James Pethokoukis

Politics and policy from inside Washington

Explaining the Oregon tax hike

Jan 27, 2010 19:36 UTC

What does it mean that voters in the state voted for higher taxes in companies and wealthier residents? Megan McArdle take a crack at explaining it:

My thoughts:

  • The fact that Clinton raised taxes, and then the economy recovered, is not proof that raising taxes has no effect on the economy.  Most people thing that there is at least some dampening effect, which is especially problematic in a downturn.
  • Realistically, income tax response gets more elastic as the tax region gets smaller.  Oregon borders two states with attractive migration possibilities.  California’s taxes are no bargain–but Oregon’s relatively lower tax rates may have attracted wealthy individuals and businesses that will now find it not so attractive.
  • The Tax Foundation says that pre-tax, it was on the top ten list for business tax climate.  That suggests that it has relatively more room to increase taxes than other states.
  • The business tax changes apparently include a gross receipts tax, which is really an awful tax, especially during a downturn.  Companies which are actually losing money may still owe taxes, which could hasten their closure, and the evaporation of any jobs they provide.
  • Trying to close the gap with only taxes on high income makes state revenues very dependent on a very small group of people.  Ask New York and California how that’s going.
  • Since state income taxes are deductible from federal taxes, this doesn’t entirely raise new tax revenue–much of it will be transferred from the Federal government.
  • There aren’t that many attractive revenue-raising measures for state budgets during a downturn, nor is cutting services always optimal, since demand for them rises when the economy tanks.  Ideally, states would run surpluses in the good years.  Practically, it almost never happens.

Taxing investments to pay for healthcare reform is a bad idea

Jan 14, 2010 17:50 UTC

Labor unions are balking at President Barack Obama’s move to pay for healthcare reform by taxing their gold-plated health benefits. So Democrats are considering also taxing investment income. Not only would that approach make reform more costly and potentially worsen the U.S. fiscal deficit, it could politically doom the whole plan.

As things stand, the year-end expiration of the 2003 Bush tax cuts means top rates on capital gains and dividends automatically rise unless Obama and congressional Democrats intervene. Now, in addition to that, if organized labor prevails in killing a plan to slap a 40 percent excise tax on its members’ pricey health plans, investors can expect to tack on an additional one or two percentage points. That would push the peak cap gains rate to 22 percent and dividends to 42 percent.

To appease these powerful special interest groups some congressional Democrats suggest for the first time extending a portion of the current 3 percent Medicare payroll tax on labor income to investment income for individuals making $200,000, a group that pays some 80 percent of investment taxes. With this source of revenue – perhaps $10 billion a year or more — the tax on union health plans could be scaled way back.

Setting aside the negative impact this could have on the formation of risk capital and savings more broadly, a health plan tax is a key mechanism for controlling rising costs. Expensive and untaxed health plans encourage overconsumption of healthcare. Arguably all deductions for health benefits should be removed to eliminate this distorting subsidy.

Taken as a whole, new investment taxes run the risk of weakening Senate support for reform – the loss of even a single vote would be lethal — since the upper chamber has shown little interest in new taxes on capital. Coming at a time when Americans’ net worth has fallen $11 trillion, it shouldn’t be hard to find one principled Senator willing to quash this misguided attempt to succor labor at the expense of investors.

Will Obama extends all Bush tax cuts?

Jan 13, 2010 15:26 UTC

That’s the DC buzz, that the WH will use bank tax to de facto pay for a 1-2 year extension of ALL the Bush tax cuts, including capital gains. The assumption was that the wealthier folks would be left out. But this would give Ds a tax cut to vote. With unemployment high and maybe going higher, Ds are scrambling for ideas.


A ploy too cynical for words. Bash the banks and tax ‘em to pay for Main Street’s (continuing) tax cuts. This is really getting out of hand.

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The new Washington Consensus: taxes, taxes and more taxes

Dec 29, 2009 15:13 UTC

This depressing WSJ article outlines some possible solutions to America’s long-term fiscal problems:

1) Don’t keep fixing the AMT

2) Let all the 2001 and 2003 tax cuts expire

3) Add a VAT overlay on top of current system

4) Tax Wall Street trading

5) Put an expiration date on business tax cuts and credits

6) Create a commission, like the Greenspan Commission on Social Security, that would cut spending and … wait for it … raise taxes.

This article perfectly encapsulates Washington thinking that fundamental change in how Washington spends America’s tax money is really impossible. So raise taxes through the roof. One more reason to believe a low-growth New Normal is here.


About: WSJ & VAT

It would be wrong, let alone politically impossible, to add a U.S. VAT on top of existing taxes. When Japan instituted its VAT, to assure adoption, it was done along with an overall tax reduction.

But, as a revenue-neutral substitute for the corporate income tax, the VAT in itself would have positive implications for the U.S. economy because it is border-adjustable, i.e., imports would be subject to the tax and exports would subtract the tax. Thus, U.S. corporations and workers would be in a more competitive position at home and abroad. Furthermore, eliminating the corporate income tax would do away with the double-taxation of dividends; the U.S. would become a magnet for foreign investment, and U.S. multinationals would no longer have an incentive to park funds abroad in lower-taxed countries.

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Why surtaxes are foolish

Dec 23, 2009 17:33 UTC

A surtax to pay for healthcare? Not good. Former Bush White House economist Alan Viard explains:

First, it would significantly increase marginal tax rates for the affected households, giving them greater incentives to reduce their taxable income through various avoidance strategies. Even with moderate responsiveness to incentives, the revenue generated by the surtax would be significantly smaller than the burden that it would impose on affected taxpayers.

Second, the surtax would significantly increase the marginal tax rate on saving and investment by the affected households, whether done through corporate or noncorporate firms. The impact would be magnified because these households, despite their small numbers, account for a large portion of national saving. The resulting drag on capital accumulation would lower real wages for workers throughout the economy.

Third, the proposed surtax reflects an unsustainable approach to tax and fiscal policy. As commentators across the political spectrum have recognized, the existing fiscal imbalance cannot be addressed without imposing sacrifices on a broad segment of the population. Any new spending programs, such as those in H.R. 3962, will impose additional burdens. By linking these programs to a tax imposed on only 0.3 percent of the population, the bill obscures that fiscal reality. If the programs in H.R. 3962 are worthwhile, they are worth paying for in an open and broad-based manner.

An interview with Rep. Paul Ryan

Dec 15, 2009 18:51 UTC

I recently had the chance to sit down and chat with Rep. Paul Ryan, a Wisconsin Republican and the ranking GOPer on the House Budget Committee. Ryan’s a rising Republican star (he’ll be just 40 next month), a guy some folks were pushing to be John McCain’s running mate in 2008.  If there’s a young Jack Kemp in today’s Congress, he’s it. And if you’re wondering what the 21st century Republican Party will stand for, many of the ideas will probably come from Ryan. Here are some excerpts from our conversation:

Boosting the economy

I would do whatever I could to keep tax rates low and permanent. I subscribe to the [Milton] Friedman permanent income effect. And I believe in the Kennedy-Mundell-Reagan policy mix of low tax rates and sound money. And that also means getting our debt under control.

Economic outlook

Look what’s going to hit us in 2011. We are going to have a massive tax increase on labor and capital, and the Fed for sure is going to be tight by then. We are doing kind of a cash for clunkers on the whole economy. We are pulling growth from 2011 into 2010. Economic decision makers are looking at the policy climate, and it is horrendous. Then they read the newspapers and see payroll taxes, pay or play, cap-and-trade and this uncertain regulatory environment. It’s the uncertainty tax. There is this enormous uncertainty being injected into the economy, and everybody is sitting on their hands.


Our government is led by ideologues, and they are bound and determined to implement a social welfare state, a cradle-to-grave entitlement society, a high-tax, high-government-dependency society. And the countries that have gone down that path have higher unemployment, a lower standard of living and more economic stagnation.

If you listened to the healthcare debate [in the House], the leaders of the Democratic party, they all basically said the same thing: This is the third wave of progressivism, we are finally completing the progressive agenda with passage of this bill. They really believe they can finally transform America into something it’s not.

Value-added Tax

The VAT is coming. They just know they can’t do it before the election. My fear is that the credit markets blow up on us again, we’ll get some shot across the bow by the bond market one of these days. And if the Democrats are still in power, that will bring us the VAT. They will say they have no choice but to do it to save the creditworthiness of the government. It will kind of be like another TARP weekend where the Treasury Secretary and the Fed chairman come to Capitol Hill hyperventilating and out of that comes a VAT. Our government is premeditating a moment like that. But there is another way with real entitlement reform, real tax reform, fulfilling health and retirement security but also paying off our debts and making our economy really competitive.

A deficit commission

I think we should just do our jobs. The way this commission is going to be stacked, I fear, will be for a slow moderation in spending but a big increase in taxes. To really fix this problem, what you’ve got to do is have a defined benefits safety net with a defined contribution system on top. You could design this in different flavors, but that is the gist of what you have to do to wipe these unfunded liabilities off the books.

Financial reform

What I think we are doing here is enshrining “too big to fail” in our system and making a permanent crony capitalist system.


always touching to see an ideologue accuse everyone but himself of being an ideologue

that guy pontificates on fiscal responsibility at every turn without suggesting a single measure to reduce spending whilst advocating cutting taxes

does he have any actual proposals?

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Peter Orszag vs. the WSJ

Dec 14, 2009 20:29 UTC

OMB director Orszag didn’t much like a WSJ editorial about the lack of  fiscal prudence of ObamaCare. And he said so on his blog. I think Orszag makes a few reasonable points, like not counting on cost savings from the pilot programs.  But he side-stepped that fact that America will be spending more on healthcare, even if paid for. Then there is this:

For an economist, the irony is rich.  The editorial board that did more to bring supply-side economics – or in George H.W. Bush’s immortal words, “voodoo economics” – to Washington is raising the specter of a fiscally irresponsible health reform bill in which efforts to rein in health care cost growth are an “illusion.”  But the ironies run richer, since an editorial that hurls accusations of overselling cost containment itself displays more impressive rhetoric than substantive content. The Journal makes three fundamental claims. The first is that health reform represents a huge risk to the federal budget, and will end up exploding the deficit, because it relies on an array of speculative policies to control costs. What the Journal misses is the crucial difference between this health reform effort and the flawed supply-side economics that drove the country into the deep deficits of the 1980s.

Me:   1) The 1980s tax cuts saved the US from complete economic collapse, yet Orszag sees them only as an accounting issue. Also, the worst deficit-to-GDP year of the 1980s was like 6 percent. The US may well average that number over the next decade.


Umm Jimmy P, can you explain exactly how “the 1980s tax cuts saved the US from complete economic collapse.” Just askin’.

Also, even as a conservative I must acknowledge that U.S. economic growth has been rather lackluster since the Clinton presidency. So, what’s up with that, why didn’t supply side economics bring us robust growth and prosperity during the Bush years?

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VAT Attack! Will deficit commission lead to a VAT?

Dec 11, 2009 15:02 UTC

That is one theory offered up as the eventual outcome of the C0nrad-Gregg deficit commission. And today in the NYT, there is a story extolling the virtues of a VAT.  Indeed, it is a great revenue raiser, and liberals love it because they think Americans are undertaxed and don’t want to cut spending to reduce the long-term structural budget deficit.

Now given that it will take 60 votes by Congress to approve the commission’s reforms, I am not so worried about a huge tax increase passing with phony spending cuts.  A currency or bond market crisis, though, could lead to calls for a VAT to show markets the US is serious about the deficit. And the WH would love to slap one on the US economy,  A better solution is actual cuts in the rise in entitlement spending accompanies by a more growthy, efficient tax system. I like the Hall-Rabushka flat consumption tax, as long as it replaced the existing taxes on labor and capital and corporate income.  It has VAT-like features, but is not hidden the way a VAT is. Here is Greg Mankiw:

If you look at the economic effects, a VAT is similar to the Hall-Rabushka Flat Tax, which many economists love. Essentially, the main difference between a VAT and the flat tax as developed by Hall and Rabushka is that firms get to deduct wages as a cost under a flat tax, but then those wages are taxed at the household level. Other than this minor change of shifting the responsibility for the tax on wage income from the firm to the household, the Hall-Rabushka flat tax and VAT have identical economic effects. (There is also an exclusion for the first X thousands of dollars of wage income under Hall-Rabushka, making it progressive in average tax rates, but the same result can be accomplished with a VAT as well by rebating some of the revenue via a demogrant.)

My bottom line: If I could replace our current tax system (including the personal income tax, corporate income tax, payroll tax, and estate tax) with a VAT, I would gladly do it.


I do not believe that the Hall-Rabushka flat tax is border-adjustable, which is a prime competitive advantage to the VAT, which is accepted as border-adjustable by OECD under GATT rules.

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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.

10 ways to cut the U.S. budget deficit

Dec 3, 2009 19:49 UTC

How to put the budget on a “sustainable path” from Jeffrey Frankel of Harvard (some excerpts):

First, auction off most greenhouse gas emission permits, rather than giving them away to firms (which would confer windfall profits).

Second, raise the gas tax.

Third, cut agricultural subsidies to rich farmers and agribusiness, saving money and improving economic efficiency.

Fourth, continue to cut expensive weapons systems that the military doesn’t want, but have in the past been kept because the suppliers are in the districts of influential congressmen.

Fifth, end manned space exploration.

Sixth, let the George W. Bush tax cuts for the rich expire as under current law.

Seventh, encourage hospitals to standardize around national best-practice medicine – to avoid unnecessary tests and procedures – using levers such as making Medicare payments conditional on best practices.

Eighth, limit or eliminate the tax-exemption for employer-paid health insurance (proposed by Senator McCain), at least the cadillac plans which are very expensive but don’t even pay off in health results (proposed by Senator Kerry).

Ninth, ideally, eliminate the tax deductibility of mortgage interest too.

Tenth, to save Social Security, raise the retirement age (just a little), tax higher incomes (just a little), and progressively index benefits for future retirees to price inflation, rather than to wage inflation (just a little).

Me: As Ryan Ellis of ATR notes, “Jeff frankel has 5 tax hikes totaling $500 bil per year, and 5 spending cuts totaling $50 bil per year. How fair!” Toss in a VAT, which Dems would love to do, and you talking near a trillion dollar in tax increases. I cant see how that is good for growth. More cuts!


Well some of these suggestions are ok but most would hurt. Example: mortage interest would hurt the housing industry as well as the tax payer. If I could not write off my interest I am not sure that I would have a house.
I think I should be able to write off all interest myself. My house hold should be no different than a business in some ways. If you could write off interest on a car load car sales would go up hink about it. What goes around comes around.
We need to cut the size of this monsterous government. 10% to 15% National sales tax for ALL, with NO deductions for anyone. Those making under $25000 a year pay no taxes, get rid of the IRS, WHOA what a savings that would be, get small business and large business back in the positions where the can once again create JOBS! for Americans. Put a halt to out sourcing our work force. Fair trade needs to be demanded. We have helped the other guy out long enough.
I tell you also we need to get rid of those greedy dirt bags in congress and get someone in that listens to the people. Need to cut their wages and benifits to match ours. This would soon make a big change in these greedy people.

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