James Pethokoukis

Politics and policy from inside Washington

Obama’s reverse stimulus on its way

Nov 27, 2009 20:42 UTC

Jed Graham of IBD highlights the coming fiscal drag in a pretty picture:

0112509ibd

Me: What would that mean for GDP growth? A pre-financial crisis analysis by Goldman Sachs predicts, for instance, found that getting rid of all the Bush tax cuts at the end of 2010 would cause a 3 percentage point drop in the economy in 1Q 2011.  In any event, anti-growth fiscal policy is one more reason to believe in the dreary New Normal

COMMENT

Rick,Which is presumably why the chart cuts off at 2013 instead of showing the out years when the net impact of the reform will be neutral.

Posted by Chi Democrat | Report as abusive

The Afghanistan war surtax gambit

Nov 24, 2009 19:32 UTC

Why is passing healthcare reform so difficult? One big reason is that Democrats are trying to pay for a broad-based new entitlement without enacting a broad-based new tax.

As the joke goes, the only real difference between Republicans and Democrats is that the Rs don’t want to raise taxes on anybody and the Ds want to clip only the top 2 percent.

But some Democrats have finally found a cause worth taxing the middle class for: the war in Afghanistan. A group of powerful House committee chairmen are pushing a graduated income surtax. (A Senate effort would tax only the wealthy.)

The twin goals, backers say, are fiscal probity and transparency, especially now that it looks like President Barack Obama will be sending up to $34 billion worth of new troops to Afghanistan.

As Barney Frank, House Financial Services chairman, puts it: ‘It’s important for people to understand how these wars are adding to our deficits.’

Nonsense. The same lawmakers supporting the war surtax also support a healthcare reform plan that is structured to hide long-term costs. No accounting trick is spared. Taxes are front loaded. Some spending is back loaded, while other spending is shunted to a separate bill.

No, the goal of the surtax is to drain public support for a war many Democrats think should be downgraded. And no doubt if this legislative effort proves successful, it would be tempting to eventually make the temporary surtax permanent.

Indeed, the whole effort could be laying the groundwork for a broad value-added tax that many centrist and liberal economists think necessary to shrink America’s long-term budget gap.

But why not take this opportunity to help pay for the war through spending cuts?

It’s inside-the-Beltway wisdom that Congress won’t cut spending. But eventually spending will need trimming to deal with the long-term budget deficit without resorting to currency devaluation or inflation or huge tax increases.

So let’s start now. The war in Afghanistan currently costs some $43 billion a year. As the Heritage Foundation rightly notes, “that sum is dwarfed by the $72 billion in improper payments (i.e. over-payments, payments made for services and goods never received, benefits and tax credits paid to people who didn’t qualify) that the Government Accounting Office said the federal government made last year.” Then there’s $92 billion in corporate welfare and $123 billion in programs that simply aren’t really showing any positive impact, according to government auditors.

Time for Congress to prove the common wisdom wrong and do the unexpected: Cut spending.

COMMENT

Maybe they’ll suggest a modest, temporary VAT to pay for the war. Also, let’s not forget about the billions of waste and fraud that Obama found in Medicare which he could cut painlessly.

Might the Bush tax cuts be repealed before 2011?

Nov 23, 2009 20:02 UTC

I have to admit, this scenario does make a lot of sense:

In a word, yes. Back in August 1993, President Clinton passed the largest tax increase in history – the Omnibus Budget Reconciliation Act of 1993 (OBRA) – and made it retroactive to January of that year.

It was challenged in court, and the court held that retroactive tax increases were legal. This was not the first time this sort of chicanery had been pulled. (You can read more on the topic of retroactive taxes by clicking here.)

Why am I so confident this trap is being set? Nancy Pelosi herself tipped her hand on the retroactive tax plan when she said last January she wanted Congress to repeal Bush’s tax cuts well before their scheduled expiration date. An early repeal of the Bush tax cuts was also one of President Obama’s campaign promises.

The administration and its allies have since gone quiet on its intentions. But that’s only because they want to avoid triggering a stock selloff before the end of 2009. That all changes once the ball drops in Times Square this coming New Year’s Eve. At that point, it will be too late to escape.

Me: Perhaps this is how Team Obama means to help pay for the second stimulus, assuming they don’t intend just to borrow it all.

6 healthcare taxes that violate Obama’s tax pledge

Nov 20, 2009 18:23 UTC

These seem pretty indisputable. From Keith Hennessey:

1. The clearest violation is the 5% excise tax on cosmetic surgery and similar procedures (including teeth whitening). I assume that cosmetic surgery and similar procedures are skewed toward the high end of the income distribution, but there certainly are many people getting these treatments with annual family income less than $250,000.

2. The bill would allow State insurance exchanges “to charge assessments or user fees to participating health insurers, or to otherwise generate funding, to support its operations.” [ §1311(d)(5)(A) ] Health insurers would pass these “assessments or user fees” through to consumers as higher premiums. This would affect anyone who buys health insurance, including those with family income less than $250,000.

3. The bill would impose a 40% excise tax on health coverage in excess of $8,500 (individuals) / $23,000 (families). While policies this generous are almost certainly skewed higher on the income distribution, there are definitely families with income less than $250,000 receiving these plans. Again, health insurers would pass these tax increases through to those families.

4. The bill would increase taxes on all health insurance plans, as well as on brand-name drugs and biologics, and on medical devices. These tax increases would affect anyone who buys these goods, even if their family income is less than $250,000.

5. According to CBO, “By 2019, … the number of nonelderly people who are uninsured would be reduced by about 31 million, leaving about 24 million nonelderly residents uninsured (about one-third of whom would be unauthorized immigrants.)” (p 8 ) These roughly 16 million people would pay “penalties” of $95 per adult in 2014, $350 per adult in 2015, and $750 per adult in 2016 and later. You’re charged half as much for each kid. Most of these 16 million people paying higher taxes will have family income less than $250,000 and will pay higher “penalties,” although not all will pay these full amounts.

6. The bill would create a new 0.5 percentage point increase in payroll taxes on individuals with incomes greater than $200,000 in 2013 and families with incomes greater than $250,000 in 2013. Since these amounts are for 2013 and not indexed, someone making $233K in 2009 would be affected by this in 2013, assuming 1% annual real wage growth and CBO’s assumptions about inflation. If you’re making $220K this year, you’ll probably be hit by the new tax in 2016. $210K this year, you first get bit in 2017, and so on.

COMMENT

In all honesty, until the politicians can put a dollar amount on a life (much less a dollar amount on quality of life), nothing but failure can come out of legislating budgets for life or quality of life.

Posted by RH | Report as abusive

Is Obama planning a $3 trillion income tax increase?

Nov 17, 2009 19:51 UTC

Did I just see a trial balloon launched? Over at a Wall Street Journal conference, Christina Romer, chairman of President Obama’s Council of Economic Advisers had this to say about deficit reduction:

But the chairman of the president’s Council of Economic Advisers admitted that health reform and a growing economy isn’t enough to bring down the deficit. She did mention one other place that revenue could come from: letting the Bush tax cuts expire.

Me: Since Obama already wants to get rid of the income and capital gains tax cuts for wealthier Americans that expire at the end of 2010, clearly what Romer is referring to is the rest of the 2001 and 2003 Bush tax cuts. Letting all the 2001 cuts — rate reductions, child tax credit marriage penalty relief — expire would raise tax revenues by $2.5 trillion through 2019. (These CBO numbers assume no negative economic feedback impact from higher taxes.) And letting the 2003 tax cuts on capital gains and dividends expire would be tantamount to a $350 billion tax increase through 2019. And none of this includes possible plans for a VAT that could raise $400 billion a year more to close the huge projected gap — maybe 7 percentage points — between spending as a percentage of GDP and revenues as a percentage of GDP.

COMMENT

[]Income Tax Return Rebate Tips for your accounts and return filling help.For more information visit http://www.incometaxreturnrebatetips.com

An economic counter-factual

Nov 4, 2009 21:39 UTC

Scott Grannis, the Calafia Beach Pundit, outlines a different “stimulus path”:

Meanwhile, though, the unemployment rate is going to remain uncomfortably high, especially for all those politicians who argued so fervently early this year that dumping a trillion dollars of tax rebates, transfer payments, make-work projects and general government largess into the economy over a period of years would guarantee a quick economic turnaround. As the evidence accumulates, we see instead that it would have been far better to just let the economy follow its own course. Better still, we could have used the money in a much more intelligent fashion by making permanent cuts in marginal tax rates that would have quickly resulted in more work and more investment.

COMMENT

But the banks needed the money.They NEEDED it! You know: to get money flowing again.or throw down with more Monster Bonuses.6 of 1… It all trickles down, right?

Posted by bryan | Report as abusive

Larry Summers: Tax increases won’t hurt economy

Nov 2, 2009 14:51 UTC

Here is Obama economic guru Larry Summers at the Economic Club of New York: “I don’t find there to be much evidence that suggests that raising top marginal tax rates from 35 to 39 percent that will be implicit in the repeal of the Bush tax rates will do substantial damage to incentives in the economy.”

1) Remember that the 1993 Clinton tax increases — the Bush tax cut  expiration would restore some of those rates – -happened when the economy had been growing briskly since the 2Q 1991. A very different situation today.

2)  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.”

3) This tax increase would be in addition to possible healthcare and energy taxes.

COMMENT

Consider the source, period! Why should We be required to pay higher taxes to make up for the incompetence, greed and arrogance of both sides of the political aisle?

Posted by RMM | Report as abusive

Harvard study: Obama stimulus should have focused more on tax cuts

Oct 28, 2009 18:48 UTC

Now they tell us. A new NBER paper from Harvard’s Alberto F. Alesina and Silvia Ardagna (“Large Changes in Fiscal Policy: Taxes Versus Spending”) makes the case for tax cuts over spending as stimulus:

As we well know a very large portion of the current astronomical 12 percent of GDP deficit is the result of bailout of various types of the financial sector.  … But part of the deficit is the result of the stimulus package that was passed to lift the economy out of the recession. About two third of this fiscal package is constituted by increases in spending, including public investment, transfers and government consumption. According to our results fiscal stimuli based upon tax cut are much more likely to be growth enhancing than those on the spending side. In this respect the US stimulus plan seems too much based upon spending.

Needless to say when considering a single episode many other factors jump to mind, factors which are difficult to capture in a multi country regressions. For instance, American families were saving too little before the crisis. An income tax cut might have just simply been saved and might have had not a big impact on aggregate consumption. However, more saving might have reinforced the financial sector, think of the credit card crisis for instance. In addition, one could have though of tax cuts that stimulate investment. Also, given the gravity of the crisis an increase in the generosity of unemployed benefits seems quite warranted both in terms of social justice and in terms of sustaining aggregate demand, since the unemployed probably save very little anyway. The benefit of infrastructure projects which have “long and variable lags” is much more questionable.

COMMENT

Drewbie,I have to admit that I’m by no means an economic expert. I do however see the flow of money from citizens that actually make up the economic engine, to merchants who’s sole purpose is profit extraction.If there were real value in what is being “produced” today then there would be no need to drive debt the way we have. We were encouraged by corporate america and also by government (because of business sector lobbying), to spend money we didn’t have, to buy things we didn’t need. We were given the blessing by the powers that be to support our country’s economic growth by way of consumption.But when this experiment failed, as it was bound to, those who are supposed to represent OUR (the citizen’s) interests, instead jumped to the aid of the business/banking sector (remember the too big to fail bs?), by giving them money to stay in business.It was money that should have gone to help citizens stay afloat while the business sector was shaped by the “survival of the fittest” philosophy they touted so loudly in the 80′s and 90′s.Instead they magically convinced our elected representatives that making sure THEY stayed in business was the only way for us poor folks to be properly served. As soon as they realized that we were focusing on paying down our own debts, we stopped getting any more “stimulus” checks.By the logic displayed in the actions of our country over the past few years, it’s easy to see that our system REQUIRES that a percentage of the population go homeless, hungry,uneducated, and sick. Otherwise there is no opportunity for profit.Even though the citizenry is too IMPORTANT to fail, our “representatives” did not serve our interests. They served their own interests and the interests of those who bring money their way.Only one president ago we spent money hand over fist to kill people in other countries because we SUSPECTED they intended to do us harm. We fought so hard for this that even when we realized the truth we still went ahead and spent that money up, and spilled the blood of our children, at the expense of our own people here at home.But now we have issues of health care and education and all of a sudden cost is a factor. How absurd is this? If we were willing to spend money we didn’t have in order to kill, then surely we can make some economic adjustments in order to ensure access to health care and quality of life.This is not a technical issue (who’s going to pay, how are we going to do it etc..).It’s simply an ethical one. We’ve already made the choice to spend money we didn’t have in order to kill.Now we have a new question before us. Should we make the effort to ensure a better quality of life for our people here at home, or not?

VAT Attack! Another reason it is a bad idea

Oct 28, 2009 18:36 UTC

One reason many free-marketeers want to take a pass on a value-added tax is that it would only fuel bigger government via higher tax revenues. Indeed, the good folks at TaxVox find new research that helps make that case (bold is mine)”

In the most recent edition of the American Economic Review, Raj Chetty, Adam Looney, and Kory Kroft, examine the effect of tax transparency – what economists call salience – on economic efficiency.

Traditionally, economists view the structure and application of a tax as unimportant. All that matters is the change in relative prices. But Chetty, Looney, and Kroft find that structure and application do matter. For example, they find that consumers are less likely to buy an item if a sales tax is explicitly listed on the product than if the same tax is instead added at check-out.

Chetty, Looney, and Kroft’s theoretical model indeed shows that efficiency increases as a tax becomes less salient. However, their model also shows that reducing the salience of a tax will necessarily harm consumers (albeit not by as much as it helps the government). In other words, tricking consumers into thinking a tax does not exist has two effects: 1) it leads them to poor consumption choices; and 2) it increases tax revenue because more transactions are taxed. In dollar terms, the harm to consumers is less than the increase in revenues. But whether or not you view an opaque tax as a useful policy instrument depends on whether you think the gains to government coffers are worth the reductions in consumer welfare.

As Milton Friedman feared, government can go a step further. If complicated and opaque taxes can dull consumer response, they can also dull the political penalty associated with higher tax rates. An optimizing government could then increase tax rates by more than fully-informed voters would like.  Amy Finkelstein, in the most recent edition of the Quarterly Journal of Economics, finds that drivers are less aware of tolls paid electronically and that switching from toll booths to electronic tolls led to a 20 to 40 percent rate increase. In other words, as salience goes down, tax rates go up.

Me: But for Team Obama, the hidden nature of a VAT would be a feature not a bug. The same approach is being tried with a) healthcare taxes via an excise tax on health insurance companies that will be passed onto consumers, and b) cap-and-trade which is a hidden energy tax that will also be passed along. There is nothing wrong with the idea of a consumption tax as long as it a) replaces other taxes and b) is transparent, such as would be the case with the Hall-Rabusha flat consumption tax.

COMMENT

Not hard to understand, but not obvious, either.

Very enlightening.

VAT Attack! The mysterious Christina Romer and higher taxes

Oct 28, 2009 18:21 UTC

Christina Romer’s speech on Monday had this overlooked bit, which I put into bold:

Our calculations showed that slowing the growth rate of health care costs by one and a half percentage points starting in 2014 would result in a budget deficit in 2020 that was 1 percent of GDP smaller than it otherwise would have been. By 2030, the impact is a reduction in the budget deficit of 3 percent of GDP; by 2040, it is a reduction of 6 percent of GDP.23 These estimates make vivid the notion that the number-one thing we can do to help get the long-run budget deficit under control is to slow the growth rate of health care costs.

Now, slowing the growth rate of costs will not solve all of our long-run budget problems. Our population is aging and even lowering the growth rate of health care costs quite substantially leaves them growing faster than GDP. As a result, other actions will also need to be taken. While health care reform may not be the “silver bullet,” it clearly must be a significant part of the solution to our deficit woes. It is the key step that we can take right now to bring the long-run budget problem down to manageable proportions.

Me:  What “other actions” might she be referring to? Obviously higher taxes. Indeed, earlier in the speech she references the work of economists William Gale and Alan Auberach in this Brookings report:

Even if rising health care costs are an important component of the long-term problem, they are not necessarily “the” cause of the fiscal gap. The estimated gap is increased by more than 5 percentage points of GDP just by continuation of the policies that were enacted during the Bush Administration. … It will prove difficult to close the gap entirely via modifications to existing taxes and spending programs. A new revenue source, such as a value added tax (VAT), may be needed. A VAT imposed at a rate between 15 and 20 percent would essentially close the fiscal gap under the Administration’s budget.

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