James Pethokoukis

Politics and policy from inside Washington

Don’t fund healthcare by taxing capital

Mar 25, 2010 02:32 UTC

Washington will have difficulty producing a stranger bit of public policy than raising investment taxes to pay for healthcare reform. Remember, the consensus critique of the U.S economy is that it’s been plagued by too much consumption and debt. O.K., fine. So the answer is penalizing savings and investment? Really? Pure Bizarro economics for that and a number of other reasons:

1) It will hit the middle-class eventually. Wealthier Americans — families making over $250,000, individuals $200,000 — are the supposed targets here. Add in the new 3.8 percent Medicare tax to the year-end expiration of the 2003 Bush tax cuts, and they will see their capital gains and dividend rates will soar from 15 percent currently to 23.8 percent and 43.4 percent in 2013, respectively. But the income levels aren’t indexed for inflation. So the taxes will reach further down the income ladder each year. Assuming steady inflation, the tax in 2013 will actually affect households making over $226,000 and individuals $183,000. Another crack in the Obama tax pledge.

2) It is an expensive way to raise government revenue. Most studies show that raising the cost of capital lowers business investment and productivity. That translated into a lower standard of living. Hardly surprising, really. Taxes matter. Tax something and you tend get less of it. That’s a principle embedded, for instance, in calls to put a price on carbon, something the White House supports. Or in this, less economic growth.
3) It creates an accidental industrial policy. People should make economic decisions based on economic merit and efficiency, not because the tax code puts its thumb on the scale. For instance: Companies are financed either by issuing debt or selling shares. By raising taxes on equity, you further bias the tax code toward debt since interest can already be deducted from taxes. This imbalance was something an Obama tax commission, led by Paul Volcker, thought needed remedy. Instead, it will be worsened. The differing cap gains and dividend rates also tilt the tax code in favor of profit-poor companies (but with bright prospects and high stock price appreciation) over those throwing off cash.

4) It moves the tax code in the wrong direction. Economists favor paying for healthcare, as well as cutting the U.S. budget gap, with consumption taxes. (That would include eliminating the mortgage interest deduction to reduce housing consumption.) That could be a straight value-add tax. Or, better, a Hall Rabushka flat consumption tax. Actually, taking investment taxes to zero is a quick and dirty way to create a consumption tax since all you can do with income is save it or spend it. Of course, cutting spending should be the first order of business. Create a better tax system, reduce expenditure and then see where you are at as far as the deficit goes.

5) It puts politics over sound policy. For an administration that tries to follow economic consensus, this is an odd deviation. Politics explains it. Consumption taxes are broad taxes. The only taxes Washington finds palatable are those on upper incomes, such as found on Wall Street. But taxing the capital they provide to pay for healthcare will only sicken the American economy.

COMMENT

There’s currently a Medicare prescription drug loophole between roughly $2700 and $6200 worth of medicine. The reform bill each supplies a $250 rebate to Medicare beneficiaries that fall into this loophole and offers for the gap’s closing.healthcare fund

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Spreading the wealth

Mar 24, 2010 17:20 UTC

David Leonhardt of the NYT just noticed that tax rates are going up  and wealth is being redistributed. This makes him happy. But right now American faces a wealth creation problem. And if that isn’t working, every other problem facing America looks a lot worse. He also assumes that wealthier Americans won’t change their behavior, reducing the government’s take. Again, here is WH CEA Chair Christina Romer’s take on higher taxes when she was a econ prof at Berkeley: “Tax increases appear to have a very large, sustained, and highly significant negative impact on output … [and] that tax cuts have very large and persistent positive output effects.”

COMMENT

Hmm, so what is her position on these issues now? Did she sell out just to get an appointment in Obama’s administration? Or does she argue these positions internally, but to no avail. Inquiring minds wnat to know.

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Why Washington will kill the market (or not)

Mar 23, 2010 13:25 UTC

The wise and wonderful Ed Yardeni gives bullish and bearish Money & Politics scenarios:

Here’s the bullish scenario for stocks: The economy could continue to grow, especially now that the uncertainty is over about how the healthcare system will be overhauled. The resilience of the economy would be attributable to the Profits Cycle. If profits continue to grow solidly this year, as I expect, companies are likely to increase their payrolls and capital spending. Stock prices would continue to rally. A regime change in November would fuel a powerful yearend rally. This is the scenario that I believe is still the most likely to unfold.

Here’s the bearish scenario: The widely expected upturn in employment won’t happen. Instead, job losses could mount again if the Obama administration now pushes ahead with more of its divisive agenda. Much of it is just as controversial as healthcare has been. The President has suggested that he won’t mind if his party loses in November and if he is a one-term president as long as his agenda prevails. On January 25, in an interview with Diane Sawyer on ABC’s “World News,” Obama said, “I’d rather be a really good one-term president than a mediocre two-term president.” He added, “You know, there is a tendency in Washington to believe our job description, of elected officials, is to get re-elected. That’s not our job description. Our job description is to solve problems and to help people.” Spoken like a true community organizer.

Me: In political terms, this is the difference between Democrats a) losing 15-25 House seats and 3 or 4 Senate seats and b) 35+ House seats and 5-Senate seats.

COMMENT

Dividends, share buybacks, M&A and company 2010 guidance are all on the rise, which gooses stocks. That’s what has been driving the market to new highs and it won’t end soon

Should Obama’s econ team resign in protest?

Mar 10, 2010 21:05 UTC

They won’t, of course. Kind of extreme. But Cato’s Richard Rahn makes an interesting intellectual case:

Despite all of this intellectual brainpower and experience within the Obama economic team, Obamanomics has so far been defined as a series of seemingly ad hoc decisions based on neither economic theory nor philosophy. … Though the Obama administration adopted traditional Keynesian “stimulus” deficit spending during the recession, even the Keynesians thought deficits should only be run at the bottom of the business cycle, not throughout the business cycle, as is being proposed.

When Richard Nixon decided to institute price and wage controls against the advice of his CEA chairman, Paul McCracken, Mr. McCracken resigned. His successor as chairman, Herb Stein, was able to keep his intellectual integrity by famously stating, “This administration believes that price and wage controls are best administered by people who do not believe in them.” Some of President Reagan’s political advisers were furious that Reagan’s acting CEA head, William A. Niskanen, would not say and endorse things he did not believe. Lawrence B. Lindsey, George W. Bush’s first head of the National Economic Council, was vilified by many in the administration for correctly stating that the cost projections for the Iraqi war were grossly understated.

Advisers cannot expect to win every issue, but to be effective andtruly do their job, they have to know which issues are important enough to either win or resign over.

Me: At the very least, Team Obama has to be going crazy about the lack of effort on trade.

The Obama Boom?

Mar 10, 2010 14:21 UTC

This Bloomberg story gives it the old college try with “Obama Defies Pessimists as Rising Economy Converges With Stocks.” It points out that the economy is expanding, job losses are down and stocks are up.

But that is not really the point is it? Unemployment is still twice as high as the average of the past two decades, and the recovery shows every signs of being a sluggish one given the depth of the downturn. Plus, the massive amount of public debt makes what growth there has been seem artificial. Certainly the public doesn’t seem to buying it, a view reflected by the cautious tone of the White House. Lots of talk about pulling the economy back from the brink, less talk about a new Morning in America.

COMMENT

A lot of rah-rah out of the White House would be viewed with some suspicion nowadays, James. A more sober, measured attitude is in keeping with the times. That said, I read the article you mentioned and the writer had a point. Take it from a guy who’s no fan of Mr. Obama, a bit of optimism might be in order, a break from the relentless gloom on these pages. The American economy has an astonishing resilience that allows it to re-invent itself in ways unforeseen by all you pundits. Have some faith for a change.

Posted by gotthardbahn | Report as abusive

Where Obama’s deficit commission is headed

Feb 18, 2010 19:13 UTC

So, like, this thing isn’t going to work. You all know that, right? Rs pretty much have zero interest in higher taxes. Zero. And Ds pretty much have zero interest in cutting spending anywhere unless the money is shifted to some new program, as with healthcare. I read Greg Mankiw’s list of what Rs should get into turn for higher taxes

1) Substantial cuts in spending. Ensure that the commission is as much about shrinking government as raising revenue. My personal favorite would be to raise the age of eligibility for Social Security and Medicare.

2) Increased use of Pigovian taxes. Candidate Obama pledged 100 percent auctions under any cap-and-trade bill, but President Obama caved on this issue. He should renew his pledge as part of the fiscal fix. A simpler carbon tax is even better.

3) Use of consumption taxes rather than income taxes. A VAT is, as I have said, the best of a bunch of bad alternatives.

4) Cuts in the top personal income and corporate tax rates. Make sure the VAT is big enough to fund reductions in the most distortionary taxes around. Put the top individual and corporate tax rate at, say, 25 percent.

5) Permanent elimination of the estate tax. Conservatives hate the estate tax even more than they hate the idea of the VAT. If the elimination of the estate tax was coupled with the addition of the VAT, the entire deal might be more palatable to them.

Rs aren’t going for a VAT, unless maybe it replaces income, investment and corporate taxes. So the commission will fail, followed by perhaps a debt/currency market freakout. And that will be followed by calls for emergency tax increases.

COMMENT

No cuts in spending until the Obama gang is gone, it appears. It is probably safe to say that Medicare and cap’n'trade are both DOA, banking re-regulation is a no-show and just about everything else on the Obama agenda – ‘change we can believe in’ – is toast. Slim pickings for the Democrats to run on in November, so more Democrat ‘retirements’ are likely. If the Republicans play it right, they can reprise Newt Gingrich’s 15 minutes of fame in 1994 and this whole progressive agenda can be tossed like so much rubbish. THEN tax cuts and spending cuts become reality. Have faith, fellow conservatives, and lots of patience.

Posted by gotthardbahn | Report as abusive

The jobs bill

Feb 12, 2010 18:06 UTC

1) Obama administration economists reckon the jobless rate will hover around 10 percent this year, and now say the U.S. economy will generate an average of just 95,000 jobs a month. That tallies with Team Obama’s forecast of anemic 3.0 percent GDP growth. Monthly job growth of 125,000 to 150,000 is needed to start bringing the unemployment rate down from its current 9.7 percent. That’s what would normally be expected more than two years after the onset of a recession. It’s not happening — at least not yet.

2) Enter the U.S. Senate. The centerpiece jobs proposal would spare businesses from paying payroll taxes on some new hires for the rest of 2010. Based on a Congressional Budget Office analysis, this measure might create a feeble 50,000 to 90,000 jobs.

3) Aside from the bill’s limited potential effects, short-term fixes are not what’s needed. America’s job machine didn’t suddenly break down in 2008. It has been sputtering since the Internet bubble burst. Some economists now think a decline in education, innovation and other former U.S. advantages means the realistic minimum unemployment rate has gone up from 4-5 percent to as much as 7 percent.

4) That suggests legislative efforts at improving the employment picture should focus on long-term measures to improve education and help innovative businesses. Options in the latter category include a reduction in the U.S. corporate tax rate, targeted infrastructure spending and long-term tax credits for research and development. It’s a shame Washington seems able to set politics aside to accommodate special interests, but not for what’s really needed.

COMMENT

The Jobs Bill will do little to put the most disenfranchised to work, especially poor Black and Latino youth. The majority of the Bill’s incentives go to businesses rather than direct job creation. Do they really think that businesses are bursting at the seems to hire inner city youth? When will they get it – If we don…’t provide jobs for the young people with whom we work, the majority will simply be without jobs.

VAT Attack! Obama and middle-class tax hikes

Feb 11, 2010 18:12 UTC

As long-time readers know, I am convinced that the Obama administration is itching to slap the US economy with a value-added tax. Team Obama just needs to figure out how to do it politically. Listen to the POTUS in this BBW interview:

The whole point of it is to make sure that all ideas are on the table. So what I want to do is to be completely agnostic, in terms of solutions. What I can’t do is to set the thing up where a whole bunch of things are off the table. Some would say we can’t look at entitlements. There are going to be some that say we can’t look at taxes, and pretty soon, you just can’t solve the problem.

In short, how I read this is that Obama is willing to consider a broad-based tax hike on the middle class. Smells like a VAT. But I don’t see how the WH gets there absent a financial crisis that puts Washington into a panic, just as happened with TARP. Maybe if Congress rejects the proposals of the new deficit commission, a bad market reaction would be a catalyst to action.

Of course, Obama could suggest the Hall-Rabushka flat consumption tax, a favorite with conservatives. It is like a VAT with part of the tax paid directly by individuals. This makes the tax more transparent, which politicians don’t like. To them, transparency is a bug not a feature. But the concern on the right is that an invisible VAT would make it too easy to raise taxes and finance a vast expansion of government. But even with an H-B tax, conservatives have no interest in a tax that would raise the tax burden as a way of increasing revenue as a portion of GDP from around 18 percent.

COMMENT

VAT is the worst idea that has come out of the conservative think tanks like Cato Inst. and others. It is regressive, will impoverish the middle class of America even more and will be a nightmare to administer.

However, the US must increase its tax revenues. How? Pass an intangibles tax (tax on net worth) on all individuals, corporations, trusts, PICs, etc. with a net worth over $10 million. Just 1% intangibles tax on the super wealthy would more than balance the budget and not disturb one bit the life styles of over 99% of Americans.

Already states like NH and Fla have an intangibles tax instead of an income tax. The Federal Government should do the same thing.

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Obama bails on ‘cap-and-trade thing’

Feb 3, 2010 16:07 UTC

President Barack Obama is now calling the carbon trading scheme that is supposed to heal the planet a “cap-and trade-thing.” That can’t be a good sign for the concept.

Here is the president in New Hampshire yesterday: “”The most controversial aspects of the energy debate that we’ve been having — the House passed an energy bill and people complained about, well, there’s this cap and trade thing. And you just mentioned, let’s do the fun stuff before we do the hard stuff. The only thing I would say about it is this: We may be able to separate these things out. And it’s conceivable that that’s where the Senate ends up.”

Whatever the impact on the environment, the probable demise of President Barack Obama’s cap-and-trade carbon plan would be a much bigger fiscal failure for the White House than the implosion of healthcare reform, at least over the near term. Taxing carbon was the hidden key to funding his administration’s policy agenda while limiting budget deficits. Now the White House is scrambling for a realistic Plan B.

For months, the Capitol Hill consensus has been that a legislative limit on carbon emissions isn’t going anywhere in 2010 or beyond. New job-killing regulations and taxes just aren’t popular when unemployment is in double digits. Now the White House seems to agree on the plan’s political prospects. But there already were hints of this in the new Obama budget proposal. Now Obama’s budget last year assumed auctioning emissions permits would generate $646 billion in revenue over 10 years. Of that amount, a fifth would have gone toward funding clean energy research, and four fifths to funding a worker income tax credit.

The administration’s new budget proposal simply contains an accounting line labeled “allowance for climate policy” followed by, well, nothing. Not a single dime of revenue is assumed for the years 2011 through 2020. The line item looks to be nothing more than a placeholder to keep hope alive for greener Democratic voters.

The near-term impact is that the worker tax credit won’t be renewed after 2011. But longer-term, the proposal’s failure would stymie administration efforts to get closer to balancing the federal budget.

Internal White House estimates predicted cap-and-trade auctions might generate two or three times as much revenue as forecast in last year’s budget, or up to $1.9 trillion. By contrast, proposed tax hikes on upper-income Americans would raise $678 billion. The extra money from cap-and-trade could have taken a big bite out of the $8.5 trillion 10-year deficit projected in the latest budget — just the kind of broad-based, if politically stealthy, tax that Obama’s economic advisers think is necessary to balance the books.

The administration’s healthcare plan was supposed to knock another $132 billion off the 10-year deficit, according to the Congressional Budget Office. With that on the back burner too, Democrat deficit hawks are left hoping Obama’s proposed fiscal commission can somehow create a menu of spending cuts and tax increases that could actually win congressional approval in 2011. Sadly for Obama, that’s about as likely as that “cap-and-trade thing” passing.

COMMENT

He is right, it is the latest ‘thing’ in hats, i.e. “de Bono hats”, and the speech writer better look for another job.

Posted by Gandhiolfini | Report as abusive

Obama and middle-class tax cuts

Feb 3, 2010 15:35 UTC

The Tax Foundation thinks the White House is too sensitive about charges that middle-class taxes are going up:

The Administration’s outrage is a bit overdone, though, for three reasons:

Democrats didn’t support most of the middle-class tax cuts in 2001. The only Bush tax cut provisions that enjoyed any Democratic Party support in 2001 were the 10% rate and the doubling of the child tax credit from $500 to $1,000. In running for president, Obama made the political calculation that the middle- and upper-middle income tax cuts (marriage penalty relief, cutting the 28% rate to 25%, and cutting the 31% rate to 28%) were unassailable; hence the $250K threshold promise. (Throw AMT relief in that basket.) In his progressive heart, Obama can’t really believe those cuts were virtuous. And now the Administration is desperate for big new sources of tax revenue, so there is suspicion that middle-class tax hikes are coming. As many commentators are pointing out, the new fiscal commission is exactly the vehicle that could deliver those tax hikes in a way that would look as if the President were being forced to do it, that he didn’t break his tax promise willingly.
Bush’s middle-class tax cuts were huge. Even now the President uses the phrase “mostly for the wealthy” in describing the Bush tax cuts as a package, which is false (at least by his own, new definition of wealthy — over $250K). Even the most anti-Bush tax think tank in town, Citizens for Tax Justice, can’t come up with numbers that portray the tax cuts for people over $250K as reaching 50% of the whole package.

So many shocking things have happened that rational expectations are shaken. No one thought this Congress and Administration would allow the estate tax to reach full repeal, as it did on January 1, a month ago. But they did, violating every premise of progressive tax policy. And quite aside from politics, it’s a nightmare for executors. Following that shocker was the health bill train wreck, resulting in a level of political and fiscal uncertainty that is almost unprecedented for a non-crisis situation.

COMMENT

Well it’s April 15th and middle class taxes went down. A lot.

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