James Pethokoukis

Politics and policy from inside Washington

Tryanny of the status quo: homebuyer tax credit edition

Oct 21, 2009 16:22 UTC

A great point made by the Tax Foundation about the National Association of Realtors and its support of the homebuyer tax credit:

When the economy is recovered, is the NAR going to support its elimination? Not a chance. There’s a better chance of Glenn Beck being appointed to Obama’s cabinet than NAR ever advocating for eliminating a tax preference for housing.

Assuming the homebuyer credit is extended to June 30, 2010, come May next year the NAR and NAHB lobbyists will be on Capitol Hill again saying that the economy still hasn’t recovered. And then when it’s extended for another year and the economy is fully recovered, they’ll be saying things like “we can’t afford to go back to where we were 18 months ago with lower home prices.” By then, it will be permanent, and any time discussion of repealing it or scaling it down is brought to the forefront, NAR will cite how home prices are going to fall if it’s repealed. You get what Milton Friedman called a tyranny of the status quo, or an endowment effect of a tax provision.


Although I am one of the taxpayers who would benefit from the $8,000 first homebuyer credit, I also realize that waiting for the right home makes more sense than rushing to grab a house currently on the market to get a credit from the IRS.

Still, extending the date 6 months would be helpful to those of us who have been making offers on short sales or bidding on foreclosures. My real estate agent has been aggressively pushing me to purchase a home in Saint Lucie County where prices are falling every month. According to the latest articles I’ve read, economists are predicting regions like South Florida will continue to see foreclosures rise and home prices drop. So if I save another $10,000 by waiting 6 months, I can’t rationalize closing by Nov 30 to beat the current deadline. As the old expression goes, Six of one, Half Dozen of the other.

Posted by Nancy | Report as abusive

Follow the Japanese example on stimulus

Oct 16, 2009 13:21 UTC

The new Japanese government is redirecting the country’s stimulus plan (WSJ):

The Japanese government said Friday it will scrap part of the previous Cabinet’s stimulus package, freeing up 2.926 trillion yen ($32.38 billion) so that it can redirect the money toward more effective projects to stimulate growth.

Me:  For the cost of the remaining stimulus program in the US, you could cut the cap gains rate by 25 percent for a decade. (Plus it likely wouldn’t cost nearly that much.) Just an idea …


Typically, I’m a supply-sider as well, but there seems to be two problems with this line of thinking IMHO:

1. As far as I understand, much of the remaining stimulus is aimed at helping states through their budget crisis. While I don’t agree with this, it seems a bit late to go back now, given that states have already made their 2010 budgets.
2. What we need are jobs, not necessarily more consumer spending. A cut in the capital gains rate sort of encourages more investment, but it’s a long term process. A targeted jobs program (more than just a bunch of money thrown about) that accomplishes longer term objectives would be preferable. For instance, the US Government gives out zero interest loans and tax credits for all vehicle fleet operators to transition to natural gas. Investment, lower dependence on foreign oil, and environmental benefit. There’s a stimulus plan…

We’re gutting the middle class in this country. I’m not sure we need more tax cuts in the ‘trickle down’ theory. The Goldman bankers have enough money as it is…

Posted by John Thomson | Report as abusive

Kudlow: Enjoy the recovery while it lasts

Oct 15, 2009 17:41 UTC

The Great One opines thusly:

But storm clouds are gathering. And a big one is the sinking dollar. No one in the Obama administration or at the Fed seems to care about it. In fact, they are probably applauding the lower dollar as a sort of 1970s way of boosting exports and the manufacturing heartland in the Midwest. But the falling dollar is bad for consumers. And it ultimately will cause higher inflation, as signaled by the rising gold price. There also are future tax hikes and the explosion of spending and debt. All of this is why it’s hard for me to be a long-term bull.

The great market boom of 1982 to 2000 was basically characterized by low marginal tax rates and King Dollar. Unfortunately, the 21st century has seen a weak dollar and more recently rising tax rates that are coming due in 2011 (if not sooner). In other words, the prosperity-inducing Mundell-Laffer supply-side model is being reversed.

As Art Laffer put it to me, we are stealing demand and production from the future. So even as we get a V-shaped recovery now and into next year, 2011 may pay the piper for both low growth and higher inflation.

Me:  That is the whole plan here, steal growth from the future. It is the ultimate in wealth redistribution.


Jimmy keep harping on the fact that the govt and FED caused the crisis so how can they possibly be expected to solve anything…it all comes down to TOO BIG TO FAIL really, we need to break up the banks into smaller entities like the 1990s which both DEMs and REPUBs do not want because it it more work fundraising and less easy money for both party campaigns…K street and DC are sick and caused this together with the banks…

Posted by paul | Report as abusive

Would Obama’s new regulator ban ObamaCare?

Oct 15, 2009 16:57 UTC

Would the Baucus healthcare reform plan pass muster with the Consumer Financial Protection Agency? That’s the new regulator the Obama White House wants to create to protect Americans from deceptive or confusing mortgages, loans and credit card agreements that contain hidden fees, costs, rates or other time bombs potentially harmful to one’s financial health.

Good thing for Democrats that the proposed consumer agency — some incarnation of which will almost certainly make it into law — won’t have health insurance  as part of its regulatory portfolio. If it did, it might ban BaucusCare.

Its cost structure, for instance, is reminiscent of a teaser-rate mortgage. The whole deal seems affordable at first — but then costs skyrocket.

The Congressional Budget Office assigned a 10-year cost estimate  of $829 billion to the preliminary version of the Baucus bill. As such, it meets the president’s goal of a bill of $900 billion or less – and avoiding a $1 trillion price tag sure to cause sticker shock among voters.

It accomplishes this financial feat, however, through budgetary trickery. The plan includes a start year of 2010, even though no money is spent that year and just $14 billion through 2013. Cost the plan out from 2011 through 2020 and it suddenly morphs into a trillion-dollar plan. Indeed, the average annual cost from 2015 through 2019 is $150 billion a year

Democrats, to be sure, have powerful rejoinder: the bill may cost a lot, but it actually saves moneycompared with  doing nothing. The CBO projects $81 billion in savings over the first decade and then “the added revenues and cost savings are projected to grow more rapidly than the cost of the coverage expansion.”

Great news. But those savings will materialize only if Congress actually cuts a projected $400 billion in government healthcare spending — including Medicare reimbursements to hospitals, doctors and other providers –  over 10 years.

Skepticism here is warranted. Previous congressional promises to cut reimbursements haven’t panned out. And Senator Debbie Stabenow, a Michigan Democrat, has just introduced a bill that would actually increase Medicare fees to doctors by $247 billion over the next decade  That $247 billion should, by all rights, be added to the cost of the Baucus bill. (Interestingly, if Congress actually stuck to the cuts, the tax increases would not be necessary, according to the Tax Foundation.)

Then there are the hidden fees. The Baucus bill imposes a $200 billion excise tax on expensive insurance plans. That’s a cost insurers will certainly pass onto consumers, nearly 90 percent of whom would make under $200,000, according to the Joint Committee on Taxation.  That kind of sounds like a stealth middle-class tax increase.

And you can be sure few taxpayers understand that a catch accompanies new government subsidies to cover the cost of private insurance. Those subsidies phase out as incomes rise. The result is a huge effective tax increase. As the CBO puts it: “Marginal tax rates would go up by about 22 percentage points for all families whose income was between 100 percent and 400 percent of the poverty level.”

Understated costs, hidden fees, deceptive advertising – why, there ought to be a law!

Actually, the flawed Baucus bill just needs to be prevented from becoming law.

Good tax policy vs. bad policy

Oct 14, 2009 18:10 UTC

Don Marron explains thusly:

Taxes on income, for example, are usually worse for the economy than taxes on consumption. That’s why there’s a rising chorus of economists recommending the introduction of a value-added tax, rather than higher income taxes, if our nation decides it wants to support substantially higher government spending. High tax rates similarly tend to be worse for the economy than low rates. That’s why economists usually favor broad tax bases and low rates, rather than narrow tax bases and high rates. Finally, it’s preferable to levy taxes on bads rather than goods. Where appropriate, taxes on pollution (e.g., emissions of greenhouse gases) should thus be preferred over taxes on working, saving, or investing.

Venture capital firms are down. Hey, let’s raise their taxes

Oct 14, 2009 13:51 UTC

First this from Reuters:

In the first three quarters of this year, only 86 U.S. funds raised money, according to data compiled by the Venture Capital Journal and the National Venture Capital Association. It the trend is maintained, by year’s end there will be somewhere between 104 and 118 new funds. By comparison, even in the blackest days of the dot-com bust of 2001, investors averaged 234 funds a year.

And this from the NYTimes:

House Democrats are planning to renew their fight to raise interest on carried interest, the share of profits that buyout shops and venture capitalists receive after they successfully cash out of portfolio companies and return money to their investors.

Me: First, don’t expect the Senate to go along with this idea. Second, I don’t see how this helps America’s innovative capacity. Surely we don’t want Uncle Same to be the only source of venture capital. BTW, candidate Obama suggested creating something called a “Clean Technologies Venture Capital Fund” and investing $10 billion a year in emerging energy technologies.

Interestingly, a study by the University of British Columbia looked at the performance of the Canadian government’s venture capital efforts. It found that government venture capital isn’t nearly as successful as private venture capital.

VAT Attack! The perfect tax … or maybe perfectly awful

Oct 14, 2009 13:25 UTC

Greg Mankiw does a good explaining the value-added tax. But this is ominous:

From a strictly economic standpoint, a VAT is great. It is essentially a flat consumption tax, like the so-called FairTax, but implemented in a way to reduce compliance problems. Because it is collected in stages along the chain of production, rather than all at the retail level, tax evasion is more difficult. … 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.

Why do some conservatives hate the VAT? For political reasons. They fear it would be a new tax, hidden from many voters, used to expand government. They fear that rather than replacing our existing tax system, a VAT would add to it.  … Which brings us to Europe. Many European countries have both a VAT and a large government. But here is the hard question: which is cause and which is effect? Did the VAT cause government to become large, as VAT-opponents fear? Or did Europeans adopt large governments and then, needing to finance it, look for a relatively efficient way to raise a lot of revenue? I am inclined toward the latter hypothesis, but I will be the first to admit that it is entirely clear which way causation runs here.

Me: Want a VAT? First, put into place hard spending limits and spending reduction pathways, such a limiting spending growth to population growth + inflation or some such. And also get rid of the income tax.


I think the US should just get on with it. Who else is left without VAT/GST?? Prepare yourself for lots of hikes. If you look at this site http://www.tmf-vat.com is shows how Europe is increasing VAT by the month to cope with the spiralling deficits.

Posted by Richard | Report as abusive

Deferral Drama: Why Obama corporate tax reversal hints at a VAT

Oct 13, 2009 17:34 UTC

Many ideas that may have momentarily seemed like smart policy earlier this year — when rage at Wall Street and Corporate America hit a fevered pitch — didn’t survive a bit of calm reflection ((and intense business lobbying.). Like that 90 percent tax on executive bonuses. Or nationalizing the banks.

Both are certainly strong nominees for “worst idea of the year.” But they have a worthy challenger in the Obama administration’s previously announced intention to limit the ability of U.S. companies to defer the repatriation of overseas income. Probably seemed a terrific twofer at the time: a nice bit of populist political posturing (this is, after all, the “Benedict Arnold” tax break that Democrats love to harp on) that would also bring in some $200 billion over 10 ten years.

Total win-win, right?

So why then is the White House now apparently dumping the whole idea? Partly because of — you guessed it — intense business lobbying of both the administration and Congress. Technology CEOs who supported candidate Obama and congressional Democrats were, by all accounts, particularly persuasive.

They had an easy economic case to make, however. Not only would the tax plan hurt American corporate competitiveness (most other countries don’t tax their companies’ overseas profits), the changes would be a de facto $20 billion- a- year tax increase on business during a time of profound economic weakness. Bottom line: the tax changes were in no way incentives to add American jobs at a time when unemployment is climbing toward 10 percent. In this case, wealth and job creation trumped wealth redistribution and revenue raising.

Great decision by the Obama White House.

But while this was one instance where “more of the same” was better than the proposed change, the corporate tax status quo should not be preserved. For one thing, business income taxes are a lousy way to finance government. Studies show that somewhere between 45 percent and 75 percent of the corporate tax burden is shouldered by workers in the form of lower wages. And big taxes and tax subsidies encourage businesses to make decisions based on accounting benefits rather than for economic efficiency and productivity reasons.

Earlier this year, a group of centrist economists sponsored by the Tax Foundation put out a wish list of proposed corporate tax changes. Among them: lowering the corporate tax rate, broadening the tax base and permitting faster write-offs of business investment. Smart ideas all.

Or, they suggested, you could replace America’s sky-high 35 percent corporate income tax with a value-added tax of 5 to 6 percent. And that idea hints at the other reason why the White House may have scuttled their original tax plan. Obama supporters and fellow travelers have been launching trial balloons all over Washington promoting a VAT to deal with Uncle Sam’s huge budget deficits. And if that is the direction the White House wants to go, why spend the time and political capital on a corporate tax increase that may only be temporary?

So dumping the deferral limitation plan is both good economics and good politics, at least for now.

There’s your win win.


btw, TWH is denying that any of the CIT changes have been shelved.

http://www.nytimes.com/reuters/2009/10/1 3/us/politics/politics-us-obama-corporat e-taxation.html

Posted by PeteKL | Report as abusive

A $150 billion a year financial Tobin tax? Really?

Oct 12, 2009 14:15 UTC

The idea of a Tobin tax, a tax on financial transactions, is gaing some mo’ in Congress (via WSJ):

With federal budget deficits soaring, policy makers and other advocates are eyeing the huge sums that could be raised as a way to cover the costs of new initiatives.

Labor unions, in particular the AFL-CIO, have proposed a financial-transactions tax as a way to defray costs of a health-care overhaul. Lawmakers have discussed a similar fee as a way to cover the cost of future financial oversight. Liberal advocates are pushing the tax to pay for new stimulus spending.

Taxing Wall Street’s financial transactions is back on the table. … The left-leaning Economic Policy Institute floated the idea of a national transaction tax that would raise $100 billion to $150 billion a year. The tax, at a rate of 0.1% to 0.25% of the value of the trade, would be levied on all financial transactions such as stock trades, but not on consumer transactions such as with credit cards.

As I wrote last month:

1)  Even a 0.10 percent tax would double the cost of US stock trading where the average commission cost is just under a dime. Welcome back to the pre-Internet early 1990s.

2) It would reduce market volumes and make the equity market less attractive. Kind of dumb thing to do in a time of constrained credit markets where it is tough to raise money.

3) That supposed $100 billion-$150 billion in revenue wouldn’t appear out of thin air. It would come from investment firms who would pass along costs to customers.

4) It would drive trading activity to less costly trading centers, such as the Toronto Stock Exchange (at least if we are talking about the US). Goodbye US jobs.


Some proponents say the purpose of the tax is to shrink the financial sector back to the size of the 1980′s. They admit it will cost investors a “bit” more just like in the 80′s. A researcher found that the average spread in 1986 was $0.53, so that alone will cost the average investor around 2% up front. I would hate to see 90% of financial activity leave the US as it did when Sweden had a transaction tax for only 6 years.

Posted by TripleTaxThePoor | Report as abusive

Should America be more like Denmark?

Oct 8, 2009 16:37 UTC

Blogger Matthew Yglesias talks up Denmark and high taxes over at ThinkProgress:

The overwhelming fact about Danish public policy is that taxes in Denmark are really high. There’s a substantial VAT and also a substantial income tax. You pay taxes to buy a car, and you pay higher taxes for heavy cars. Gasoline taxes are high (gas costs almost $7.50 a gallon) as are taxes on electricity, which account for more than half the cost of electricity to consumers. In exchange for all this, the Danes have basically achieved all the stuff progressives say they want. The country is rich, clean, and highly egalitarian. The high taxes finance generous public services, and the high levels of expenditure allow the country to do without a lot of extraneous business regulation which helps keep the place economically dynamic. According to surveys, the people are all very happy, which is exactly what you would expect from a very rich, very egalitarian society. And as this trip has emphasized, they do it all while doing much less polluting than Americans do, despite a higher average material standard of living.

There’s more to that than taxes, of course, but the high taxes really are integral to the whole thing. And that includes the environmental piece. In part because there are directly pro-environment taxes. But also, I would say, in large part because it’s the egalitarian income distribution and robust redistributive state that makes the environmental policies tolerable. Cheap gas and electricity are, in part, what we do in the United States instead of real social policy.

All of which is just to emphasize a point I’ve been making a lot over the past few months: there’s no way to have a progressive renaissance in the United States unless progressives find some politically feasible way of directly making the case that higher taxes for better services can be a good trade. And it’s worth trying to be honest about this.

Me: Yes, that last point is a problem.  A recent poll shows Americans think half of all government spending is wasted, while data from Gallup shows Americans fear Big Government more than Big Business by 55-32. That is narrower than the late 1990s, but higher than the early 1980s when Reagan successfully campaigned against Big Government. (The Cold War was probably also a factor.)