James Pethokoukis

Politics and policy from inside Washington

Why we need a tax holiday for overseas earnings

Jun 20, 2011 16:05 UTC

U.S. companies have huge profits sitting offshore, and some in Congress want to give them a tax break as incentive to bring nearly $1 trillion back to America. The New York Times describes the plan this way:

Under the proposal, known as a repatriation holiday, the federal income tax owed on such profits returned to the United States would fall to 5.25 percent for one year, from 35 percent. In the short term, the measure could generate tens of billions in tax revenues as companies transfer money that would otherwise remain abroad, and it could help ease the huge budget deficit.

Corporations and their lobbyists say the tax break could resuscitate the gasping recovery by inducing multinational corporations to inject $1 trillion or more into the economy, and they promoted the proposal as “the next stimulus” at a conference last Wednesday in Washington.

But the story — reflecting the agenda of the Obama White House and liberal think tanks —  is skeptical about the whole idea. It highlights research that shows when companies got tax amnesty in 2005, 92% of the $312 billion brought back was used for dividends and share buybacks — not directly hiring workers, boosting salaries or purchasing equipment.

Economist Douglas Holtz-Eakin is working on a study for the U.S. Chamber of Commerce that supports a tax holiday. I chatted with him briefly this morning and here is the thrust of what he told me:

I am strong believer in a territorial tax system period, and this is a step toward fundamental tax reform. Now it’s short of fundamental tax reform in two ways: Number one, the rate’s not zero and, number two, it’s not permanent.

I would go for zero and permanent in a heartbeat if that was on the legislative agenda, but it’s not. I also think it would have substantial near-term beneficial economic impacts.

If you think of it this way: There’s over a $1 trillion out there, so let’s suppose something like $830 billion came back, which I chose specifically to match exactly what [President Obama's American Recovery and Reinvestment Act] was. Like the [ARRA], this would flow into the economy and go into corporations first, but they would then either make real purchases with it – salaries, payroll, capital investment, R&D and that would would further flow into the economy – or they would change their financial structure: share repurchases, debt reduction, dividends.

And in each case, that would flow to someone else. So on a cash-flow basis, it’s the same model. … And those balance-sheet effects would drive consumption further because of the wealth effects. That’s got to be at the heart of any response to any wealth-destroying bubble. We need pro-wealth creation policies. This is one of them.

Holtz-Eakin says his study will highlight these broader macroeconomic impacts. But his major point echoes what I wrote last March:

Treasury is stretching a point in assuming the government would somehow lose revenue by taxing repatriated income at a sharply lower rate. In reality, without the reduction most of the money will remain offshore.

And even if all the cash returning to the United States went to companies’ shareholders, that could still generate more consumption, growth and jobs, a knock-on effect Treasury ignores. Yet this so-called wealth effect is explicitly part of the rationale behind the Fed’s second round of quantitative easing. Some economists dispute the linkages, but not the ones that work for Obama. So despite some political risks, it might be time go on holiday — as long Washington also continues the work of reform.

COMMENT

That’s one of the reasons I like Cain. He is a businessman nor a politician.

Posted by Texan4Cain | Report as abusive

Tax cuts for companies — but not kids?

Nov 8, 2010 17:22 UTC

Doug Holtz-Eakin gives a perfectly lucid explanation of why the U.S. needs to cut its corporate tax rate, allow immediate expensing of capital purchases and end worldwide taxation of  profits. But then his deficit hawkishness emerges:

Note, however, that not all components of the Bush tax laws are equally likely to foster growth. Marginal tax rates and the taxation of dividends and capital gains directly affect companies’ decisions about innovation, investment, and savings. But refundable tax credits, marriage-penalty relief, and other targeted incentives within the Bush laws make no contribution to growth. These provisions may become unaffordable luxuries.

So the GOP is going to cut taxes on companies but be perceived as raising taxes on families and children? (I know, I know — 70 percent of corporate taxes are paid by workers.) An alternative is this proposal by economist Bob Stein, who think the GOP needs an  tax agenda that is pro-family as well as pro-growth. The biggest item would be a $4000 per child tax credit (offsetting income and payroll taxes) that would grow at the same rate as wages, not inflation. In turn, high-income taxpayers would get fewer deductions:

Overall, the plan is designed to be revenue neutral — and yet most taxpayers without children will pay a little bit less in taxes, while middle- class families with children under 18 years of age will pay substantially less. So who pays more? Primarily high-income workers, but also upper-middle-class taxpayers who do not have children in the home (either because they have decided not to raise children at all, or because their children have already turned 18).

To be blunt, the plan is a tax hike on the rich and makes the tax code even more progressive than it is today. Given the loss of the state and local tax deduction, the tax hike will be particularly acute for high earners from high-tax states. And although the top income-tax rate would be capped at 35%, that rate would kick in at lower income levels than it does today. The result would be a marginal tax-rate hike — and a corresponding weakening of work incentives — for many workers who today find themselves in the 25%, 28%, and 33% brackets.

The Dow knows — all the Bush tax cuts will be extended

Nov 5, 2010 01:29 UTC

The Dow industrials are up 2 percent today as Wall Street figures out what DC insiders know: All the Bush tax cuts will be temporarily extended, more than likely during the “lame duck” session in December.  Robert Gibbs gave it all away today after Obama hinted as much yesterday:

Two days after congressional elections, White House spokesman Robert Gibbs signaled that Obama might consider a compromise with Republicans that would keep tax breaks not only for the middle-class but for wealthier Americans as well. “He’d be open to having that discussion and open to listening to what the debate is on both sides of that,” Gibbs told reporters. “Making those tax cuts for the upper end permanent is something that the president does not believe is a good idea,” Gibbs said. He said he believed the discussion would take a large part of the final weeks of this year’s U.S. congressional session.

A few more points:

1. The only question is if Obama will get much in return, such as approval for his national infrastructure bank (or likely his fave tax cuts such as the Making Work Pay credit or AMT).

2. Is this a sign of Obama shifting to the center? Look, even if Obama doesn’t want to move right, the Dem Senate will. There are a dozen Dem senators from red-states up for reelection in 2012. They are not going to follow Obama off a cliff on taxes or anything else.

3.  If all the tax cuts were left to expire, it would drop GDP growth by 2-3 percentage points. Even just letting the high-end ones expire would cost 0.2 percentage points of GDP and boost the unemployment rate by as much as 0.7 percentage points (based on Goldman Sachs’s estimate and Okun’s Law).

4.   2011 could be the year of the tax cut. GOP may put in for a corporate tax cut, and Obama may offer a payroll tax cut, in addition to his business tax cuts. Starts to look like an all-of-the above, tax cut  bidding war to boost a weak economy.

Why 2011 will be the Year of the Tax Cut

Nov 3, 2010 17:20 UTC

American presidents usually win second terms, even if their parties suffer midterm blowouts. But President Barack Obama better not rely on history for a 2012 victory. To lift his political fortunes after Tuesday’s absolute shellacking — and those of the economy — he needs to work with incoming Republicans to do two big things: cut spending and cut taxes.  Here’s why:

1. Unless Obama actually desires to be a one-termer, he really has no other choice. Ronald Reagan and Bill Clinton both sailed to reelection despite suffering midterm setbacks, thanks to good growth and popular policies. When it’s one-and-done, as was the case with Jimmy Carter in 1980 and George Bush in 1992, it’s the economy that sends them packing. And that’s just the scary scenario emerging for Team Obama. The White House’s own forecasts don’t predict unemployment dipping below an average of 8 percent until 2013. Even worse, some of the hardest hit states — Florida, Michigan and Ohio – are big ones in the Electoral College that Obama needs to win again if he’s going to score another four years in the job. And all three just elected Republican governors.

2. Obama could stay the course. He could battle the GOP newcomers including their sizeable Tea Party contingent, pray for a boom and continue to push his agenda, such as capping carbon emissions, through regulatory agencies. But that’s a dead electoral end unless the economy perks up considerably (and immediately) and Republicans choose some incompetent, unelectable nominee. (As the midterms showed, candidate quality matters.) One of the clear midterm messages is that Americans have rejected the beyond-center-left, big government, redistributionist agenda. Exit polls said that some 60 percent of voters think government is doing too much. And voters in blue-state Washington rejected tax increases on the rich.

3. Voters say they want compromise. And there are deals Obama could potentially reach with Republicans that might generate jobs and reassure markets about America’s fiscal seriousness. Obama has already proposed letting businesses immediately deduct new capital investments. He could add cuts in corporate and payroll taxes and temporarily extend some or all of the expiring Bush tax cuts.  Both parties should also take a look at the Wyden-Gregg tax reform bill. In return, Obama could bargain for more infrastructure spending, especially if he agreed to suspend federal pay rules that raise the cost of government-funded construction projects.

4. But there might be even more opportunity on the spending side. In a bit of fiscal jujitsu, Obama could challenge the Tea Party folks to cut billions in corporate tax breaks and vote for any social insurance cuts recommended by his own deficit panel. And Obama must surely know that when advanced economies have reordered their fiscal houses by cutting spending, it’s often been under center-left governments able to pull a “Nixon to China” moment with interest groups.

It may not feel like it right now to the shell-shocked White House, but the Democratic election throttling might just help the president pivot to a second term.

COMMENT

I don’t understand, forgive me… Spending cuts reduce public treasure and public goods. Tax cuts also reduce public treasure and public goods. With all the negative momentum of global environmental crises on top of our own nation’s burst private-sector bubble, why is it that the republic now calls for reducing public treasure and public goods?

Posted by psuckow | Report as abusive

Is this the tax reform Obama and the new Congress can agree on?

Nov 2, 2010 12:28 UTC

From my Reuters Breakingviews column:

President Barack Obama’s bipartisan deficit commission has a mandate to cut the U.S. budget gap. But the White House panel may surprise in another area: tax reform. Democrats and Republicans are taking a hard look at a plan that would simplify the code and cut corporate taxes. Although not perfect, it would be a big improvement.

Much of the public focus on the commission, which is expected to vote on any recommendations it makes next month, has been on its efforts to slash spending. Two areas that could suffer the knife are tax breaks and Social Security, analysts say. But panelists are also assessing ways to reform America’s labyrinthine tax code to promote economic growth, and thereby more tax revenue to help pay down the debt.

Smartly, members won’t recommend a total scrapping of the current system in favor of some ideal tax code concocted by academics. No politically unfeasible value-added or flat taxes here (though a flat consumption tax would be ideal). Instead, they’re examining a plan devised by politicians — Senator Ron Wyden, a Democrat from Oregon, and Senator Judd Gregg, a Republican from New Hampshire and panel member — that uses the current system as a baseline and then tweaks it a whole lot.

The Wyden-Gregg idea mostly succeeds. For individuals, it would reduce the number of tax rates from six to three and dump the alternative minimum tax. It would also combine several existing government savings plans into one. For business, Wyden-Gregg would combine multiple rates, including a 35 percent top rate, into a flat, 24 percent corporate rate. Small businesses could immediately write off capital investments. And companies could only deduct part of their interest payments, making equity financing more competitive. All great, great stuff.

There are some downsides, which is to be expected of a plan meant to win votes on both sides of the aisle. It would raise the top capital gains tax rate to 23 percent from 15 percent (not counting what happens with the Bush tax cuts or the new Obama Medicare tax). It would also subject the foreign income of U.S. multinationals to immediate taxation. Most advanced economies tax only income earned domestically.

But taken as a total package, Wyden-Gregg would create a more pro-growth tax system without, says the Congressional Budget Office, adding to the national debt. Corporate taxes, for instance, are the most harmful tax that nations levy, according to the OECD. If Congress and the White House want to shock cynics with a big compromise in 2011, tax reform would a great place to start.

And let me add this: The Heritage Foundation ran a great dynamic scoring analysis of the plan, unlike the static, for-accountants-only version from the CBO. It found the following:

1. The federal deficit would be an average of $61 billion (nominal) lower per year;

2. The nation’s debt-to-GDP ratio would be 3.9 percentage points lower by the end of 2020, indicating a significant reduction in publicly held debt;

3. An average family of four would have about $4,095 more disposable income every year;

4. Foreign investment in the U.S. would be an average $292 billion (nominal) higher each year, and U.S. multinational corporations would repatriate and invest an average $19 billion (nominal) more in the U.S. per year;

5. 2.3 million more jobs would be created on average each year;

6. The aggregate net wealth (assets minus liabilities) of U.S. households would be $643 billion higher by the end of 2020; and

7. Real GDP would be an average $298 billion higher per year.

COMMENT

James,
The presidential term is for 4 yrs, it takes time for policies to reap benefits, there is some amount of gestation period before the yielding & maturity kicks in, these poll pressures can change policy before the policy actually shows results,

potential Mayors are filing candidature.

thx
Arvind Pereira
http://www.ArvindLeoPereira.co.nr

Posted by pereiraarvindin | Report as abusive

Will 2011 be the year of the tax cut or tax hike?

Oct 29, 2010 14:53 UTC

There’s a brewing debate among conservatives over whether they should favor some tax increases to close the budget deficit. Some Republicans on Obama’s deficit panel are talking about cutting various tax breaks for individuals. Possible presidential candidate Governor Mitch Daniels of Indiana recently spoke favorably about a value-added tax and an energy tax.  And here is Kevin Williamson of the National Review Online’s Exchequer blog:

Here’s the problem: The deficit is, by my always-suspect English-major math, about 36.3 percent of federal spending ($1.29 trillion deficit out of $3.55 trillion spending). For comparison: Defense accounts for about 18 percent of federal spending. So you could cut out the entire national-security budget, and another Pentagon-sized chunk of non-military spending, and not quite close that deficit. You could cut the Pentagon to $0.00 and eliminate Social Security entirely and just barely get there.

Don’t get me wrong: In a perfect world, Exchequer would love to see the budget balanced and some tax cuts enabled through spending reductions alone.  … Not going to happen. So, our choices are this: 1. Hold out for the best-case scenario, in which a newly elected Speaker Boehner gives President Obama the complete works of Milton Friedman and everybody agrees to cutting federal spending by more than a third. 2. Keep running deficits and piling up debt. 3. Raise taxes. My preferences, in order, go: 1,  3, 2. And No. 2 is not really acceptable.

Like it or not, taxes are going up: If not today, then in the near future. Even once the deficit is under control, that debt is still going to have to be paid down, lest debt service alone overwhelm the federal budget, necessitating even more tax hikes.

What all this misses is that 2011 will more likely be the Year of the Tax Cut than Tax Hike. The Bush tax cuts will be extended, various business tax breaks passed, maybe even a payroll tax cut — all to do something about a slow growth, high unemployment economy. Here is how voters see things, according to Rasmussen:

When faced with a budget crisis, most Americans think “it’s always better to cut taxes than to increase government spending because taxpayers, not bureaucrats, are the best judges of how to spend their money.” A new Rasmussen Reports telephone survey finds that 59% of Americans agree with that statement, while 26% disagree. Fifteen percent (15%) are undecided. … That’s down just slightly from August 2009, when 62% agreed that taxpayers are better judges of how to spend money. However, in January of 2009, just 53% agreed with that statement.

Fifty percent (50%) of Adults now say a dollar of tax cuts is always better than a dollar of public spending, up nine points from January of last year. Twenty-nine percent (29%) disagree, and another 21% are not sure. Just 27% think public spending provides “more bang for the buck” than tax cuts when it comes to economic policy and creating jobs. Forty-nine percent (49%) disagree, a seven-point increase from the beginning of 2009. But 24% are not sure.

Obama deficit panel partying like it’s 1986

Oct 25, 2010 14:19 UTC

The WSJ says President Obama’s deficit panel is looking at cutting various tax breaks — also known as “tax expenditures” — as a way of reducing the budget deficit:

Sacrosanct tax breaks, including deductions on mortgage interest, remain on the table just weeks before the deficit commission issues recommendations on policies to pare back with the aim of balancing the budget by 2015.

The tax benefits are hugely popular with the public but they have drawn the panel’s focus, in part because the White House has said these and other breaks cost the government about $1 trillion a year.

At stake, in addition to the mortgage-interest deductions, are child tax credits and the ability of employees to pay their portion of their health-insurance tab with pretax dollars. Commission officials are expected to look at preserving these breaks but at a lower level, according to people familiar with the matter.

A few thoughts here:

1.  Lots of this stuff distorts markets, particularly in housing and healthcare. We get too many resources devoted to building McMansions and giving workers gold-plated health plans.

2.  So I am all for reducing/phasing out hundreds of billions in these tax breaks in a 1986-style tax reform bill.

3. But at the same time, we should be reducing marginal tax rates. The code should be simpler, broader and flatter.

4. And only by reducing marginal rates, at least somewhat, would such a plan ever pass.

5. In fact, it took a deep cut in marginal rates to get the 1986 reform done. Individual taxes went down, business taxes went up, though many CEOs didn’t mind so much since the system was simpler.

6. Take another look at the Wyden-Gregg plan for tax reform, since it may be a model for the panel.

Relitigating the 1990s boom

Oct 19, 2010 16:32 UTC

Over at e21, former Bush administration official Joel Harris provides a nice reminder about the real  foundation of the 1990s boom. And it was not the Clinton tax increases:

The story of the 1990s economy holds an important lesson for today’s tax debate, but it’s not the one the Administration intends by invoking it. While the Clinton-era expansion did indeed take place under higher tax taxes, it was largely due to crucial changes in IT production and investment that led to growth and once-in-a generation productivity gains. The lesson here is a basic but important one: the past doesn’t predict the future. If the Administration believes there are similar productivity gains on the horizon that will lift the U.S. economy out of its financial crisis-induced hangover, it should explicitly identify the source of these gains. Otherwise, the 1990s experience provides no guidance for what to do about the tax policy set to expire on January 1.

A chat with economist Glenn Hubbard

Oct 13, 2010 15:26 UTC

In their must-read policy manifesto, “Seeds of Destruction,” Glenn Hubbard and Peter Navarro outline the biggest economic problems facing America and what can be done about them. Hubbard is the former head of the Council of Economic Advisers under George W. Bush and is now dean of Columbia Business School. Navarro, a Democrat, is a business professor at the University of California, Irvine and author of  ”The Coming China Wars.” Here are some excerpt from a chat I had with Hubbard:

What could we have done back in 2009 to put the U.S. economy on a better growth trajectory today?

One, not introduce a lot of policy uncertainty — not have healthcare mandates that raise the cost of hiring, threaten tax increases on small  business — but more positively, if one wanted to do stimulus, things you could have done included a payroll tax cut, investment incentives and perhaps even a corporate tax cut.

In the book, you mention trade reform to deal with China’s weak currency and protectionist limits on market access. But what should be done beyond more talks with Beijing?

We have to remind the Chinese leadership that it is in their self-interest to increase domestic consumption. Our self-interest is just the opposite, we need to be saving more. For that environment to be successful, we still need to open markets between the two countries. And where we do see unfair practices, we continue to call attention to them. The currency is not the top thing I am worried about.

You have an idea for a flexible carbon tax. Why would Republicans go for that?

I am not a politician, but I think a couple of things might attract Republican interest. We’re not trying to raise revenue with this. The revenue should be recycled through tax cuts. The point here would be to solve the uncertainty problem in the private sector. You want to promote innovation, but you don’t want something like cap and trade.  But [with really low oil prices], you won’t have the innovation. But if you can go to businesspeople and say I guarantee you [big price swings] won’t happen, then you will get the innovation.

Did we really need to put taxpayer money into the bank back in 2008?

I do think we needed to recapitalize some of the banks. TARP got off to a rocky start because that is not where the Bush administration started. They sort of wound up in a good place but it was a rocky road. The other issue at the time that made is hard was the seeming capriciousness of how each bank failure was handled. That kind of policy uncertainty was chilling.

What would be the best way to deal with the housing market?

I would try to do what we can promote overall economic growth and do what we can to aid consumers in the housing market without subsidizing housing, the plan that Chris Mayer and I put out.  It’s actually a pretty simple solution. Normally a recovery would be helped by a lot of refinancings given the very low mortgage interest rates. But that isn’t happening. And I think if we took away some of the structural impediments and allowed more refinancings, more people could stay in their homes. It would be like a long-term tax cut, and it wouldn’t cost the treasury a dime.

What are the political and economic risk to more quantitative easing by the Federal Reserve?

Quantitative easing still probably has the capacity to lower long-term rates a bit, but it’s only a bit. If the Fed did another trillion dollars of quantitative easing, maybe 20 or 30 basis points in the ten-year rate — but is that what’s really holding back investment? I don’t  think so, and it raises the risk of a very large balance sheet being hard to pull back, politically. So personally I wouldn’t do it. And it also complicates the recapitalization of the banks because currently banks are recapitalizing themselves by borrowing money from the Fed at zero and buying government bonds. The flatter the slope of the yield curve, the lower the profitability. I am just mystified why people think this is a silver bullet.

How long before the U.S. debt burden begins to cause an adverse market reaction?

I think as soon as a real recovery takes hold, we are going to see some real uncertainty being created in the bond market. The U.S. fiscal situation is really perilous. It’s not a new story, but the political unwillingness to deal with it will finally start to really trouble people. In order to head that off, we need to do something. Personally, I would start with Social Security since it something we know how to do and shouldn’t be that controversial.

Does America need to pay more in taxes?

I think it’s a question for the American people about what they want government to do. If we want a government [where spending as a percentage of GDP] is rising into the mid [20 percent range], then the easy answer to your question is “yes.”  But if we want a government that is more along traditional lines, then we don’t need to do that. That is really the first order question, and once we decide the answer to the that question, we need to pick a tax system that raises revenue at the lowest cost. But the big thing is “What government do you want?” and this is what voters will have to decide.

How Ben Bernanke is trying to raise taxes

Oct 12, 2010 16:05 UTC

It’s the return of the inflation tax, as Ed Yardeni rightfully notes:

The rational for another round of QE is to boost economic growth and to avert deflation. In other words, Fed officials would welcome a pickup in the inflation rate. The problem is that they are stoking an inflationary fire in the commodity pits. I doubt that’s the sort of inflation they are rooting for. Presumably, they want prices for consumer goods and services to rise moderately to stimulate producers to expand their capacity and to hire more workers. Higher commodity prices are a tax on consumers and producers and can have the opposite effect.

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