Editore"s Note
Tilting at Windmills

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January 5, 2009
By: Hilzoy

Nooooo! No More Tax Cuts!

From the NYT:

"President-elect Barack Obama plans to include about $300 billion in tax cuts for workers and businesses in his economic recovery program, advisers said Sunday, as his team seeks to win over Congressional skeptics worried that he was too focused on government spending.

The legislation Mr. Obama is developing with Congressional Democrats will devote about 40 percent of the cost to tax cuts, including his centerpiece campaign promise to provide credits up to $500 for most workers, costing roughly $150 billion. The package will also include more than $100 billion in tax incentives for businesses to create jobs and invest in equipment or factories."

It's fine by me if Obama wants to include the middle-class tax cut he promised during the campaign. And the business tax cuts he has mentioned seem more intelligent than the standard cuts in corporate tax rates -- they're targeted at firms who invest, or who hire new workers.

That said, there are a lot of reasons not to focus on tax cuts. First, the money we are proposing to spend on stimulus is not free. We are proposing to spend a lot of it, and a lot of economists seem to think that $750 billion is on the low side. For both reasons, it's important to get the greatest possible stimulus per dollar. And tax cuts won't do it. Yves Smith:

"In very simple form, stimulus programs of various sorts are meant to compensate for a falloff in demand. You can have government spending (as in government does the consumption) or give the money somehow to consumers (in direct ways, such as tax cuts or vouchers of various sorts, like food stamps).

The problem with tax cuts is they may not be spent. And the degree to which they are saved means the stimulus was ineffective. In other words, reliance on tax cuts runs the risk that greater spending will be required to achieve the same result than via government spending.

That is not a theoretical concern. We saw it, big time, with last summer's tax rebate. Gary Shllling did a detailed look at when the checks got in the hands of taxpayers versus changes in retail spending. He concluded that about 80% of the tax rebate was saved.

In graphic form:

Photobucket

Second, we have an enormous backlog of public spending. Our bridges are crumbling, our mass transit systems are generally pitiful, we badly need to upgrade our electric grid, etc., etc., etc. We need to do these things.

Third, people used to say that it was better to cut taxes than to spend more money, since tax cuts were easier to reverse. This might once have been true, and it's probably still true for some politically connected programs, but it is absolutely not true for things like basic infrastructure spending. And we are going to need to be able to reverse course quickly. Once we have successfully avoided a full-scale depression, we are going to have to confront the next looming problem, which (imho) will be a run on the dollar. To do that, we are going to have to bring down the deficit. That will be hard in any case, but it will be a lot harder the sharper the increase in taxes it requires.

According to the WSJ, one reason for relying so heavily on tax cuts is that "it may make it easier to win over Republicans who have stressed that any initiative should rely more heavily on tax cuts rather than spending." To which I can only say: screw them. Their economic philosophy got us into this mess; we should not let them force us to use ineffective means to get out of it.

If the Democrats can't keep enough of their Senators in line to get this passed, and corral a couple of Republicans, then we're in worse shape than I imagine. I'd really rather try to do it right before preemptively conceding to the Mitch McConnells of the world.

Hilzoy 1:36 AM Permalink | Trackbacks | Comments (29)

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Comments

First telecom immunity and FISA legitimation, and now tax cuts as fiscal stimulus?

Somebody needs to tell this doucehbag that we had a chance to vote for a Republican two months ago. Most of us chose not to.

Posted by: brewmn on January 5, 2009 at 2:02 AM | PERMALINK

Can we at least wait to see what the plan looks like before we refer to PE Obama as a douche bag? Especially since the WSJ has Amy "yahoo message boards" Chozick as a contributer. Don't get me wrong, if it is as its being reported I am won't be happy but damn what HAVEN'T we slammed Obama for at this point before he has even spent one day as President?

Posted by: sgwhiteinfla on January 5, 2009 at 2:32 AM | PERMALINK

There's a name for this stupidity: "negotiating against yourself."

Here's what he should do: Propose a fiscal package of spending for infrastructure, education (human capital), and new energy. Let the Republicans whine that there aren't enough tax cuts for businesses. Then relent and include a few business-friendly tax cuts so that Republican legislators have a fig leaf to wear when they vote for the stimulus package. The end result is that Obama gets 85% of what he wants.

But--if 40% of the package is Republican-friendly from the start, the Right will still bitch just as loudly, and we'll end up w/ a package that looks like it came from the Bush White House.

If Obama really thinks that he can head off opposition by granting the other side what it wants from the start, then he needs to talk to Hillary about health care reform.

Obama is soon to learn a brutal lesson about negotiating w/ the Right. He's going to get his ass handed to him on this one. Let's hope he does better the next time.

Posted by: WSP on January 5, 2009 at 2:33 AM | PERMALINK

Moody's is missing, of course, the biggest hypothetical Keynesian multiplier of all. Add massive trade tariffs to everything. That should be a serious indication that something's a little amiss.

Posted by: ndk on January 5, 2009 at 4:02 AM | PERMALINK

Behold the transformation - behold Doh'bama!

Posted by: SteinL on January 5, 2009 at 5:37 AM | PERMALINK

Does anyone have any actual arguments against tax cuts? I see several that don't really lead anywhere. For example, you say, well, tax cuts might be okay if they are the middle class tax cuts he promised, or if they are for businesses who invest. But then you question whether tax cuts are as good as direct spending because people will save rather than spend. However, your example is food stamps. I'm sorry, but I fail to see how this makes any sense - I see no reason why tax cuts and food stamps are somehow a good comparison for understanding this stimulus.

The second argument I am reading here is that tax cuts are bad, because they're Bush like, so a stimulus with a tax cut is like Bush II. This also doesn't make sense to me, as I don't see anywhere where Bush combined tax cuts with three times as much spending as total tax cut. I don't know where all this money Bush placed in transit, energy, medicine, education, etc., makes this comparison of Bush and Obama on taxes relevant. Are we to be disappointed if Barack also says "God Bless America" at the end of his speeches as well?

More seriously, I am not sure where the argument against tax cuts comes in. As far as I am concerned there were only two good arguments against the Bush tax cuts. The first was preserving the balanced budget. It seems this argument would not currently apply. And the second was that the Bush tax cuts were disproportionately benefitting the wealthy - this, for example, is why Daschle and other Democratic leaders had their "Lexus for every millionaire" angle on the tax cuts. I just don't see the tax package designed the same way.

Posted by: g50 on January 5, 2009 at 7:41 AM | PERMALINK

"Tax cuts were easier to reverse"

Meaning that once the wealthy are asked to pay for their fair share of health care and the social safety net, the public will not give it up. The wealthy have been fighting all social programs that might redistribute wealth for decades. They have been successful which is part of the reason for the current mess.

Posted by: bakho on January 5, 2009 at 7:44 AM | PERMALINK

Oh, please. How can you complain about declining real median wages and not want Obama to keep his campaign pledge of a tax cut for the lower 95% of income earners? Before we start calling people douchebags, let's see what the plan is for the top 5% first, okay?

Posted by: jps on January 5, 2009 at 7:49 AM | PERMALINK

If this is a sign to come, I think many on the left are going to pass out from hyper-ventilating over every rumor or thinly sourced article. Wait for the outline of the plan to come from Obama (or someone senior in the administration) before reacting. I'm sure there will be plenty for you to be pissed about.

Posted by: KJ on January 5, 2009 at 7:57 AM | PERMALINK

I'm not so sure this is an Obama problem. Get Obama's replacement seated (if there's no evidence of a bribe, if he good enough) and just deal with Blago as time permits. Seat Al Franken; if the R's complain, sweeten the deal for the Maine senators, as necessary. Why concede anything to the assholes, when you only need one vote to break filibusters?

This is not even hardball, this is just a case of not being stupid, and gettings things moving.

Posted by: dr2chase on January 5, 2009 at 8:10 AM | PERMALINK

I just can't help but reply to the individual who said "it's about time the wealthy started paying their fair share".

The top 5% of income earners already pay 60% of all federal income taxes (the bottom 50% pay less than 5%), so I wonder what would be considered "fair". You can never get Leftists to answer this question because their intent is to push incremental tax increases until they've literally got it all.

Posted by: JohnR22926 on January 5, 2009 at 8:15 AM | PERMALINK

This goes against the head of his Council of Economic Advisors, Christina Romer. She believes that in times like this we get more bang for our buck with tax cuts.

Please separate these economic times from normal times. We will benefit from tax cuts now and then should raise taxes when the economy gets back on its feet. We should also spend now.

Posted by: Ben on January 5, 2009 at 8:34 AM | PERMALINK

I'm begging please bring Steve back. Your mind blowingly boring and inane.

Posted by: Gandalf on January 5, 2009 at 8:58 AM | PERMALINK

To piggyback off of that, the next person that says the phrase "the so-and-sos of the world" should jump in a lake.

Posted by: reb on January 5, 2009 at 9:07 AM | PERMALINK

Hey JohnR22926, you wonder what might be considered fair for the top 5%? Check out Sweden.

Posted by: jps on January 5, 2009 at 9:58 AM | PERMALINK

Wow. You got a plug from snake face, Carville. You BET I'm gonna read, NOW. You're right. NO MORE TAX CUTS! We should tax EVERYTHING, right in to the ground. Congress NEEDS that money to take care of us. Obama NEEDS that money. He needs to spread it around so that everybody has the same. Like Mao did. In fact, would it kill us, to all wear the same clothes. That sounds fair. Doesn't it? We've got to do whatever it takes, to get Obama all of our money. Only THEN, can he save us. You idiots, on the LEFT, are out of your minds.

Posted by: Timothy L. Pennell on January 5, 2009 at 9:59 AM | PERMALINK

Let's not get caught up in the phrase "tax cuts", which admittedly are most associated with Bush, Republicans, and other things that got us into the current mess.

If the "tax cuts" for businesses are handled properly -- i.e., given out after an investment is made or a new position is created and filled -- then they end up being subsidies. If that's the case, it really isn't much different than funding shovel-ready infrastructure projects, in that it injects federal funds to stimulate activity.

Further, investments in new equipment or expanding a company's workforce tend to be more lasting. Infrastructure projects end when the road or whatever is built; a workforce expansion in a private company can be ended but with considerably more difficulty.

Posted by: DrGail on January 5, 2009 at 10:11 AM | PERMALINK

Gotta love the irony of someone SCREAMING AND YELLING, making stuff up out of whole cloth, using terrible grammar in the process of calling other people idiots. Good fun, this internet thing.

For my part, I'm a little disappointed at Hilzoy's confusion between tax cuts and tax rebates. If we're talking serious policy, it probably makes sense to be clear about what we mean.

For instance, Obama is apparently proposing allowing small business to take tax writeoffs for some investments which would otherwise be pure expense. Explain, please, how exactly that money is likely to be saved rather than spent?

Maximizing stimulus makes sense. Infrastructure spending makes lots of sense. Adjusting tax policy -- yes, tax cuts -- to incent reinvestment makes sense.

However, arguing policy based on "good" and "bad" labels and jargon rather than clear thinking makes little sense, and is too reminiscent of the way idiots like our screaming friend operate.

Posted by: Brooks on January 5, 2009 at 10:13 AM | PERMALINK

What

Posted by: Marko on January 5, 2009 at 12:03 PM | PERMALINK

I see many posters blaming the Bush tax cuts as to "what got us into this mess". In reality funky loans that were designed to let everyone own a home were heavily supported by Democrats. These loans caused a major shift in demand for real estate which in turn caused irrational pricing. (double digit annual real estate price moves with low single digit median income increase) When the funky loans (pick and pay, intrest only...) that the Democrats supported came crashing down the economy came with. This was all magnified by the use of credit default swaps. If anything the tax cuts helped soften the blow.

Posted by: Marko on January 5, 2009 at 12:13 PM | PERMALINK

JohnR22926, since you are talking total amounts, not percentage of income, the top 5% pay about 60% of the total tax amount. However, they own 95% of the total wealth.

You need to understand the following sentence as it relates to the current "fair" tax talking points (presumably from Frank Luntz):

"Fair means they should tax everyone the same, even though they've got no money, and I've got a f%^& load!"

Posted by: royalblue_tom on January 5, 2009 at 1:55 PM | PERMALINK

But since my figures are somewhat unfair too, to put it into perspective you can see that the top 5% earned (income) roughly the same as the bottom 60% earned. So, since they earned 60% of the total income, surely they should pay at least 60% of the taxes?

http://www.visualizingeconomics.com/2006/01/30/total-income-of-top-middle-bottom/

Now John, explain to me how this is unfair.

Posted by: royalblue_tom on January 5, 2009 at 2:30 PM | PERMALINK

One of the right-wing’s favorite talking points is the claim that 50 percent of American households don’t pay income taxes. From that claim flow a couple of other points: First, it’s impossible to “cut” taxes for those households because they don’t pay any tax in the first place; second, those households are somehow less deserving of respect or even a voice in politics because they aren’t paying their own way.
That claim is bogus both in its details and its general charge.
The actual figure of “taxable units” who don’t pay the standard income tax — a taxable unit being a couple filing jointly or a person filing — is somewhere around 38 percent. Even that number is grossly exaggerated, because it excludes what people pay through the payroll tax.
That tax, in total, amounts to 15.3 percent of earned income up to a gross income ceiling that this year is $102,000. Above the ceiling amount, a taxpayer pays only 2.9 percent. (Employers technically contribute half the 15.3 percent, but economists classify the entire amount as a tax burden on the worker because it is a tax on their labor. If you’re self-employed, you have to pay that entire 15.3 percent yourself.)
Because of that income ceiling, high-income workers end up paying the tax only on a relatively small part of their income, while poor and many middle-income households pay it on everything they earn, so the payroll tax is to some degree a surtax on the poor and middle-class worker.
How much does the payroll tax amount to? Well, last year the standard income tax brought in $1.17 trillion, while the payroll tax brought in $873.4 billion.
Technically, payroll tax receipts are supposed to be reserved for paying for Social Security and Medicare, which is what allows some people to claim it is not an income tax. However, in practice that distinction was abandoned long ago. For decades now, the payroll tax has been bringing in a lot more revenue than needed for Social Security, and the excess has been siphoned off for general fund use like any other government money.
Last year alone, $190 billion in payroll tax receipts was diverted to general fund use, paying for everything from Iraq to the salaries of park rangers.
As of 2007, a total of $2.25 trillion of payroll tax money paid into the Social Security and Medicare trust funds had been diverted to general fund use and replaced with government IOUs. In effect, the trust funds are an illusion. Payroll taxes and income taxes go into the same pool of money and are withdrawn from that same pool of money to fund government.
And for that reason, the claim that 50 percent, or even 38 percent, of Americans pay no income tax is flat out wrong.

Posted by: Jay Bookman on January 5, 2009 at 2:46 PM | PERMALINK

I'd be curious about more numbers.

What would the payback be for payroll tax cuts that are capped at double minimum wage?

What's the payback for payroll tax cuts for new hires only, sunsetting after 5 years?

What's the payback for tax credits against equipment purchasing as Obama suggests?

The Payroll tax cuts were rather competitive in that list. What happens if you tweak it?

If our new president asks the right questions, perhaps liberals can master the art of tax policy stimulation where the GOP failed on a Depression-causing level.

Can liberals make tax cuts a GOOD thing? I bet we could. THEN what would the GOP run on? Ineffective tax cuts? Color me curious.

Posted by: toowearyforoutrage on January 5, 2009 at 2:58 PM | PERMALINK

Infrastructure neglect is a symptom of government overspending. The slice of the pie for infrastructure was pulled out of the pie so that other slices like wages could grow faster. The State's need to maintain a certain percentage in their Budget for Infrastructure. If they don't the FED's will have to pay for the next thing they can't afford like their State Pensions. We have a babyboom, a pig in the python in government and they are in their peak earning years. I wouldn't be surprised if our Government was top heavy with respect to employment simply because there are too many babyboomers. In my State there was an explosion in hiring in the early 80's. People felt that it was better to hire someone than to pay them Welfare. Well now, we've got to pay that person's pension, that person that was a chair warmer for 25 years.

Posted by: John P. on January 5, 2009 at 2:58 PM | PERMALINK

royalblue_tom - please read and understand charts before you make ignorant assumptions. The top 5% according to your link made only slightly more than 20% of the total income but paid more than 60% of the taxes. Does this seem fair? The reason we have bloated and corrupt government is because more than 50% of the people don't pay for it and don't care. If everyone had a stake, our govennment would be much smaller and more efficient. Now what we have is a patronage jobs program for the highest doners with union (non) work rules and lavish pensions (how many of you in the private sector still have pensions?).

I want to remind everyone like royalblue_tom that there is a difference between wealth and income. Income is the what you earned by working or investing (risking your money). People who earn large amounts of income are not always wealthy but are trying to become wealthy to benefit their families, employees, churches, and communities.

We do not tax wealth so liberals like the Kennedys have no problem levying high taxes on people trying to become wealthy via income taxes (keep the new money trash out of our country club).

Posted by: tcopeand_bs on January 5, 2009 at 3:44 PM | PERMALINK

Hi Hilzoy,


I just wanted to let you know that THEWEEK.com linked to your article today in a piece we wrote titled 'Obamas tax cut,' (http://www.theweek.com/article/index/91970/3/Obamas_tax_cut). We enjoyed reading your take on this subject.

Thanks, and all the best,
Harold Maass
Editor
THEWEEK.com

Posted by: Harold Maass on January 5, 2009 at 4:15 PM | PERMALINK

We really need a three-tiered tax system:

1. Low taxes for fiscal conservatives.

2. High taxes for libs who want to husband 30 million illegal aliens and their anchor babies, spend, spend, spend on stimuli, on education and healthcare, send troops to Sudan, etc.

3. High taxes for Republican, Evangelical, and Neocon bully boys who want to fight all the Arabs for Israel, maintain military bases in 160 countries, spend, spend, spend on military; and the femi-Nazis who want to crush the Taliban and install Amazon and lesbian rule.

Wouldn't that be fairer than the present system?

Posted by: Luther on January 5, 2009 at 5:24 PM | PERMALINK

The retired folks get screwed by Mr. Obama. No paychecks to have enhanced.

Posted by: MARSHALL on January 5, 2009 at 6:38 PM | PERMALINK




 

 

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