Stimulus: Treat the Disease, Not the Symptoms
When it comes to stimulus, President Bush and congressional Democrats may not quite be on the same page, but at least they are reading from the same book. I just wonder whether it is the right one.
Bush said today he supports a quick, temporary fiscal boost of about 1 percent of Gross Domestic Product, or roughly $140 billion. He said it should include broad-based individual tax relief along with investment incentives for business. While he put in a plug for making his 2001 tax cuts permanent, Bush did not insist that such an extension be included in a fiscal relief plan—a major concession to political reality.
While Bush did not lay out specifics, the White House is hinting that his plan would be built around the temporary suspension of the 10% tax bracket and a proposal to allow business to immediately write-off half the cost of new equipment purchases.
Democrats won't buy Bush's plan for individual tax cuts, which would provide no benefits to one-third of filers who pay no income tax. They are more likely to back rebates for all, or at least for those who pay payroll taxes. Similarly, the Democrats will insist on less generous investment tax breaks and demand some new spending, including an expansion of food stamps and unemployment benefits, as well as aid to the states—all items the White House is likely to oppose.
These are relative quibbles that could be worked out fairly quickly, if the politicians are in the mood. But whatever they do, it isn't likely to help fix the underlying causes of the current slump.
Today's slow-down seems to be driven by three factors: high energy prices, high defaults in the subprime mortgage market, and the related credit crunch, the magnitude of which we don't yet understand.
It is easy to see how $100 billion in tax rebates would help soften the blow of high energy prices. However, I thought we wanted to reduce energy consumption, and high prices are a pretty good way to do that.
It is harder to see what this stimulus will do for the subprime mess. A thousand extra dollars in the hands of a family on the brink of default may buy them a reprieve of a couple of months, but it won't save their house.
The credit crunch seems to be driven by a number of large financial institutions that made some truly stupid investments. This problem will resolve itself only once these firms write-down their losses and again begin lending to credit-worthy borrowers. I am not sure how tax rebates will speed up the process.
Until banks start lending again, many companies won't have money to invest, tax breaks or not. Of course, some businesses are rolling in cash and can easily buy new equipment. But why do we need to help them?
A consumption-based stimulus may cushion the blow for some, but it won't fix the structural problems that got us here.
Confessions of a Job Exporter
I am one of the people who decides to locate jobs outside of the U.S.
Specifically, I am the head of tax for a U.S. multinational. It is my job
to advise that high value manufacturing and research should, from a tax
point of view, be located outside of this country. I advise that it is
better to invest cash in foreign operations than in American ones. If the
recent tax proposal of House Ways and Means Committee Chairman Rangel
becomes law, I will advise that good administrative jobs should be moved
out of the U.S. I don't like giving that advice, but under current law
that's what the numbers dictate. I want to change that.
Of course tax isn't the only thing that governs the decision on where to
put operations. My company has a set of activities that we can afford to
keep in the U.S. out of loyalty, but if we did too much of that we'd be
acquired by another (probably foreign) company. For the rest of the
operations, it's just math – add up relative labor and transportation costs
and the cost of materials, figure in tax, and that tells you where to
locate, excluding places with homicidal or corrupt governments. For the
highest tech, highest profit operations, though – the ones that involve the
best jobs – tax becomes dominant.
U.S. law currently provides that most income earned abroad is only taxed by
the U.S. when you bring the cash home. So, if you make $100 in America you
only keep $65 after the U.S. 35% corporate tax, but you keep the full $100
if you earn it in the Dominican Republic. When you reinvest that $100 of
D.R. cash you can use the full $100 if you invest abroad, but only $65 if
you invest in America, due to the U.S. tax bite. So you invest in new
foreign operations, not American ones.
Changing the law to tax the D.R. operations currently would not work.
America is not the only economy that counts any more, and most countries do
not tax foreign earnings at all. If the U.S. immediately taxed foreign
earnings, our companies would get acquired or crushed by competitors, and
we'd just lose our headquarters jobs. Like it or not, it is a global
economy now, and this country does not control it.
But there is a simple solution that works. Give corporations a deduction
for dividends they pay, and make up the tax revenue by getting rid of
special rates for capital gains and by imposing a 7½% tax on individual
income over $500,000 a year, which is all it takes to be revenue neutral.
That would make the U.S. the best location in the world for high value
operations. It would restore our economy and give middle class workers
market power.
There are plenty of proposals circulating for ways to stimulate our weak
economy. The American people need to demand a real, long term solution.
Change the rules so that I can tell my employer to put all the best jobs
here.
Matt Lykken is a tax attorney and is Director of SharedEconomicGrowth.org.
Details of the proposal can be found at http://www.sharedeconomicgrowth.org
Today we have a broad consensus between the Chairman of the Federal Reserve, the President of the United States, the many candidates for the presidency, and the bipartisan leaders of the Congress that we must act swiftly on an temporary stimulus package to get the economy back on its feet. But that is not all we must do. There is, as we await the President’s budget, a responsibility to right the ship of state. Congress needs to adopt and implement a budget that restores fiscal balance and guarantees an end to our burgeoning debt—one that imposes upon us the obligation to pay for each and every commitment we make, whether it be a war, a new entitlement benefit, or a tax cut. The current path is simply and utterly unsustainable.
Here, after all, is what’s changed since the last recession:
In 2001, we had a surplus going forward from the Clinton administration as far as the eye could see;
In 2001, we had sufficient funds in the Medicare trust fund to last for years and years;
In 2001, we had nearly a decade before the first wave of baby boomers retired and began to draw down from the Social Security and Medicare trust funds, rather than contribute to them.
So we had a federal budget surplus with which to help finance an economic stimulus to get the economy back on its feet.
This time, we need a stimulus, but think about what’s changed:
· Now we have deficits as far as the eye can see;
· Interest on our national debt is the fastest growing part of our federal budget;
· Most of those interest payments are made overseas—not back into our own economy;
· The President narrowly secured passage of changes to Medicare without offsetting the enormous costs, rapidly accelerating the expiration of the trust fund;
· The President commenced not one, but two wars—the first wars in our nation’s history in which not all Americans were asked to sacrifice to help shoulder those burdens and costs. Instead we borrowed from China, Japan, India, and other countries’ central banks, burdening ourselves with unprecedented debt to nations with vastly different interests than ours;
· Despite the rapid decline in our federal budget surplus, the President and Congress enacted repeated, deep federal tax cuts—just at the same time the President commenced these two wars and massive new Medicare costs.
So today, we are deeply in debt—far more than at any time in our history. The first wave of baby boomers this year will begin to leave the work force. Instead of contributing to Social Security and Medicare through payroll taxes; they will be drawing down from those inadequate trust funds. We are more indebted to China—a single nation with radically different strategic interests than we—than to any nation; so that we must divert ever increasing taxes we pay to the federal government to send to China, instead of to finance education and health care for our own citizens.
Our piggy bank is empty just as we are facing a tidal wave of retirements and some who are proposing expensive commitments to remain in occupation of Iraq for at least another decade.
These policies cannot be sustained. So we need not just to get our economy back on its feet, but also to gird ourselves for the sacrifices essential to getting our country back on its feet, to being able to look our children in the eyes and restore our commitment to making their future as good or better than ours.
Why aren't the Democrats talking about a Social Security tax rebate, instead of an income tax rebate? Shouldn't we be reducing the regressive tax, rather than the progressive tax?
This approach would answer the President's argument that only those who pay the tax should get the rebate – it would highlight the fact that millions of working people pay Social Security taxes who never pay income tax because they earn too little.
There may be some optics issues “invading the Social Security Trust Fund crisis,” but maybe it's time we educated the public that's it's really all one pie, and that the total tax system needs to be examined, not just the pieces the President wants to talk about.
If there are good economic or political reasons not to do this, I'm eager to hear them.