James Pethokoukis

Politics and policy from inside Washington

Back to recession in 2011? (Even kind of rhymes)

Jun 7, 2010 14:43 UTC

Tax-cut guru Arthur Laffer worries about next year. He attributes the economic rebound this year to workers and business pulling forward economic activity into 2010 to avoid more taxes and regulation in 2011. As he puts it in the WSJ today:

In my view, this shift of income and demand is a major reason that the economy in 2010 has appeared as strong as it has. When we pass the tax boundary of Jan. 1, 2011, my best guess is that the train goes off the tracks and we get our worst nightmare of a severe “double dip” recession.

In 1981, Ronald Reagan—with bipartisan support—began the first phase in a series of tax cuts passed under the Economic Recovery Tax Act (ERTA), whereby the bulk of the tax cuts didn’t take effect until Jan. 1, 1983. Reagan’s delayed tax cuts were the mirror image of President Barack Obama’s delayed tax rate increases. For 1981 and 1982 people deferred so much economic activity that real GDP was basically flat (i.e., no growth), and the unemployment rate rose to well over 10%.

But at the tax boundary of Jan. 1, 1983 the economy took off like a rocket, with average real growth reaching 7.5% in 1983 and 5.5% in 1984. It has always amazed me how tax cuts don’t work until they take effect. Mr. Obama’s experience with deferred tax rate increases will be the reverse. The economy will collapse in 2011.

Me: That is the supply-side version of things. But even Keynesians should worry. Goldman Sachs ran a study awhile back looking at what would happen if all the 2001 and 2003 tax cuts were repealed. As I have written:

Using the respected Washington University Macro Model, Goldman reset the tax code to its pre-Bush status, assumed all tax cuts expired, and watched how the economy reacted as 2011 began. What did the firm see? Well, in the first quarter of 2011 the economy dropped 3 percentage points below what it would have been otherwise. “Absent a tailwind to growth from some other source,” the analysis concludes, “this would almost surely mark the onset of a recession.”

COMMENT

Sub:Appeal to all world citizens.To me world is one country.
Hello Sir/Madam,
Pls do not think its a general recession.Its a tremendous failure of the global administrators(not leaders).They shd not cont. anymore.In global administration only sefless and honest people are required……….and I don’t see any other option.The development and all good things are created by only selfless and honest people,not by those people who are enjoying luxury in unacceptable level.If you pls try to understand what I meant.
thanking you,with kind rgds….Chinmoy Chatterjee from India.

Posted by chinmoy | Report as abusive

Here comes the iPad tax

Jun 7, 2010 14:21 UTC

It’s almost as dodgy a notion as nuking BP’s gusher. The U.S. Federal Trade Commission is mulling ways to subsidize the flailing news industry. Paying for it could involve head-scratchers like taxing iPad sales. What the media industry needs is innovation not intervention.

America’s struggling newspapers might like a $35 billion-a-year cash infusion. They have historically drawn 80 percent of revenue from advertising. But Internet competition — from Google to Craigslist — has halved that since 2000. Classified ad revenue alone has plunged to $6 billion from $20 billion.

But the FTC’s “possible policy recommendations” draft paper seems out of sync with a nation wary of more government bailouts and spending. Among the various subsidies: a program to pay young people to work at small-town papers. Federal funding for public radio and television might get a boost from $400 million a year to $7.5 billion, matching the per-capita spending level of Canada. Newspapers could get a tax credit for every journalist they hire. Taxpayers could also elect to donate $200 of their federal income taxes to industry non-profit organizations. (Wisely, no dollar estimate for that is given.)

In this age of austerity, all that spending would at least be paid for. Radio and TV broadcasters would be taxed up to $6 billion a year. A 2 percent sales tax on TV advertising would bring in as much as $6 billion. A 3 percent tax on monthly mobile phone service would be good for another $6 billion.

Then there’s a 5 percent tax on consumer electronics – the iPad levy – which could generate $4 billion. As if all this money weren’t enough, changes to copyright law would make it harder for search engines to make use of newspaper content.

The trouble with all this, is that government support for Old Media at the expense of New Media seems inconsistent with also advocating cutting support of Old Energy (oil) in favor of New Energy (wind and solar.) Instead of addicting newspapers to government handouts — which would also raise issues of journalistic independence from the state – it would be better to keep the playing field level.

New business models will continue to emerge and evolve, especially as the economy and ad climate improves. Journalism has a future even if traditional newspapers may not.

Where Barry Ritholtz questions my tax analysis

Jun 3, 2010 18:42 UTC

Superblogger Barry Ritholtz of The Big Picture takes issue with my claim that America’s wealthy have a high tax burden since they pay such a huge share of U.S. taxes. A bit from his email to me (in his own inimitable style):

All you have proven is that the Rich pay most of the taxes. Duh. But you have failed to demonstrate the rich have a “high tax burden” — indeed, you actually say ABSOLUTELY NOTHING ABOUT THEIR TAX BURDEN. Paying a lot of taxes — even most of the taxes — is not the same as a high tax burden.
You have mentioned that 2010 taxes are higher than 2004 taxes. You stated 1% pay alot of taxes. Again, probably true, but fails to demonstrate your claim.

When you discuss “A high tax burden” you are making a qualitative statement. The tax burden is onerous, difficult, challenging. Its painful, disruptive, counter-productive.

OK, I am intrigued by your claim. So prove it to me.
I think you have raised a very fascinating and fundamental issue — but have not created a convincing case for it.
(It’s easy to sway innumerate nitwits, but I assure that is not what my driver’s license states). My question ultimate boils down to this: Is the tax burden on the rich that high?

Me: The post referenced earlier states a few things: 1) there is research that shows combined taxes on the rich are at the point when higher rates will bring in lower tax revenues; 2) to balance the budget, tax rates on the rich would have to skyrocket; and 3) the top 1 percent of tax returns pay 40 percent of all income taxes (as of 2007.)

Certainly I think if you put all that together it makes the case that forcing the rich pay higher taxes is a self defeating way to restore fiscal solvency. Indeed, there is also research that shows cutting spending is a better way to balance the  budget than raising taxes. (It is less harmful to economic growth.) Moreover, the track record of countries cutting debt though austerity is not good.

COMMENT

HBC…

I’m not sure how you inferred only 1% of Americans are rich, that’s just the group being used to make the point of income percentage vs. tax percentage. The poorest 10% of Americans are actually quite wealthy compared to much of the population of the world. That is the fruit of a free market capitalism – it’s the only system in the history of the world ever to lift masses of people out of poverty and destitution.

Barry…

Why even argue burden? It’s semantics. Either you believe it is morally right for the government to use the threat of force to take private property from some citizens in order to give it to other citizens or you believe it is morally wrong. It’s certainly not in keeping with the values of the founders of this country and it will certainly do serious harm to the system of incentives that made this country wealthy and powerful in the first place.

You obviously think the benefit to our society of more equal wealth distribution outweighs the reduction of freedom and liberty that comes along with very high taxes. Your approach is unconstitutional and will destroy the system of incentives that drives innovation and wealth creation. Don’t hide behind the word burden, I don’t think you care if it’s a burden on these folks or not, you simply think it’s unfair they finished with more than others.

Posted by MatthewDS | Report as abusive

5 reasons why “Son of Stimulus” is a bad seed

May 26, 2010 18:34 UTC

The American Jobs and Closing Tax Loopholes Act? Really? Even by the disingenuous standards of Capitol Hill, calling the $174 billion spending package making its way through the House “a jobs bill” takes some real moxie.

Die-hard Keynesians, of course, will contend that so long as money gets pushed into the economy, how it gets spent isn’t so critical. But for a government running trillion-dollar budget deficits, at least every billion or so should count. And it’s hard to argue that this bill is optimized for job creation or economic growth.

1) For instance, the bill includes a one-year, $6.7 billion extension of the federal research and development tax credit. By not making it permanent, the credit is less likely to foster long-term investment. The bill also extends tax breaks for NASCAR and Hollywood, ensuring both Red and Blue state residents get fed their respective helpings of pork.

2) More than a quarter of the spending — $47 billion over 10 years — goes toward extending unemployment insurance benefits. Economists worry the increased availability of such assistance may reduce the intensity with which the jobless look for work and lengthen the duration of unemployment by nearly 10 percent. It’s also tough to pin down the job-creating impact of spending $63 billion to increase Medicare payments to doctors and $24 billion for higher Medicaid spending.

3) Even worse, the proposal enlarges the budget deficit. Less than a quarter of the tab is paid for, showing again just how easy it is for Congress to avoid self-imposed limits on deficit spending. And increased Medicare spending was excluded from healthcare reform so the bill could get a better score from the Congressional Budget Office.

4) The White House will argue that given the high unemployment rate, bringing down the deficit is less of a priority. But listen to what economist Carment Reinhart told the president’s deficit panel today (via The Hill):

The gross U.S. debt is approaching a level equivalent to 90 percent of the country’s gross domestic product, the level at which growth has historically declined, said Carmen Reinhart, a University of Maryland economist. When gross debt hits 90 percent of GDP, Reinhart told the commission during a hearing in the Capitol, growth “deteriorates markedly.” Median growth rates fall by 1 percent, and average growth rates fall “considerably more,” she said.

Reinhart said the commission shouldn’t wait to put in place a plan to rein in deficits. “I have no positive news to give,” she said. “Fiscal austerity is something nobody wants, but it is a fact.

5) Barack Obama’s original stimulus plan was $787 billion (though costs have pushed it up to $862 billion). While some advisers argued for $1.2 trillion, the president sided with those who believed an amount of such Brobdingnagian size would alarm financial markets — and probably voters, too. This latest legislation, combined with a $17 billion jobs bill passed in March, would put the tally at around $1 trillion, not counting interest. In due course, the math will be easy enough for the markets to understand.

COMMENT

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Mankiw on the VAT

May 3, 2010 17:02 UTC

A nice primer on the issues surrounding a value-added tax from Greg Mankiw. This is the key part for me:

Moreover, a VAT is the twin of the flat tax that conservatives sometimes advocate. To see why, imagine that we started with a VAT. Then we add a wrinkle: We allow businesses to deduct wages, in addition to the cost of goods and services. We also require households to pay a tax on their wage income.

Other than shifting the responsibility for the tax on wages from the business to the household, it might seem that we haven’t done anything significant. Indeed, we haven’t. But the new tax system would no longer be a VAT. It would be the flat tax that Robert E. Hall and Alvin Rabushka first proposed back in 1981.

Me: Wouldn’t the D-R compromise here be a Hall-Rabushka VAT as a revenue-neutral replacement for the income tax? See how to what extent it works its pro-growth magic before boosting it. But those would need to significant given the disruption converting a brand-new tax system would cause. Just eliminating investment taxes is a quick and easy way to a consumption tax.

Kudlow: Profits today, politics tomorrow

Apr 28, 2010 18:12 UTC

The Great One opines thusly:

To be perfectly honest here, as much as I love to dig into all the money-politics issues — including the financial-reform bill — I’m much more interested in these big profits and capital gains. This V-shaped recovery is the most important item on my radar screen. It’s the single-biggest investor issue out there right now. I don’t think the bull market in stocks is over yet. Again, regarding taxes and regulations, I’ll warn about next year. But frankly, I think the prosperity theme is issue number one.

COMMENT

I believe Arthur Laffer is correct, the US economy will collapse at some point in the future. There is nothing on the horizon that bodes well for economic recovery or any kind of a boom. With deficits out of control and taxation on the rise, it is just a matter of time until we forced to realize the fact that we are insolvent, bankrupt. Just because we can print our own currency and rely of foreigners to buy our useless bonds, does not eras the fact that are economy is nothing but the largest ponzi scheme in history!

Posted by fthomascain | Report as abusive

Has the Obama deficit panel already failed?

Apr 28, 2010 17:02 UTC

Well, if you define success as having the commission come up with solutions that can pass Congress, then yes. I am watching several commission members at the Peterson Foundation Fiscal Summit.  They are all downplaying what the commission can accomplish, saying that as long as the panel educates the American public on the debt problem, they will consider it a success.  But will bondholders of U.S. debt agree? Downplaying expectations may avoid an adverse financial market reaction to failure, but I am not sure it should. We won’t cut spending. We won’t raise taxes broadly. And we ignore policies that would boost economic growth. What else is there?

COMMENT

re-freelove
your comments on just who pays the taxes in the usa, and how much they pay….is quite interesting.
you see, it reflects just how little you know about who really pays the bills in this country.
you want a middle class?
you want some of the money brought back to the lower levels of society?
heres a tip…it already is being distributed.
our govt is engaged in a social engineering experiment whereas they take billions from the top 10% of wage earners and disperse it to the lower 47% of wage earners in the form of tax refunds or earned income credits.

how about…instead…the lower 47% pay their fair share of taxes and not rely on the top 10% to pay the majority of the taxes for this country.

in other words…if you aint paying anything …then you dont really have the right to say anything.

Posted by JayWx | Report as abusive

Obama’s deficit commission and the politics of crisis

Apr 27, 2010 16:30 UTC

Good luck to the Obama deficit commission. In my heart, I do not believe Congress will pass huge entitlement cuts (preferable)  or tax increases without a  crisis.  (There needs to be a focus on boosting economic growth.) To quote Milton Friedman in Capitalism and Freedom:

Only a crisis—actual or perceived—produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable.

Here is one crisis scenario, as outlined by the Committee for a Responsible Federal Budget:

If low interest rates lead to continued debt accumulation and then suddenly, creditor preferences shift, we could experience a “catastrophic budget failure” as set out in a recent paper by Len Burman of the Maxwell School at Syracuse University and his colleagues at the Tax Policy Center.

Under this scenario, at some point financial markets or foreign lenders decide we are no longer a good credit risk, possibly due to debt affordability concerns. They conclude the United States cannot escape basic economic and financial “laws of gravity” forever. They stop buying our debt securities or demand dramatically higher interest rates due to increased perceived risk. With the sudden shift and large rise in interest rates, the economy goes into a severe recession. (“The longer it takes for the crisis to occur, the worse it will be.”) Unlike the past two years, we cannot, however, borrow to stimulate the economy because the crisis was caused by excessive debt and lost confidence. “In the extreme case, the U.S. may not be able to borrow at any interest rate.” Creditors concerned with hyperinflation or even default will not buy U.S. debt.

COMMENT

wait!
What happens after that? The Road Warrior – Hilly Have Eyes scenario?

Seriously. What would the landscape look like after the “unthinkable” happens? I’m curious.

Posted by bryanX | Report as abusive

Becker vs. Posner on the VAT

Apr 26, 2010 14:35 UTC

The online conversation between Gary Becker and Richard Posner is one of my favorite things on the web. Currently they are taking on the the idea of the US implementing a value-added tax. First a bit from Becker, as excerpted by me:

1) A flat VAT tax would be more efficient for two reasons than a progressive income tax that raises the same revenue: it does not discourage savings relative to consumption, and it induces fewer distortions on other behavior because it has flat rather than rising tax rates. A flat income tax eliminates the effects of rising tax rates, but still distorts savings behavior.

2) The downside of a value added tax to anyone concerned about growing government spending and taxing is very much related to its upside; namely, that a VAT is a more efficient and relatively painless tax. … For example, the VAT rate in Europe started low but now ranges from 15 to 25%, and averages about 20%. In Denmark, for example, the VAT rate was 9% in 1962, but quickly rose to 25% by 1992, and has remained at that level.

3) However, the problems is that a VAT would be introduced not as a partial or full substitute for personal and corporate income taxes, but rather as an additional tax. This would make it much easier to close the fiscal gap by maintaining or increasing government spending and overall tax levels.

4) Since high taxes and high levels of government spending would discourage economic growth and raise rather than lower the overall distortions in an economy, I am highly dubious about introducing a VAT into the federal tax system unless accompanied by a major overall of this system. One big improvement that does not involve a VAT would be to flatten the present income tax rates and greatly reduce the various exemptions, so that the tax basis is widened. Even then it is necessary to be vigilant about combating the incentives government officials have to increase flat taxes over time, whether they are flat income taxes or flat value added taxes.

Now Posner:

1) Because (assuming no exemptions) the tax base for a VAT is so broad—all goods and services—a VAT can generate enormous tax revenues at a low tax rate, which reduces the distortionary effect of the tax. … The VAT also avoids the double taxation of savings under a corporate plus individual income tax system, further encourages savings by making consumption more costly, and reduces the disincentive effects of heavy income taxation. … Of course the benefits of the VAT are greatest if it is substituted for income taxes and other inefficient taxes rather than being added to the existing tax system to generate additional tax revenues.

2) Becker’s main objection to the adoption of the VAT by the federal government, which is similar to the objection to taxes on Internet sales and indeed any new taxes that do not merely replace existing taxes, is that by increasing government revenues it will increase the size of government relative to the private economy, and if (as is doubtless true) government is less efficient, the result will be a reduction in economic welfare. … I agree but on the other side of the issue is our awful fiscal situation.

3) In light of the nation’s fiscal bind, the imposition of a federal VAT becomes a more attractive prospect. One immediate beneficial effect, provided that the VAT was not entirely additive to existing taxes but was coupled with some reduction in corporate and payroll taxes, would be a reduction in export prices and therefore an increase in exports and hence a reduction in our trade deficit, which is a contributor to our public debt. The General Agreement on Tariffs and Trade permits VAT to be rebated on exports, thus lowering the cost to the foreign buyers.

4) More important, the VAT would increase federal tax revenues with minimal distortion because it is an efficient tax. To the extent (even if modest) that it replaced less efficient taxes, it would increase economic efficiency and thus increase the rate of economic growth. Most important, by discouraging consumption in favor of savings, a VAT would reduce the interest rate on our public debt and the Treasury’s dependence on foreign lenders.

American job insecurity

Apr 26, 2010 14:11 UTC

Two interesting polls from Gallup show why a few ticks in the unemployment rate here and there are really besides the point. (Thanks to Jim Geraghty of NR.)  This downturn has scarred the American psyche. The first chart shows how worried workers are about finding a comparable job if they ever lose their current one. The second chart shows that they are still pretty worried about losing their existing job.

gallup2

gallup1

COMMENT

Last night when Fu Bo appeared at the venue next, “Legal Evening News” reporter noted that is different from the previous game in his dress, a black suit, a dark grey cashmere scarf, this has been a sportswear based coach, in such a way that the game for his meaning something different

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