James Pethokoukis

Politics and policy from inside Washington

Is DeMint crazy to oppose Obama-GOP tax deal? No.

Dec 8, 2010 03:30 UTC

For many conservatives, the thumbs-up from Rep. Paul Ryan of Wisconsin is reason enough to support the Obama-GOP tax deal — well, that and the fact so many liberals are in a purple rage about it. And certainly there is nothing wrong about letting individuals and businesses keep more of their money — even for a little while. But Sen. Jim DeMint of South Carolina, another lover of tax cuts and hater of bloated big government, says he will oppose  and even filibuster the ginormous stimulus package. Here is DeMint on the Hugh Hewitt radio show:

I’m glad the President recognizes that tax increases hurt the economy. I mean, I guess that’s progress. But frankly, Hugh, most of us who ran this election said we were not going to vote for anything that increased the deficit. This does. It raises taxes, it raises the death tax. I don’t think we needed to negotiate that aspect of this thing away. I don’t think we need to extend unemployment any further without paying for it, and without making some modifications such as turning it into a loan at some point. It then encourages people to go back to work. So there’s a lot of problems with it. I mean, and frankly, the biggest problem I have, Hugh, is we don’t need a temporary economy, which means we don’t need a temporary tax rate. A permanent extension of our current tax rates would allow businesses to plan five and ten years in advance, and that’s how you build an economy.

DeMint might have a point, several actually – and the implications are huge. The perceived failure of the 2009 Obama stimulus plan has again discredited the idea that government can spend America back into prosperity. But liberals, including many in the White House, protest that conclusion. They argue that the $900 billion package was both clumsily designed and too small given the depth of the Great Recession. But sorry big spenders, you only get one chance to fire a trillion-dollar bullet.

Of course, Republicans may find themselves in the same position if the $900 billion (mostly) tax-cut plan fails to reignite job growth in 2011 and 2012. Oh, the folks with the Keynesian demand-side, static analysis economic models say not to worry.  Wall Street firms such as Deutsche Bank, Goldman Sachs and JPMorgan — as well as the Congressional Budget Office —  think a) extending the Bush tax cuts, b) cutting payroll taxes, c) allowing business to immediately expense investment and d) funding more unemployment insurance will add as much as a percentage point to GDP growth next year and reduce the unemployment rate by around a third of a percentage point.

But if this new trillion dollar bullet doesn’t work as promised, the power of the tax-cut message would be greatly undermined.  And there is good reason to think the results will be disappointing:

1. DeMint thinks America needs a “permanent economy,” not a temporary one. Milton Friedman would agree. Uncle Miltie’s Permanent Income Hypothesis says short-term changes income don’t change spending habits, changes in long-term expectations do. PIH has been backed up by numerous studies (such as here and here and here) and argues for permanent tax cuts, not ephemeral ones.

2. The much-hyped payroll tax cut is not a supply-side cut. The Institute for Policy Innovation nails it:

One of the proposed provisions in the deal to extend the Bush tax cuts is a temporary 2 percentage-point reduction in the Social Security payroll tax, from 6.2 percent to 4.2 percent. Tax cuts that stimulate real economic growth operate at the margins–affecting an additional dollar of income, or an additional dollar of savings and investment–not the first dollar of income. Supply-side tax cuts encourage additional production by stimulating additional work, saving and investment.

A payroll tax cut is not a supply-side cut and won’t have much impact on economic growth. Rather, it embraces the Keynesian idea that the economy is stimulated by putting a few hundred dollars in people’s pockets so they can consume more.  … If there has to be a payroll tax cut, it actually makes more economic sense to give it to the employer half of the payroll taxes than to the employee. That would at least mitigate some of the risks of hiring new employees that have been imposed by Obama administration policies.

3. All of these temporary tax cuts will do little to lower policy uncertain among business and investors. There is still plenty of reason to worry about taxes and spending in the near future. Business is already sitting on a mountain of cash, and even Goldman Sachs wonders if the expensing provision will do much in this environment:

The proposal includes expensing of business investment in 2011, similar to the policy that the president proposed in September. This should reduce corporate taxes by about $100 billion next year if enacted, but would increase corporate tax liabilities in future years. Given low interest rates and significant spare capacity, this proposal is likely to have a limited effect on corporate behavior.

4. The 13-month renewal of emergency unemployment benefits will almost certainly keep the unemployment rate higher than it would otherwise be. Research from the San Francisco and Chicago Federal Reserve banks suggests the unemployment rate would be 0.4 percent to 1.7 percentage points lower if not for the extended unemployment benefits.

Republicans didn’t own the Mega-Stimulus. They will own Mega-Stimulus 2.0 in the eyes of the public. Before they sign off, they may want to seek a second opinion Dr. DeMint.

COMMENT

@breezin,
you said [Opposing the death tax is ridiculous. Dead people don’t need money and think it’s reasonable for the deeply-indebted country that created the conditions for their success to expect to demand a large portion of that wealth back. People who remain alive in this country don’t need an aristocracy.]

while I agree that dead people don’t care, I’m pretty sure their heirs do – and thats the point. And why does the event of death create more tax liability? Taxes are imposed upon transactions, service, and products – is death any of those? Why should death be taxed again?

[Handouts should never come from governments because they do a miserable job of deciding who is worthy of my money]

Agreed, are you saying then that Social Security and Medicare should be ended? What about unemployment benefits?

Posted by BHOlied | Report as abusive

Secret GOP plan: Push states to declare bankruptcy and smash unions

Dec 7, 2010 18:42 UTC

Congressional Republicans appear to be quietly but methodically executing a plan that would a) avoid a federal bailout of spendthrift states and b) cripple public employee unions by pushing cash-strapped states such as California and Illinois to declare bankruptcy. This may be the biggest political battle in Washington, my Capitol Hill sources tell me, of 2011.

That’s why the most intriguing aspect of President Barack Obama’s tax deal with Republicans is what the compromise fails to include — a provision to continue the Build America Bonds program.  BABs now account for more than 20 percent of new debt sold by states and local governments thanks to a federal rebate equal to 35 percent of interest costs on the bonds. The subsidy program ends on Dec. 31.  And my Reuters colleagues report that a GOP congressional aide said Republicans “have a very firm line on BABS — we are not going to allow them to be included.”

In short, the lack of a BAB program would make it harder for states to borrow to cover a $140 billion budgetary shortfall next year, as estimated by the Center for Budget and Policy Priorities. The long-term numbers are even scarier. Estimates of states’ unfunded liabilities to pay for retiree benefits range from $750 billion to more than $3 trillion.

Republicans in the House of Representatives already want to stop state and local governments from issuing tax-exempt bonds unless they are more forthright about these future obligations. Republican Representatives Devin Nunes and Darrell Issa of California and Paul Ryan of Wisconsin have introduced a bill that would require state and local governments to estimate the size of public pension liabilities if their assets earned a more conservative rate of return than many plans currently expect. Failure to do so would result in the suspension of their ability to issue tax-exempt bonds

Greater transparency on these obligations can’t be bad. In fact, the federal government itself would do well to report deficit numbers not just on the current cash-in, cash-out basis but also incorporating the underfunding of promised pension and healthcare benefits to retirees.

But it’s about more than just openness. Some Republicans hope the shock of the newly revealed debt totals will grease the way towards explicitly permitting states to declare bankruptcy. Indeed, legislation  amending federal bankruptcy law is currently being prepared by congressional Republicans. Local municipalities do declare bankruptcy from time to time, most famously California’s Orange County in 1994. But states can’t. Allowing them the same ability to renegotiate obligations could enable them to slash public employees’ lavish benefits, a big factor in their financial woes. In a recent issue of the The Weekly Standard, bankruptcy expert David Skeel of the University of Pennsylvania walks through the implications:

With liquidation off the table, the effectiveness of state bankruptcy would depend a great deal on the state’s willingness to play hardball with its creditors. The principal candidates for restructuring in states like California or Illinois are the state’s bonds and its contracts with public employees. Ideally, bondholders would vote to approve a restructuring. But if they dug in their heels and resisted proposals to restructure their debt, a bankruptcy chapter for states should allow (as municipal bankruptcy already does) for a proposal to be “crammed down” over their objections under certain circumstances. This eliminates the hold-out problem—the refusal of a minority of bondholders to agree to the terms of a restructuring—that can foil efforts to restructure outside of bankruptcy.

The bankruptcy law should give debtor states even more power to rewrite union contracts, if the court approves. Interestingly, it is easier to renegotiate a burdensome union contract in municipal bankruptcy than in a corporate bankruptcy. Vallejo has used this power in its bankruptcy case, which was filed in 2008. It is possible that a state could even renegotiate existing pension benefits in bankruptcy, although this is much less clear and less likely than the power to renegotiate an ongoing contract.

It wouldn’t be easy to change the law. Public employee unions have traditionally carried great influence with Democrats, even if President Barack Obama’s willingness to freeze their pay on the federal level suggests their clout may be waning.  From the Republican perspective, the fiscal crisis on the state level provides a golden opportunity to defund a key Democratic interest group. For the GOP, it’s an economic and political win.

COMMENT

“Here, the ‘take’ for public-employee union entitlements is projected to DOUBLE in 5 years, and it is already HIGH! The old contracts MUST be broken.”

I’d love to know where this garbage came from – do you even have any evidence to back this assertion up? I think not. In fact, don’t bother – by actually showing you the errors used in cherry-picking such an arbitrary figure, I’d just upset you and you clearly aren’t likely to be changing your mind based on the facts.

“Look at the gulf that is widening between public and private sector jobs. This has to stop. It is unsustainable.”

Look to the gulf that is widening between the personal tax burden and concentration of wealth into the polutocratic top 2% in the USA. THAT is what is unsustainable.

“Sounds like a good plan as far as this Red Stater is concerned because we can see the Blue States circling the drain and we know what’s next…federal handout. The liberal test beds have run their economies into the ground. They shouldn’t expect flyover country to bail out their bad policies. Did you see the way CA voted in the last election for heaven’s sake? These people are clueless…drop the guillotine.”

Take a look at how much your ‘red state’ gets in Federal funding vs. the ‘blue states’ – or should I say, engines of the economy, and then edit out your outrageous comments about blue states needing federal handouts. Red states are generally the highest recipients and lowest contributors to Federal funds – and oddly enough its exactly those welfare states that hold the strongest views on these issues. Don’t kill your golden goose.

for more information here is a good place to start:
http://en.wikipedia.org/wiki/Federal_spe nding_and_taxation_across_states


The American Dream used to be that you can build a life from scratch here, that you can come here with nothing and end up with a business, a house, even wealth that you can leave to the next generation.

Guaranteed wages and social security for some mean less opportunity for the rest of us. That is why I left Europe; I saw that I was going to have to pay for the babyboomers retirements and healthcare for the rest of my life. America is now worse than Europe.

Home values should fall! They are inflated. The entire Obama agenda is about keeping the bubbles inflated, bailing out the rich, the babyboomers, the too big to fail companies, union/government workers.
- Posted by peterverkooijen”

So you swallowed the conservative agenda hook, line and sinker, then you found out that it’s exactly the same over here, in a country where all they’ve managed to achieve is a quarter of the population without health care – and yet you are still unable to admit this ideology is fundamentally flawed.

Why are you blaming public and union workers for something as functionally disconnected as prices in the housing market?? Since Unionized and public workers together account for less than 7% of the United States’ work force, and under 33% of them are unionized. It doesn’t seem that the influence they could exert on the market could be the reason for high property prices.

The republican party and their allies are playing a negative-sum game in order to win. The problem is, they will destroy their prize by playing this way.

Posted by Retalliouns | Report as abusive

A few thoughts on the Obama-GOP tax deal

Dec 7, 2010 15:53 UTC

Let’s assume for a moment that the Democrats don’t scuttle the whole thing. And that very well may happen. It’s all very good news from a Keynesian perspective. Unemployment insurance and the payroll tax cut both score especially well in the sort of  demand-side economic models run by, say, the Congressional Budget Office. And I will certainly take even temporary tax cuts over more spending to prop up public employee unions and cater to the green lobby.

But this package does little to bring long-term certainty about public policy. The corporate tax rate is still too high, while rest of the tax code is an uncompetitive mish-mash that reflects the interests of lobbyists. I thought Goldman Sachs had an interesting take on the immediate expensing provision:

The proposal includes expensing of business investment in 2011, similar to the policy that the president proposed in September. This should reduce corporate taxes by
about $100 billion next year if enacted, but would increase corporate tax liabilities in future years. Given low interest rates and significant
spare capacity, this proposal is likely to have a limited effect on corporate behavior.

And let’s not forget what Milton Friedman might have to say about this sort of deal. Bring on the funk, Wikipedia:

The permanent income hypothesis (PIH) is a theory of consumption that was developed by the American economist Milton Friedman. In its simplest form, the hypothesis states that the choices made by consumers regarding their consumption patterns are determined not by current income but by their longer-term income expectations. The key conclusion of this theory is that transitory, short-term changes in income have little effect on consumer spending behavior.

cbo1

U.S. tax deal puts austerity on back burner

Dec 7, 2010 15:33 UTC

Fiscal austerity may be coming to America, but it probably won’t be arriving any time soon. President Barack Obama and Republican leaders have agreed to some $1 trillion of economic stimulus over the next two years, mostly in the form of tax cuts (or non-increases). If the package makes it past Congress—and especially past Democrats—the message will be that, for now, Washington is going for growth.

If only by accident, the politicians seem for once to be doing at least some of what many economists are recommending, including Federal Reserve Chairman Ben Bernanke. While America has longer-term deficit and debt problems, they argue now is the time for stabilizing the economy and planning ahead rather than cutting. With unemployment high, the more immediate concern is boosting a flaccid economy that has yet to find its legs a year and half after the last recession officially ended.

The latest compromise may help do that, and crucially it has a realistic shot at passing Congress. Earlier this year, the Congressional Budget Office rated a list of short-term stimulus options by their ability to boost growth and jobs. It turns out many of the best options are in the deal reached by Obama and the Republicans: a 13-month extension of unemployment benefits; a one-year reduction in employee payroll taxes; and allowing full deduction of business investments in 2011.

That said, the heart of the package is in a form that may provide little near-term oomph, according to the CBO’s models. That’s the two-year extension of President George W. Bush’s 2001 and 2003 labor and investment income tax reductions, at a cost of $500 billion in lost revenue. But Republicans were never going to budge on that. Besides, letting those taxes go back up could have dented such economic growth as there is.

Of course, congressional Democrats could scuttle the deal. Some are steaming about Obama’s agreement to extend the Bush tax cuts for the wealthiest taxpayers as well as the middle class—rewarding Republicans, as some see it, for intransigence. But time was against Obama if he wanted stimulus in any form, and he may be betting that the hoped-for positive impact on job creation will silence grumblings in his party.

How to make sure Uncle Sam doesn’t bail out states

Dec 6, 2010 22:08 UTC

Here is a bit from latest Reuters Breakingviews column (more on this topic to come):

Republicans in the U.S. House of Representatives want to stop state and local governments from issuing tax-exempt bonds unless they are more forthright about future obligations. The effort may pave the way for a more radical one: changing the law so that states are allowed to go bankrupt and stiff their creditors. .. But it’s about more than just openness. Some Republicans hope the shock of the newly revealed debt totals will grease the way towards explicitly permitting states to declare bankruptcy. Local municipalities do this from time to time, most famously California’s Orange County in 1994. But states can’t. Allowing them the same ability to renegotiate obligations could enable them to slash public employees’ lavish benefits, a big factor in their financial woes.

Is China ginning up its GDP data?

Dec 6, 2010 16:44 UTC

Is China one giant Enron? Well, maybe not. Clearly, there is real growth going on there. But this does seem fishy:

China’s GDP figures are “man-made” and therefore unreliable, the mn who is expected to be the country’s next head of government said in 2007, according to U.S. diplomatic cables released by WikiLeaks.

Li Keqiang, head of the Communist Party in northeastern Liaoning province at the time, was unusually candid in his assessment of local economic data at a dinner with then-U.S. Ambassador to China Clark Randt, according to a confidential memo sent after the meeting and published on the WikiLeaks website.

The U.S. cable reported that Li, who is now a vice premier, focused on just three data points to evaluate Liaoning’s economy: electricity consumption, rail cargo volume and bank lending.

“By looking at these three figures, Li said he can measure with relative accuracy the speed of economic growth. All other figures, especially GDP statistics, are ‘for reference only,’ he said smiling,” the cable added.

A spokesman for the U.S. Embassy to China was not immediately available.

Chinese economic numbers, especially at the provincial level and lower, have long been viewed with suspicion by analysts.

“That China’s GDP is not reliable, especially for local GDP, that is nothing new,” said an economist with a foreign bank who requested anonymity because of the sensitivity of discussing top national leaders. ”Some of the volume data, such as power and rail freight and even (bank) credit, are interesting because there is less incentive to massage them at the local level. But they reveal only part of the truth, not the entire truth,” he said.

Ouch. Then you start to recall all those stories about the nation’s empty cities and ghost malls

Tax cut endgame

Dec 6, 2010 16:34 UTC

OK, so for sure we seem to be talking about 2-3 year extension, including dividends and capital gains), as well as a one-year extension of unemployment insurance. Other adds on may include the doc fix, Obama’s Making Work Pay tax credit, the R&D tax credit, an estate tax around 35 percent with a$3.5- 5 million exclusion. I am still wondering if the final deal with include raising the debt ceiling. I hope not since I would rather enjoy writing about the battle over the issue in 2011.

Krugman’s numbers on the Bush tax cuts don’t add up

Dec 6, 2010 15:59 UTC

Why is Paul Krugman being so  unhelpful here:

A few months ago, the Congressional Budget Office released a report on the impact of various tax options. A two-year extension of the Bush tax cuts, it estimated, would lower the unemployment rate next year by between 0.1 and 0.3 percentage points compared with what it would be if the tax cuts were allowed to expire; the effect would be about twice as large in 2012. Those are significant numbers, but not huge — certainly not enough to justify the apocalyptic rhetoric one often hears about what will happen if the tax cuts are allowed to end on schedule.

That might be true of the high-end Bush tax cuts, but letting them all expire would chop at least two percentage points off GDP, according to a variety of economic models run by banks and consultants

COMMENT

Banks and consultants know way more about economics than a Nobel Prize for Economics winner.

Posted by whowhatwhy | Report as abusive

Even Obama’s debt panel doesn’t buy Obamacare

Dec 6, 2010 03:43 UTC

President Barack Obama’s debt reduction commission defined tough fiscal choices for Washington, though its members weren’t unanimous enough to force the ideas on lawmakers. But even if they had, the panel pulled punches on healthcare cuts. Reducing that burden may be central to the next presidential election.

The 18-member panel needed 14 votes in support of its recommendations to trigger concrete action in Congress. Few if any members ever thought it was possible to clear such a high bar. Still, half of the 12 commission members drawn from Congress backed the final plan, with the recommendations getting the support of 11 members altogether.

That was a pleasantly surprising result for deficit hawks because any decent political consultant would tell clients to flee most of the ideas in the blueprint. It would, for instance, sharply limit the tax deductibility of mortgage interest. The plan would also cut Social Security benefits for higher-income retirees and accelerate the rise in the eligibility age. Three conservative Republicans on the panel even supported a package that included higher taxes.

Many elements of the commission plan may resurface over the next two years. House Republican leaders hint they will include the majority of the panel’s suggestions in their official budget plan next spring. There could be compromises over Social Security and corporate tax reform.

Yet the biggest stumbling block remains healthcare, which accounts for three-quarters of the U.S. government’s long-term budget woes. A presentation from Medicare’s chief actuary persuaded many panel members that Obama’s recently-passed reform law does less than estimated to reduce future government outlays. Despite this and the legacy of successive administrations’ overgenerous commitments on health spending, the panel danced around the issue in its recommendations.

Democrats in Congress have little desire to revisit the issue anytime soon. Republicans, on the other hand, want to make it a central issue of the 2012 White House campaign so that a positive electoral outcome, if they achieve one, would be a mandate for their plan — whatever it turns out to be. Though Obama’s commission provides useful direction, the endgame for healthcare spending could be more significant for America’s fiscal future.

Team Norquist replies

Dec 2, 2010 21:23 UTC

From Americans for Tax Reform to Gregg, Crapo and Coburn:

You have today announced that you will support the Simpson-Bowles-Obama debt commission report on Friday.  This report contains a ten-year net tax hike of over $1 trillion and increases tax revenues from their historical 18 percent of GDP to a record and permanent 21 percent. This report shifts the debate from where it properly should be—spending—and onto deficit reduction, and thereby tax increases.

This report opens the door to a third round of disastrous budget summits. In 1982, President Reagan agreed to $3 in spending cuts for every $1 in tax hikes.  The tax hikes became law, but spending went up.  President Reagan called this the worst mistake of his presidency.  In 1990, President George H.W. Bush broke his “read my lips” Pledge when he agreed to $2 in spending cuts for every $1 in tax hikes at the infamous Andrews Air Force Base summit.  He later lost re-election largely on the tax issue, and actual spending was higher than CBO predicted it would be before the deal.

All the tax hikes in Simpson-Bowles are real—they become law upon the bill being signed.  Many of the spending cuts are simply promises to do better on appropriations bills, and have been historically-impossible to enforce.

The tax increase in question is not “tax reform” along the lines of the 1986 Tax Reform Act.  That bill lowered marginal tax rates and broadened the tax base, just as the commission report does—but with one essential distinction.  That 1986 bill was tax revenue-neutral, whereas the commission report is a massive, $1 trillion-plus net tax hike on the American people.  It’s a tax increase that is merely disguising itself as tax reform.  Real tax reform would lower the rates, broaden the base, and be at worst tax revenue-neutral.  Again, this plan has a stated goal of raising tax revenue to 21 percent of GDP indefinitely, a record never hit in any one year, and higher than the historical level of 18 percent of GDP.  The plan raises the gas tax and raises the Social Security payroll tax.  Taxpayers may have lower marginal tax rates under this plan, but they will have a bigger tax bill to Uncle Sam.

I urge you to only support a plan that is tax revenue-neutral.

  •