– Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The views expressed are her own. –
President-elect Obama announced on January 8 that he is planning to use $300 billion of his $700 billion two-year stimulus package for tax cuts—but we should not celebrate too soon. Obama is proposing a series of temporary tax cuts, not permanent cuts that would hasten economic recovery.
For two years only, Obama wants to give a tax cut of $500 a year to individuals and $1,000 a year to families, at a cost of about $145 billion over the two years. Rather than mail out U.S. Treasury checks, as was done last spring in an effort to ward off a recession, he would lower withholding rates so that the tax cut would be spread over the year.
Obama and his advisers evidently believe that a temporary tax cut spread out over 52 weeks would induce more extra spending than one delivered all at once. The problem is that tax cuts that are temporary have limited effects on spending behavior. Milton Friedman won a Nobel Prize for his permanent income hypothesis, which showed that spending decisions are made not by the amount of money in consumers’ pockets, but by their expectations of future income.
Businesses with losses in 2008 or 2009 would also receive temporary tax cuts. They would be allowed to convert those losses to cash by applying them to taxes paid in earlier years. Treasury checks for the losses would give them additional cash for new investments.
As an incentive to spend the money, businesses would be allowed to expense—deduct in full—up to $250,000 of equipment in 2009 and again in 2010, up from the present limit of $125,000 a year.
Firms do tend to respond to temporary incentives, boosting current GDP. But they often do this by advancing investment projects from future years to the present, lowering GDP in the future. If a firm, to take advantage of the extra write-off, invests more this year or next, then some additional projects would be advanced from 2011 and 2012, reducing investment and employment in those years.
Businesses would also be given a one-year tax credit to hire new workers, or prevent layoffs, valued at $3,000 per worker, at a cost of $40 billion. This provision is so murky that it will obviously be abused. A company could fire workers and rehire them to get the credit, or announce plans for layoffs in order to qualify.
The goal of tax systems, in addition to raising revenues that governments need, should be to encourage work and investment, and thereby production of national income. Income effects are critical when it comes to assessing the effects of changes in tax rates on government revenues and the inefficiencies associated with different taxes.
The most effective measure would be a permanent cut in individual tax rates and an increase in business expensing, paid for by a permanent cut in spending when the recession is over. The tax cuts of 2001 through 2003 would have been more effective if spending could have been cut in subsequent years.
Economists such as Professor Jonathan Gruber of MIT have found that households earning more than $100,000—typically containing two middle-class professionals—are highly responsive to changes in tax rates. When tax rates rise, their work declines.
Others, such as Professor William Gentry of Williams College, found that higher marginal tax rates discourage entrepreneurs from starting new businesses, which involves much risk. Additional investment in new ventures creates jobs, encourages innovation, and enables people to reap further benefits from economic creativity. (Click here for Gentry’s report.)
An efficient tax system is a vital tool for restarting American growth. Improvements in our tax system can help us outgrow the recession and keep up with the rest of the world. If we’re planning tax cuts of $300 billion, let’s do it right.
For previous columns by Diana Furchtgott-Roth, click here. The author can be reached at dfr@hudson.org.
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“One of the things the author failed to point out is that of the 90% of taxpayer who would “benefit” from such tax cuts, 40-50% don’t even pay taxes, thus, such a tax break would be in the form of a “welfare” payment, contrary to those who actually do pay taxes.”
Really?? Have you ever lived a year @ minimum wage(read poverty level) income?
When I did, the Taxes I paid were higher in %% than they are now that I am up at middle income. I @#$% you not.
The poor of this country pay a MUCH higher percentage of their income back in taxes than the rich, the upper middle class, or the middle class. Period. Fact.
The collapse of the economy was caused by several things: sub-prime mortgages, derivatives, credit default swaps, etc. The biggest cause of all was never debated in the presidential campaign: deficit spending for eight years to the tune of $5 trillion has kept the government on steroids, over-stimulating the economy. Deficit spending has doubled the national debt, creating the biggest government waste of all: $500 billion interest costs, that can’t be cut, must be paid. President Obama will have to raise taxes to stop the waste and rebuild the economy. Fortunately, a value added tax will help stop deficit spending and put a tourniquet on the outsourcing of jobs. But President-Elect Obama says all economists, both conservative and liberal, agree that we need to stimulate to jump-start the economy. Stimulation won’t work. Needed infrastructure spending is good, but won’t jump-start the economy. These are the same economists that counseled the banking, housing and automobile industries to go broke. I’ve learned that most of the economists are high-paid lobbyists. The interests that cause them to recommend stimulation are invested in outsourcing. Their economists know stimulation won’t work, but they’ve got to keep their jobs. Two years ago the Princeton economist, Allen Blinder, estimated that in ten years we will lose forty million jobs to outsourcing. As the economists palaver whether to stimulate $300 billion, $600 billion as recommended by Paul Krugman and Robert Reich, or now $780 billion in two years for three million jobs, it will still be five million jobs short. President Obama can’t wait for economists submitting plans to create jobs that loses them faster than being created.
After World War II, Japan started the trade war by subsidizing its manufacturing, targeting items of export, closing its market and selling the targeted export at cost, making up the profit in the closed domestic market. After fifty years, Toyota is #1 while Ford and General Motors struggle. China increased the competition with tax policy, controlling its labor and opening its country to produce in China in exchange for investment, research, technology – and jobs.
We have been importing subsidized foreign cars for eight years at the rate of $10 billion a month. No U. S. industry can withstand $5 trillion of subsidized competition. And a good place to start is with the bail-out plan. When Japan attacked Pearl Harbor, President Franklin Roosevelt put everybody to work 24/7and had Ford produce the tanks and General Motors produce the B-24 bombers. A nation must have rolling stock. Before long we will be importing subsidized Chinese hybrid cars 17 percent cheaper than Detroit’s manufacture. Detroit must pay all taxes, but China rebates its 17 percent VAT at export, and all bail-out plans now considered will be found wanting. We need to immediately impose import quotas on foreign cars. We need a VAT to compete in globalization and the trade war. It will take a year for the Internal Revenue Service and business to gear up for a VAT. In the meantime, we need to impose a 10 percent surcharge on all imports as President Nixon did so successfully in 1971. Those that argue that an import surcharge or VAT will cut off stimulation can forget about it. People are not consuming. They’re desperately trying to save.
Fortunately, a value added tax will help stop deficit spending and put a tourniquet on the outsourcing of jobs. The Secretary of Commerce is required to promulgate a list of weaponry necessary to our national security, so that the United States can be assured of domestic production and supply. But the Defense Department ignores this caution. We had to await flat panel displays from Japan before invading Kuwait in Desert Storm. Our fighter aircraft depends on parts from India and Sikorsky must import a vital part for its helicopter from Turkey. At any crisis now, Marine One could cause the Commander-in-Chief to be grounded.
President Obama can harken the lesson of our first President’s first message to the first Congress in 1789. President Washington stated: “A free people should promote manufactories to render them independent of essential, particularly military, supplies.” Refurbishing our production of defense material will put America back to work
The wealth that the U.S. achieved in the early 20th century has been eroded by encouraging other countries to build their industrial base while not taking care to insure a domestic industrial future in this country.
This has been extensively documented and is evidenced by 30 years of trade deficits and a most recent deficit of $817 billion last year - the U.S. simply does not produce what it needs to sustain itself.
What can we do to correct this?
Coming to terms with reality
U.S. consumers of many products including capital equipment now find that foreign imports or foreign-owned domestic producers provide a better value or quality than domestic counterparts, if they even exist. Without some incentive, current policies are simply failing to stimulate competitive domestic industry.
Limitations of the free market
Capitalism is motivated by profit, which can be affected by government tax or other policies & foreign competition. If the policy of the government & foreign competition does not allow for profitable returns on investment in critical domestic industries then it seems that there are two options.
1) Protectionism
By closing the trading borders, domestic demand may be met with increased industrial domestic investment. However, in limiting foreign goods, U.S. consumers will not be able to afford much needed goods until domestic industry catches up. There is also the risk of encouraging domestic monopolies.
2) Government direct investment
For industries that do not provide sufficient return for risking private capital, there should be a way to employ public money to benefit the entire country. This is what happens with government healthcare programs, military, public transportation, and countless other examples. There should be some mechanism to insure that core commodity (like steel and transportation) industries that form the basic platform for a self-sufficient industrial country should be maintained even if these commodity industries themselves are not profitable to private investors.
Examples from other countries
Japan through its Ministry of International Trade and Industry (MITI) has helped provide leadership and assistance for development of industrial productivity and employment.
According to the Federation of American Scientists (FAS), “MITI facilitated the early development of nearly all major industries by providing protection from import competition, technological intelligence, help in licensing foreign technology, access to foreign exchange, and assistance in mergers.”
MITI is a successful case study in how the government can work with industry to stimulate core sectors that serve the entire country without attempting to establish a centrally planned economy.
The FAS continues: “MITI served as an architect of industrial policy, an arbiter on industrial problems and disputes, and a regulator. A major objective of the ministry was to strengthen the country’s industrial base [by encouraging investment through incentives and selection of most needed products and development procedures to be developed that would benefit their most important industries like steel and robotics]. It did not manage Japanese trade and industry along the lines of a centrally planned economy, but it did provide industries with administrative guidance and other direction, both formal and informal, on modernization, technology, investments in new plants and equipment, and domestic and foreign competition.”
We should take the best that other countries have to offer and refine it with our own experience and objectives. By doing nothing we are bound to be buffeted by those other countries that have a strong plan to continue to dismantle our industry and economy.
Japan has used intelligent planning as opposed to our unplanned industrial regression (witness the auto industry). Japan is accomplishing this from a zero base of ashes from end of the war in 1945 and having only 4% of our land area, only 40% of our population & with absolutely no natural resources. It is very obvious from their example that there are better ways than our ways, that major changes should take place immediately or we will be relegated to become a 2nd class power & eventually a 2nd class country.
The United States economy has been ravaged by crisis during the past year. The housing market collapsed; bringing the credit, financial and banking industries down with it. These problems are dire, but they have also been relatively short-lived. The biggest problem in the U.S. economy is the imbalance and instability produced by “free trade” under NAFTA and the WTO. Estimates show that NAFTA has cost the U.S. a minimum of 525,000 manufacturing jobs, according to BusinessWeek.
Everyone knows that the U.S. has lost thousands of productive manufacturing jobs to Mexico, but the problem goes much deeper than the sheer number of jobs lost. NAFTA helped ingrain the injurious precedent of outsourcing into the mind-set of American corporations. Companies like General Motors and Ford have survived, but their former employees are out of work. Ford makes thousands of vehicles every year in its multi-million dollar facilities in Mexico. GM likewise has major facilities in Canada and Mexico where labor is cheaper than in the U.S.
In their never ending search for bottom line profits these companies have sold their employees out. Now, under the auspices of liberal “free trade,” the U.S. is losing more jobs to places outside of Canada and Mexico. While much of our heavy industry has been outsourced locally, many high paying technology and service jobs have been sent overseas to places like China and India.
Pascal Lamy, President of the WTO, argues that all trade is beneficial. His clouded world-view ignores the very real problems caused by unfettered and unregulated trade. Trade definitely benefits parties on both sides, but the groups that benefit are too small to help the overall economy. NAFTA has allowed dying industrial giants like GM and Ford to stay alive while providing thousands of jobs to Canadians and Mexicans. Executives keep their jobs and maintain their ballooning salaries; Mexicans and Canadians get the opportunity to work in the manufacturing sector. Unfortunately, the benefits of NAFTA ignore American workers who are replaced by foreign labor and lack a cushion to fall back on.
Our current stance on “free trade” has to be amended in a way that guarantees benefits to the American people as a whole, rather than the executives at the top and the foreign laborers at the bottom. The United States should pursue any means – including tariffs, economic protection and the potential removal of trade agreements – to shore up its economy and protect its workers. We have ignored the problem for too long and it has grown well beyond a crisis. This problem has become a catastrophe
Im sorry but I have to say I think most of us americans would rather have a one lumpsum check we have children to feed and clothe so by all means send me my check!!!!
If the USA is to survive then OUR elected Representitives(President included) Have to take us out of Nafta WTO and other myraid restictions that have in effect killed our domestic manufacturing base. It is more PROFITABLE FOR THE CORPORTATIONS TO OUTSOURCE OUR JOBS THEN TO KEEP US EMPLOYED DUE TO WTO AND NAFTA, JUST TWO OF MANY TRADE AGEEMENTS AGAINST AMERICANS WORKERS AND BUSINESSES. THINK ABOUT IT FOR A FEW MINUTES.If you want jobs created here, then we have to have fair trade. High tariffs on ALL IMPORTS REGARDLESS OF WHERE THEY ARE FROM OR WHO MADE THE PRODUCTS. REQUIRE OUR MANUFACTURERS TO HAVE BETTER PRODUCTS THEN THE COMPETION. remember we started the country on the belief that we would be SELF SUFFICENT.THIS IS CALLED PROTECTIONISM NOT ISOLATIONIST. THIS IS WHAT OUR FOREFATHERS SAID AND DID TO GET THIS GREAT COUNTRY MOVING. WHAT IS OLD SHOULD BECOME THE LAW OF THE LAND STARTING TODAY. not dependant on other countries for OUR money. So far 16% of our domestic companies have been bought by foreign nationals. Reason FREE TRADE AGREEMENTS NOT FAIR TRADE AGRREMENTS. All the stimulus will do is make us all poorer and give foreign investers sway over ALL OF US. So if this is not done, then get ready to slave for someone other then the USA.
…I can’t imagine that Obama is going to keep printing money to pay for all his plans…the US dollar is doomed, mark my words.
Good luck with this thing folk keep trying to call an “Economy”.
As a foreigner who has been blessed with the opportunity of living in this still great country, it baffles me how we do not mention the loads of money being blown in two wars that have not accomplished anything. Billions of dollars that no doubt could reduce the deficit significantly. Bailouts for banks that practice usury because of losses based upon projected money to be made on hyper inflated interest rates is wrong, and people losing their homes is wrong. Instead, that money should have gone to the home owners not to the fact cats in Wall Street, some of whom got paid upwards of 50 million dollars annually as recently as last year for managing their companies into the ground. Only in America!
Finally, I have raised 4 children who perform academically at the 97th percentile or higher and I am falling behind at a rate of 20K per year on College costs for the first one now in College because I was dumb to stress academics over sports. Had they learned how to hit a ball with a piece of wood they would probably have gotten Scholarships. A society that does not support its bright minds and that sees more value in sports than in academics is doomed. A society that insists on making health care and education a profitable business is a condemned society. A society that does not realize and accept that it is to its own benefit that its citizens be as healthy and as educated as possible is a society that does not deserve an admirable place in history. God have mercy on us all!
“Businesses with losses in 2008 or 2009 would also receive temporary tax cuts.”
for real? They want to reward failure?
A 1.2 trillion dollar deficit (before Obama’s bailout!), an economy deep into a recession and still heading south (fast) with another minus 20% in house prices due, a rapidly falling tax take – municipal, corporate and private, multiple US States (14 at last count) on the very brink of insolvency, multiple US banks already technically insolvent, multiple large US corporations (AT&T, P&G, WalMart) having to pay a lot more to re-finance their (high) debt levels, record Treasury bond spreads plus signs that foreign (esp Japanese, Chinese, Russian and Mid-eastern) investors, who used to hold 98% of US Treasury paper, are shifting away from anything to do with US government and municipal debt due to the perceived risk (Brad Setser at the CFR: “Foreign demand for any US bond with a smidgen of credit risk has disappeared”); and the plan is to cut taxes and increase government spending.
This is profoundly impressive mental arithmetic!
US Treasury will require somewhere between 1.5 and 2.3 trillion dollars financing for fiscal 2009; this number includes Obama’s bailout. Where will these dollars come from?? Taking that amount of money out of an already depleted world’s savings pool will ensure “difficulties” for all other governments (the UK in particular) and most corporations as all bond markets will be starved of funds. That is if investors were persuaded to accept the very real risk of a US default.
Rationally, a US government debt default in the near future is a strong possibility and then things will start to get bad. To quote Jim Rogers: “…the dollar is a flawed and, maybe, even doomed currency”. For those Americans who do not understand “default”; research Argentina 1970-1990.
Savers of the world be afraid, very afraid.
Milton Friedman was the biggest fraud of all times.
His abnormal misguided “spend your way until you die for economic growth” philosophy is what caused the current crisis.
And Alan Greenspan’s “laissez faire” “looking the other way” policy accelerated and grew this crisis to much higher proportion.
This crisis has been brewing for the past 40 years since Nixon delinked dollar from gold.
Milton Friedman was the “fraud” who advised Richard Nixon to drop the dollar gold standard.
This has led to Fractional reserve lending and leveraging of 50:1 by banks. All banks in this country are technically “completely insolvent - aka dead banks”
All this stimulus (by tax cuts etc) is going to put both the US people and US ( as a country itself) more “inside the hole” they have dug themselves into in the past 40 years.
“No country ever spent its way to prosperity”
That’s $9.61 a week for individual. I can’t imagine how this could change my spending habits.
It could be better used for infrastructure investments or they could use it to promote telework programs among employers, there is a multitude of jobs that could be performed from home - employers just need proper incentives. $500 tax credit per each teleworker would be a decent incentive to introduce full scale telwork programs and it would have significantly higher impact on the economy and environment:
1. Reduced use of fossil fuels - reduced pollution.
2. Employees would be able to save much more than 9.61 a week on gasoline. Most of the money would be spend domestically instead of flowing abroad to pay for imported oil. Much higher stimulatining effect on economy.
3. Reduced highway congestion allowing those who because of the nature of their jobs cant telework commute to work faster - saving their time and money.
4. When the economy will finally rebound price of oil will skyrocket. Having large portion of our workforce working from homes would limit both rise of the price of oil and impact of that rise on our economy.
” How would a one-time check provide more optimism than one granted over a year, seen in each paycheck?
”
What “seems” like more money? A check for $500, or $9.61 a week? Which will buy a TV? Which will make a house payment?
Which will buy a couple packs of smokes or a 12 pack of beer (Each and every week!!!) ?
Ah, yes….the gift that keeps on giving all year long.
I think that if the Government were to encourage corporations to invest back into their companies, and other companies, instead of taking as much profit as possible, that would increase our country’s ability to compete, stimulate the economy, and make everyone happy and not just the CEO’s. I mean, all of their family members can’t be all employed under their own company. Spread the wealth with tax incentives for those Corporations to reinvest, and not profit hoard.
According to Friedman’s hypothesis, taxes would certainly take a back seat to a recession, where consumers feel that income will drop. How would a one-time check provide more optimism than one granted over a year, seen in each paycheck?
If high incomes are highly responsive to tax rates, will I stop working if taxes rise? Will I work twice as hard if my tax rate drops in half? That smacks of the Laffer curve and Reaganomics. The same is true of businesses…tax rates are not the only factor driving entrepreneurs, and some tax rate would be needed to keep entrepreneurial bubbles from forming (wasn’t cheap investment capital the root of the dot com boom?)
Lastly, if I move business investments forward due to tax considerations, I simply plan new ones to replace them. And even if I do move an investment forward because of a tax break, I would be doing it at the opportune time, during a recession, when most companies dig in and tighen belts, worsening the recession. Who is concerned with GDP in 2011-2012 when the economy when suffering through a the current recession?
To DumberThanJoe;
If you get a corporate paycheck and/or have investments, you ARE Corporate America
“Rather than mail out U.S. Treasury checks, as was done last spring in an effort to ward off a recession, he would lower withholding rates so that the tax cut would be spread over the year.”
I SAY:
Oh…whoopdee-Doo! $500/52 weeks = $9.61/week! Oh, thanks! That will certainly stimulate me to spend more! Keep your $500 Obamowhamo and pay down the deficit!
What about the TWO TRILLION IN BAILOUTS ALREADY PASSED? THAT’S FREE MONEY TO CORPORATIONS!
I can’t wait to stimulate the economy with the extra $10 my wife and I will get in our weekly paychecks. Why can’t the media convey the ‘tax break’ this way?
I fully agree. A “permanent”, at least for few years, lower tax bracket structure for individuals and the 15% corporate federal tax raised to $100K per year (from the current $50K)would make the US more competitive and productive.
Interesting thoughts.
I think people shouldn’t spend more money. It will help hasten the fall of this corrupt Ayn Randian construct in which all common (wo)men are imprisoned.
Think of the power we wield! All we have to do is not spend!
It must be a terrifying time for the elite. Sucks to be them.
– Spastica Rex
One of the things the author failed to point out is that of the 90% of taxpayer who would “benefit” from such tax cuts, 40-50% don’t even pay taxes, thus, such a tax break would be in the form of a “welfare” payment, contrary to those who actually do pay taxes.