Obama's $300 Billion Tax Cut: Lots of Buck, Not Much Bang
The soon-to-be Obama Administration floated quite a trial balloon over the weekend: $300 billion in tax cuts for workers and business over the next couple of years. When you get past the eye-popping number, perhaps the most striking element is how conventional most of the ideas are.
For individuals, they’d include some version of Obama’s Making Work Pay Credit, a refundable tax credit (aka cash payment) for everyone making roughly $200,000 or less. Obama aides did not say how this money would be distributed, although they hinted they’d try something other than the rebates that the Bush White House turned to three times over the past eight years. One idea: reduced withholding, which would release the funds more slowly than a lump-sum payment would.
The research on the last three rebates suggests that people spent between one-third and one-half of the money within nine months of the time it got into their pockets. If Obama pumped $150 billion into these tax cuts and 40 percent, or $60 billion, got spent, the impact on the U.S.’s $14 trillion economy would be real, though modest.
On the business side, Obama aides leaked three ideas. The first: extending bonus depreciation, another Bush measure that would allow companies to write-off the cost of equipment faster. The second: giving companies immediate refunds by letting them use using last year’s losses to reduce prior year tax liabilities. Idea #3: giving businesses a refundable tax credit for each new worker they hire or even each employee they don’t lay off.
The net operating loss idea makes some sense. But other than trying to buy votes from pro-business Capitol Hill Republicans, it is hard to see what the other two schemes would accomplish. Bonus depreciation in its many incarnations has been tried a half-dozen times over the past four decades and its benefits are, shall we say, hard to find. It won't help companies with losses (most of them, these days), or non-profits. A year ago, while both were at The Brookings Institution and TPC, Obama advisor Jason Furman and CBO director-designate Doug Elmendorf wrote of the 2001-2003 versions, “bonus depreciation for business investment did not seem to be very effective in spurring economic activity.”
Refundable tax credits for hiring new workers promise to be an administrative nightmare and won't create many new jobs. It is tough to see how a company that is seeing its sales slaughtered in today’s recession is going to hire just because it gets a few thousand dollars per new worker from the government. Profitable firms would merely take the credit for bringing on workers they were already planning on hiring.
I can’t begin to imagine how the variation on this idea–credits for not laying someone off–would work. My head throbs at the concept of the IRS trying to administer a rebate based on intentions. Worse, these breaks would never work unless they are refundable and, to be honest, giving such credits to failing business makes my skin crawl. In reality, it would become yet one more bailout—only this time taxpayers wouldn't even get stock for their trouble.
Let’s hope that many of these trial balloons crash to earth long before they have a chance to become law, though I fear they won’t.
thats a good post !!!
Websites worth visiting……
[...]here are some links to sites that we link to because we think they are worth visiting[...]…
Gems form the internet……
[...]very few websites that happen to be detailed below, from our point of view are undoubtedly well worth checking out[...]…
Online Article…
[...]The information mentioned in the article are some of the best available [...]…
I think the tax cut's is not sufficient. The benefit enjoyed by the employees and the businessmen doesn't reflect any growth in the economy. Rather its just a life saver. The unemployment rate is going high.So instead just sticking to tax cuts the US government should create employment opportunities by imposing ban on outsourcing to other countries.
Thanks
Collin paul
Learn Forex
The US unemployment rate is currently at a 9.8% and I think it will go over 10% very soon and stay there for quite some time. Even though some experts point fingers to positive economic data, there are still many factors of concern that are pushing against a quick recovery. Eventually it will get back to reasonable levels, but we won’t see the economy getting back to shape until 2012 or maybe even 2014 (complete recovery). I think at the moment spend less and be very conservative with your spending should be the new motto of every US household, you have to hang in there and take in consideration that nobody knows exactly when things will return back to normal. What experts say it is as good as their imagination allows them to be and the assumption theories they base their forecasts on. I don’t think those experts have a clear vision of future or where is the economy heading…
Why doesn't the tax-based stimulus tackle the problem head-on by restoring the sales tax deduction for big ticket items? The collapse of the investment markets has set the paradox of thrift in motion. Everyone wants to rebuild their savings; they don't need a tax incentive to do that. What they need is a tax incentive to spend. The sales tax deduction would help.
And raising the $1,000,000 limit on mortgages interest deductions would take some pressure off the top of the real estate pyramid, allowing for some upward drift to create some equity.
How to spend 1 trillion dollars.
Since corp tax cuts essentially have a small multiplier, and there's only so many roads to build, I have a proposal:
more energy efficient retrofits.
Both for large buildings and for residential. Essentially expand current programs for subsidizing home retrofits for the elderly, poor.
I see this plan having many positives:
1) Since most of these projects are labor intensive, I can see this having an immediate impact on unemployment (especially soaking up skilled construction labor which is otherwise laying idle right now).
2) B/c this program is feeding money to working-class folks (who tend to spend a greater % of income) this money will have a higher multiplier and greater effect on economy.
3) It will also have a multiplier of sorts for the resident/owner. Money saved on energy bills will be available to spend in the economy at large. — Let's take fairly conservative numbers. 10% energy savings as percent of initial cost of retrofit. Let's say half of that savings goes back into increased utility consumption (there is a demand curve after all). So, for every dollar spent, you're getting an extra 5%. And that's a conservative estimate.
4) The efficiency savings in 3) will exist year after year, providing future stimulus of sorts–important in the face of a multi-year recession. In addition, strategically, the US will be more broadly prepared for whenever the next energy price spike happens.
I see this plan broadly applicable to both home owners and businesses/industry. In addition, if the US might dress this as an incentive plan, with dollar-for-dollar matching with private companies, e.g., to help ensure that only needed retrofits/upgrades are pursued.
The most cost effective way to increase output is to temporarily lower the variable (labor) cost of output. That's what Obama's New Jobs Tax Credit does. It is similar to the 1977-78 NJTC that was quite successful at speeding the economy's recovery from the 1974/5 recession. Despite poor implementation it generated at least a million extra jobs. The 11.1% increase in private employment during the NJTC was larger than for any other 24 month period in the last 50 years.
When the economy is going into a recession a marginal employment subsidy stimulates new firm formation. A NJTC will encourage entrepreneurs to try a risky aggressive expansion at a time when skilled workers are available and some of their established competitors are weakened by commitments to flawed business models.
• If the credit is 12 % of the 2009 wage bill above a threshold of 95% of the firm’s 2008 social security wages, the first round stimulus to GDP is about $78 billion and the revenue cost of only $45 billion (using Hammermesh's (1976) estimates of output constant SR wage elasticity of labor demand of -.15). • The research on the NJTC was published in the May 1979 AER and in Studies in Labor Economics, Sherwin Rosen ed 1981. For more detail see: • http://digitalcommons.ilr.cornell.edu/articles/184/
The criticism by Dr. Gleckman of a revived New Jobs Tax Credit does not address two important points. First, if this proposal is an “administrative nightmare”, how were we able to successfully implement a similar program in 1977-78? Second, as pointed out in a previous comment, there is some research that suggests that the New Jobs Tax Credit of the 1970s was reasonably effective in creating jobs. I review some of this evidence at the Upjohn Institute's website at http://www.upjohninstitute.org/Bartik-NJTC-proposal.pdf
Of course, the devil is in the details. I agree with Dr. Gleckman that extending such a tax credit to companies averting layoffs is problematic. On the other hand, making the credits refundable seems likely to be helpful for smaller businesses with cash flow problems or that are not subject to the corporate income tax.
Tim Bartik, Senior Economist, Upjohn Institute
So far most of the tax proposals floated have been government taking in less or giving out money so others will spend it.
One can imagine taxing companies who don't spend money.
Some number of companies are cutting expenses often by means of layoffs in order to preserve profits. But those profits are often not spent, making the capital gains tax a very inefficient way of helping the economy. It's probably politically impossible at this point to speed the sunsetting of the capital gains taxes which are scheduled to sunset at the end of 2011. And inefficient as it is it may not even be a good idea to cut it in the current environment. However one could imagine changing it so that for some companies that behaved in certain ways it would expire in say 2012 and for other it would expire earlier say 2010. Properly formulated this would be revenue neutral.
Not all spending companies take grow the economy equally.
Consider a company which increases it's stock price by buying back stock. That doesn't do much for the economy except to put more money into the hands of stockholders who as the above article points out don't spend the money quickly. In fact it's a disinvestment plan. There's no reason the government should be rewarding disinvestment.
Capital gains incentives should go to companies that are actively growing. One good measure of growth would be that the aggregate size of the payroll, or perhaps the size of the payroll for the 80% lowest paid workers is growing or at least stable. Stretching out capital gains for companies who's payroll grows from what it was in 2008 to the point that stock was sold would be a powerful incentive for stockholders to encourage management towards longer term organic growth.
Has anyone looked at stretching out or shrinking the window for the stronger capital gains rate to incent companies that do not shrink their payroll? Alternatively what other taxes that have a small multiplier could be used to incent behavior?
I agree that the tax cut is probably too little. But I disagree with you about the failed businesses.
Would these businesses have failed if not for the dishonesty of the individuals that sold the subprime loans?
I don't know but I think it is wrong to say all these businesses are failing because of a bad model.
One thing is for sure, we need a way to stop the massive job losses because it is perpetuating a vicious cycle.
If we could use the remaining TARP money for refinancing (for those with good credit), we might put some meaningful money into the economy and take some of the fear away.
Actually, John Bishop at Cornell has done research on the mid-late 1970's New Jobs Tax Credit, which seems to be similar to Obama proposal. He estimates that the effective stimulus from that (two year) tax credit program was very large (8.7x), and their is no indication that the administration of the plan was especially cumbersome. Bishop recommends several modifications to the NJTC to avoid unintended consequences, but explains pretty clearly how the baseline for employment would be established and monitored. You can find the paper here.
With regard to the proposal to provide credits to corporations for hiring new employees (or as you note the even more difficult proposal to provide companies with credits for each employee they do not lay off), it seems a better proposal would be to expand the existing Section 199 deduction. Section 199, the domestic production activities deduction, allows a deduction equal to 9% of a company's income from domestic production activities in 2009, subject to limitations based on wages. It is equivalent to a 3% credit (roughly) against the corporate income tax for income from domestic production and manufacturing activities. Why not just increase this deduction so that it is equivalent to, say, a 10% credit against the corporate income tax? Mechanically, this would translate into a deduction equal to 30% of a company's income from domestic production activities. If limited to 50% of domestic payroll as under current law, this creates a relatively significant subsidy for domestic labor, and helps to offset some of the benefits of shipping jobs overseas. It also reduces the corporate tax rate for domestic corporations and does not appear to have triggered any protests in the WTO.
Robert Ricketts