.

Read the whole thing.

Published on Leave a comment on Global Climate Change

Catching up on my reading after some recent travels, I notice an excellent symposium on "Global Climate Change" in the latest Economists' Voice, with contributions from Joseph Stiglitz, Sheila Olmstead and Robert Stavins, Kenneth Arrow, and Thomas Schelling. The first and the last were particularly interesting.

From Stiglitz, arguing for a global environmental tax on emissions:

The big advantage of taxation over the Kyoto approach is that it avoids most of the distributional debate. Under Kyoto, getting the right to pollute more is, in effect, receiving an enormous gift. (Now that pollution rights are tradeable, we can even put a market value on them.) The United States might claim that because it is a larger country, it "needs" more pollution rights. Norway might claim that because it uses hydroelectric power, the scope for reducing emissions is lower. France might claim that because it has already made the effort to go into nuclear energy, it should not be forced to reduce more. Under the common tax approach, these debates are sidestepped. All that is asked is that everyone pay the social cost of their emissions, and that the tax be set high enough that the reductions in emissions is large enough to meet the required targets.

Greg Mankiw has previously confirmed Stiglitz' entry into his Pigou Club. From Schelling, a good discussion of how to appreciate the uncertainty of projections of climate change:

In some public discourse, and in sentiments emanating from the Bush Administration, it appears to be accepted that uncertainty regarding global warming is a legitimate basis for postponement of any action until more is known. The action to be postponed is usually identified as “costly.” (Little attention is paid to actions that have been identified as of little or no serious cost.) It is interesting that this idea that costly actions are unwarranted if the dangers are uncertain is almost unique to climate. In other areas of policy, such as terrorism, nuclear proliferation, inflation, or vaccination, some “insurance” principle seems to prevail: if there is a sufficient likelihood of sufficient damage we take some measured anticipatory action.

At the opposite extreme is the notion, often called the “precautionary principle” now popular in the European Union, that until something is guaranteed safe it must be indefinitely postponed despite substantial expected benefits. Genetically modified foods and feedstuffs are current targets. (One critic has expressed it as, “never do anything for the first time.”) In this country the principle says that until a drug has proven absolutely safe it must be deferred indefinitely.

Neither of the two extreme principles—do nothing until we are absolutely sure it’s safe; do nothing until we are absolutely sure the alternative is dangerous—makes economic sense, or any other kind. Weigh the costs, the benefits, and the probabilities as best all three are known, and don’t be obsessed with either extreme tail of the distribution.

Kudos to Lawrence Goulder for putting this together as special editor.