James Pethokoukis

Politics and policy from inside Washington

The risk of a supertax on banker bonuses

Dec 11, 2009 14:31 UTC

U.S.-based bankers shouldn’t worry too much about their bonuses. Even though Wall Street remains wildly unpopular and Washington needs more revenue, it’s unlikely U.S. authorities will follow their UK counterparts with a giant windfall tax on banker payouts.

That upcoming election cycle will certainly give American politicians all the impetus they need. A combination of fat payouts of 2009 bonuses in the first quarter and high unemployment will tempt incumbent lawmakers to play the populist card ahead of the 2010 vote.

But past efforts at such radical moves have failed. Congress is again struggling to raise taxes on carried interest, the profit generated by private equity firms and hedge funds. Some Democrats want such performance-based compensation to be considered regular income taxed at a 35 percent rate rather than the current capital-gains treatment it gets with the accompanying 15 percent rate.

The policy logic is plausible. Plus, as Warren Buffett has famously argued, fund managers shouldn’t pay lower tax rates than their office assistants.

But legislation to change carried interest taxation probably isn’t going anywhere. Sure, the House just voted in favor of it. But the bill is DOA in the Senate, which has shown scant interest in direct higher taxes on the wealthy or on capital. For example, it declined to copy one of the House’s preferred methods of paying for healthcare reform — a surtax on the wages and capital gains of top earners.

Moreover, New York Democrat Charles Schumer, a key player on the Senate Finance Committee, is an avowed opponent of higher taxes on alternative asset managers.

What’s more, the United States has already trod this path unsuccessfully. The House voted overwhelmingly to tax 90 percent of AIG bonuses, but the effort went nowhere in the Senate. The Obama administration didn’t push the issue, and polls showed only a bare majority in favor once the issue was fully explained. There were also substantial questions about the constitutionality of a tax targeting a specific group.

U.S. bankers have another six weeks or so to stew before seeing an actual bonus check. But in reality, they should be able to enjoy the holidays.

Washington and the 2010 stock market

Dec 10, 2009 16:32 UTC

Here is how economic analyst  Ed Yardeni sees things:

Could the S&P 500 rise back to its record high next year? I was in Boston on Tuesday, and met with the first money manager on Planet Earth to ask me this question. That is definitely a contrarian’s scenario. I am currently predicting a 2010 high between 1300-1350, and more specifically 1332 by March 6, which would be up 100% on a y/y basis, from the Da Vinci Code bottom of 666. Then I see a nasty correction on growing concerns that the expiration of the Bush tax cuts might depress the economy in 2011. That selloff could last until the November Congressional elections. If Gridlock wins, with the Democrats losing their majority control of one or both houses of Congress, then stocks might resume the bull market.

Obama’s jobs conundrum

Dec 10, 2009 16:27 UTC

The insightful Andy Busch of BMO Capital Markets eyes it:

Here’s the ironic duality of the government spending creating jobs and massive deficits: it creates a small amount of short term jobs that steal a larger amount of long term jobs. Deficits are like weeds, when they are small they’re not a problem. When they get large, they block out the growth of what we want. It’s part of the reason why we have a conundrum of low interest rates while the deficit continues to expand. The markets are buying Treasurys because the prospects for strong growth are low and get further reduced with every new public sector spending initiative that adds to the deficit.

Let’s see if President Obama can morph himself away from FDR towards another presidential acronym: JFK. Like the 1960′s, it would be great to see corporate and individual tax cuts accompanied by a strong US dollar policy by the Federal Reserve to bring in foreign direct investment. Unfortunately, it will most likely take a year of sub-optimal growth to get the political momentum moving in this direction. It’s where economic policy needs to go to create sustainable growth.

The state of the union

Dec 9, 2009 18:27 UTC

It ain’t so hot, says David Rosenberg of Gluskin Sheff:

Things are so good in the U.S.A. that President Obama’s approval rating just sank to a new low for any president at this post-election juncture and Treasury Secretary Geithner is now seeking to have the $700 billion TARP extended to October. In fact, Obama wants to tap $200 billion from the program to fund a jobs initiative — let’s hope it turns out to be more effective than the last package that was supposed to cap the unemployment rate at 8%. It is rather amazing that here we are, 30 months after the onset of the credit crunch, and we see this as a headline on the front page of the FT: Obama to Boost Jobs With Bank Rescue Cash.

COMMENT

Why am I always being told to “continue reading” when there is nothing additional to read? If this is going to be on every post could you at least put something like “more below the fold” on each one that has more to read? That way we don’t have to click on every single link to see if we are missing anything. It makes no sense.

Posted by Mark | Report as abusive

Drilling into Obama’s jobs plan

Dec 9, 2009 17:50 UTC

Keith Hennessey:

This looks like a smaller version of the original stimulus law.  Its origins are more political and fulfilling a legislative need, than policy-driven. I’m OK with the UI extension and extending the health insurance subsidy, although I wish both were better designed. I generally support tax relief, but I am concerned the targeted capital gains reduction will give some cover to let the broader capital tax rates jump at the end of 2010.  That would be very bad. The spending programs will have little near-term GDP effect, and so should be evaluated in how they meet other policy goals.  They’re largely ineffective as immediate stimulus, because government spending is slow. The $250 check to seniors was pandering the first time Congress passed it (on a broadly bipartisan vote).  It’s still pandering.  Why are seniors more deserving of aid than, say, a low-income working family? The “using TARP dollars to help Main Street” is a transparent gimmick.  If you’re going to increase the deficit, it’s better just to stand up and say the deficit increase is worth the short-term economic benefit you think will result from the other policies. I suggest they do a targeted bill that contains only the UI and COBRA provisions, because I think the large deficit impact of the other provisions, relative to their small macroeconomic benefit, isn’t worth it.

Supply-side Obama?

Dec 9, 2009 17:41 UTC

Larry Kudlow has a strange but oh-so wonderful thought:

The president’s jobs proposal includes a zero capital-gains tax-rate for small-business investors, and full cash-expensing for small-business investment in plant and equipment. These are potentially powerful incentives for the job-creating small-biz sector. They may only last for a year or so, depending on the mark-up. But they are good things in and of themselves, and they suggest that Obama is aware of incentive effects on economic growth.

Sure, the new spending is all wrong. That won’t create jobs, and will only bloat the deficit. But Obama’s language was on the supply-side, even in addition to the tax-cut proposals. He said growth will bring in revenues to cut deficits.

And there’s more. CNBC is reporting that the administration will dedicate $175 billion of TARP money to deficit reduction. This will leave about $140 billion of unused TARP money for spending — or for incentive tax cuts.

Now just think what would happen if a zero capital-gains tax rate were applied economy-wide for all investors. Or if Obama’s new supply-side thinking leads him to leave the cap-gains tax rate right where it is at 15 percent. Are the markets sniffing out a more centrist, pro-growth Obama? The dollar is rising, and gold is falling, so that might be the case. Growth solves inflation, and it can restore King Dollar to its throne. Growth can absorb Ben Bernanke’s free-money balance-sheet cash creation.

Is it possible that we are looking at a supply-side solution to the economy and the deficit?

COMMENT

I agree. Larry Kudlow is the best! I’d like to see more of him and his common sense.

Posted by gotthardbahn | Report as abusive

Obama and jobs, take two

Dec 8, 2009 19:38 UTC

A few thoughts on the Brookings speech:

1) Lots of big ideas from liberal thinks on  how to boost jobs. Obama pretty much took a pass.

2) Obama proposals certainly aren’t game changers

3) To a great extent, Obama will still be relying on the unspent 70 percent of his $787 billion stimulus plan, passed earlier this year, to perk up the flaccid labor market.

4) It’s clear that the deficit is driving policy.The high government debt-to-GDP ratio of the U.S. risks crowding out private investment, reducing the future potential of the economy to grow. And rising deficits increase investors’ fears about the creditworthiness of the U.S. government.

5) Obama needs to keep interest rates as low as possible to boost growth and not worsen interest payments. So no mega-stimulus. This is his version of Clinton’s bond market strategy.

Here is Michael Feroli of JP Morgan:

For now, we’re not pencilling in any major change to our growth forecast for 2010. Many of the proposals — listed below — are business tax cuts which are infra-marginal and will probably have a muted impact on behavior. In addition, there are some one-time tax cuts or bonus payments which are less likely to affect household behavior than more permanent tax cuts. It is possible that accelerated infrastructure investment and some other secondary proposals will be significant enough to lead to a forecast revision.

Proposals:
* One year elimination of capital gains on small business stock
* One year expensing of up to $250,000 of capital investment for small businesses
* One year extension of bonus depreciation expensing
* “A new tax cut for small businesses to encourage hiring in 2010″
* Eliminating SBA fees and increasing guarantees
* More infrastructure spending, including “merit-based” infrastructure
* Incentives for energy efficient home retrofits, including expanding programs from the first stimulus
* Extending unemployment insurance (presumably extending past December 31, not extending past 99 weeks).
* Extending COBRA benefits
* Another $250 one-time bonus payment to social security recipients
* “Taking steps to ensure that state and local governments are not forced to layoff teachers”

The EPA and Obama’s Uncertainty Tax

Dec 8, 2009 11:23 UTC

Here’s the theory about the new U.S. position on greenhouse gases. The official finding by the U.S. Environmental Protection Agency that the emissions endanger human health sets the stage for permit requirements on power plants, factories and automobiles. It also supplies President Barack Obama with more evidence at the Copenhagen summit of a “new normal” in America when it comes to climate policy. And back home, it supposedly gives a nudge to the Senate where cap-and-trade legislation is stuck on the back burner.

But in practice, the only thing certain about the EPA ruling is more regulatory uncertainty leading to less economic growth and fewer jobs. Bad news, to be sure, for American businesses already flummoxed by the mercurial state of healthcare, financial and tax reform. Call it Obama’s Uncertainty Tax.

While a cap-and-trade bill has already passed the House of Representatives, few Capitol Hill observers expected the Senate to approve one, even by the end of 2010 thanks to the anemic economy and political risks for incumbent Democrats facing midterm elections. What’s more, expectations of a more Republican-leaning congress after 2010 made it seem like economy-wide carbon caps were sliding off the Obama agenda for the foreseeable future.

But now it’s conceivable carbon restrictions would be implemented as early as next year – even though the EPA itself admits its efforts would be more disruptive and less efficient than congressional action. Such an optimistic timetable assumes no legal challenges. But there will be plenty of those. Already, business groups are preparing to file suit against the EPA. It could fall to U.S. courts to determine the future of the nation’s approach to climate policy. This is a nightmare scenario for the private sector when it comes to planning for new expansion or hiring. Note that the big problem with the job market at the moment is not so much job losses and zippo new jobs being created. It will take a year of 4 percent growth adding 250,000 jobs a month to lower the unemployment rate to 9 percent.

Of course, about the only thing worse than regulatory uncertainty would be for the EPA to follow through with its top-down, command-and-control approach to dealing with perceived climate change.

One solution would be for Congress itself to act. GOP strategists would love to disrupt reeling Democrats with another controversial proposal – which is precisely why it won’t happen. Dems in the Senate are well aware of the shellacking their House colleagues have taken on their cap-and-trade vote.

Another option would be for the White House to devise a plan that would generate some bipartisan support. One idea might be a carbon tax whose revenue could be distributed back to citizens as a dividend, or used to offset payroll taxes. Such a refund could be progressive and popular.

But the most likely scenario is no cap-and-trade and no carbon tax, just more government “investment” in clean energy. But for now, workers and business are left to keep paying the Uncertainty Tax.

COMMENT

its been proved that these tax reforms will only bring more pain in the long term

Posted by cainindia | Report as abusive

The chart that keeps the WH econ team up at night

Dec 4, 2009 18:26 UTC

A nice jobs report. A long way to go, as this chart from Calculated Risk shows:

jobchart

COMMENT

Writing as an interested observer outside America, I find this thread unbelievable. You voted these guys into power, remember? Overwhelmingly, too. You all bought into ‘change we can believe in’ and all the other rubbish spewed by the Dems. You allowed your dislike of Mr. Bush and Mr. McCain and Ms Palin to colour your vote last November. Now the reality of a radical-left administration in Washington is setting in and you aren’t too happy about it. What did you expect? I don’t know if I should laugh or cry.

Posted by gotthardbahn | Report as abusive

The November jobs report and the 2010 midterms

Dec 4, 2009 17:46 UTC

A few thoughts, sports fans:

1)  The drop in the U3 rate is welcome news for the WH, congressional Dems (and US workers, of course). But it is really just a smoothing out of last month’s weird pop from 9.8 percent to 10.2 percent. As Action Economics notes:

The jobless rate also fell by a welcome two-ticks, to 10%, though this just reversed half of the surprising four-tick October pop to leave intact the recent uptrend of roughly 0.1% per month for this measure. We now assume a flat payroll figure in December, with the resumption of positive payroll growth in Q1, but we still expect a modest up-trend to remain in place for the unemployment rate.

2) That being said, there was certainly good news in both temporary hires and hours worked — though if the labor force participation rate had stayed steady, U3 would have been 10.1 percent.

3) But economics is one thing and politics another. The U3 rate is an ugly indicator to Americans that the economy is still broken.

4) Still a quite good chance that on Election Day 2010, unemployment for over a year will have averaged in double digits. This is virgin territory for political forecasters, and the single biggest reason why 2010 may be more like 1994 (incumbent Ds lose 52 House seats) than 1982 (Rs lose 26 seats). Average the two and you get a loss of 39 House seats — not a bad guess for a U-shaped recovery.

COMMENT

hey, charlie cook has 15-25 (and 3-5 senate seats) as a conservative case …if its 35, hardly a shocker

Posted by James Pethokoukis | Report as abusive
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