Will the Tax Cuts Help Fix the Economy?
How much will the $300 billion in tax cuts approved today by the House Ways & Means Committee really stimulate the economy? They will help some, but don’t expect them to accomplish a lot.
I’d give the overall plan a Gentleman’s C. Some provisions would channel money to low-income people most likely to spend it, but deliver the cash too slowly. Others distribute the funds relatively quickly, but give an awful lot to wealthier taxpayers who are least likely to spend it.
The business tax cuts may be even less effective. The proposed investment incentives are troublesome on two counts: They are not likely to help companies that are losing money (if you are already not paying taxes, an additional tax break is of no value). At the same time, they would create a windfall for profitable companies that were going to invest anyway.
TPC will release a detailed report card on the Ways & Means bill within the next few days but, in the meantime, here’s a quick look at the pros and cons of the tax stimulus, starting with the breaks for individuals:
Proposals to increase the Earned Income Tax Credit and the child credit get high stimulus marks for targeting those working families most likely to spend the money, one key to getting the economy back on its feet. Unfortunately, many families won’t get their credits until they file their 2009 tax returns in 15 months.
The cash payments to workers through the Make Work Credit, one of President Obama’s big campaign promises, almost mirror the pros and cons of the EITC. By increasing take-home pay by about $10-a-week, it will get cash into people’s wallets quickly enough. However, couples making up to $200,000 would get this payment, and many are likely to save, not spend, those extra dollars. One good idea: Paying out the money a bit at a time rather then in a lump-sum rebate. Some economists think people are more likely to spend money when they get it in small chunks.
It is tougher to see how most of the business credits would help much. The bill would allow small businesses to immediately deduct the cost of up to $250,000 in capital investment they make this year. It would also allow larger businesess to take faster write-offs for investments they make in 2009. But in the real world, how many are in any position to buy new equipment now? Their sales are in the tank and they can’t get credit.
Another proposed change would get cash to businesses that were once in the black, but are losing money now. Making better use of Net Operating Losses would not only provide a much-needed boost to their cash flow, it might also leverage the investment incentives. This may be the best of the business tax breaks when it comes to helping the economy in the short-run.
While some of these ideas may help a bit in today’s lousy economy, what will happen once we get back on our feet? Obama wants to make the Making Work Pay credit permanent, and it is unlikely the increases in the EITC or child credit will ever be rolled back. It is the same for small business expensing of equipment. So we probably are making some important long-run changes to the tax code in the name of stimulus. I’m just not sure they are going to do very much good right now.
How can the demand for land be there when the asking price of the rent or purchase of the land is so high? This is the reason why there is so little opportunity for entepreneurs, they cannot manage to compete with the monopolists whose occupation and partial use of the land is without the need to pay the associated rents. Occupation of land (with the aim of speculation in its subsequent developments)without its use, drives up the price of the sites that are available for purchase or rental. Look around the cities and see what proportion of the land is unused. It varies between 20 and 50%!
I think the other possibility is more likely, that land is not being used because there is a lack of demand for it. For example, urban renewal proposals are made where land is under-utilized (from the perspectives of the developers) – rather than in the areas where there is real blight. In DC, for example, Wisconsin Avenue is what the developers really want, not MLK.
In order to understand macroeconomics you need to examine the whole of it and not the small part in your example. (This was originally the “Lesson” in Henry Hazlitt's 1946 book “Economics in one Lesson”.) When the effect of competition to rent is applied to a land-value taxed community, the effect will be to reduce the land values and stop any land being held out of use, from it being properly used.
The other taxes that the community pays would be reduced to zero as LVT takes on a progressively greater part of the national income. As should already be clear, the ownership and monopoly of land is detremental to the whole of the population although a single land-lord in one region can charge almost as much rent as he likes and will do so, provided that the community is not driven out by this harrisment. This is what land ownership and its monopoly can do. Yet with the competition coming from fully utilized land and without its rent being raised (when some of the land only is available for use), the only looser will be the landlord whose greed for its speculated and highly raised value when it is eventually sold, has finally been stopped. To use a Marxist expression, his non-action takes the bread and butter from out of the mouths of the landless prolitariate.
What LVT really collects is the rent on the land which is potentially there but is being largely neglected and fogotten about. Unused land appears to be of no significance to the country, whereas in fact its growing value and non-use and speculation-cost is what has driven us to the stage of economic slump.
Does the government benefit at all? Surely we the people are the ones whose benefit the government should be looking after, without one penny benefitting the administration of our country.
In thinking about the LVT, let us try a thought experiment. Assume a hypothetical community of renters occupying a district which is owned by one family. The land lord is a military retiree whose pension is wholly funded by the taxes of the renters, who of course also provide rental income. Let us assume there is also a land value tax, which funds the operations of the sherrif, the jail, the group home for the mentally ill and the fire department. Should the landlord also be charged for the teaching of the community's children? (which sadly happens in most communities). If so, why? If the community passed a levy to increase taxes on the landlord for this purpose, would you not expect the landlord to simply raise the rent by that much? What if there were two similarly situated landlords, or a dozen? What if, as is common in the United States, many community members owned their own land? Should the landowners be on the hook for the education of their children and those of the renters? What if everyone in the community worked for a cooperative? Would it not be better if the cooperative simply hired a teacher and funded a school than to use the proceeds of the LVT? Going back to the fire and police protection, et al – if only the land were held by the landlord and the tenants owned the improvements, who should pay for fire protection on the improvements? If the landlord owned the improvements, who should pay?
What if the community came under attack from the community over the hill? Would payment for the community members mobilized come from the landlord or the community coop (or both?) (the short answer is, the soldiers would not be paid, they would be minute man, not conscripts). Silly proposition, this last bit? Not really. Often land distribution came about from feudal battle arrangements. Even the United States' land holdings started out with land distribution to veterans.
This is originally an income tax and economic stimulus thread. Enough about land value taxes, which are essentially a tax on only one factor of income, which is inappropriate as a single tax, given that government benefits more than that one factor.
Land Value Taxation is exactly the wrong thing in this economy. It would permanently put mortgages under water, whereas now they are merely bobbing down, but will bob back up after either income rises or housing values rise again.
An LVT is part of a good portfolio of taxation, since there are government activities which benefit land holding (fire, police, corrections, mental health care, homeless shelters, recordation). There are other activities that have nothing to do with land value – activities which still must occur (education). Defense may qualify for an LVT support, althought the scale thereof would require a fairly high LVT. If an LVT were high enough to fully fund defense the tax rate would be so high that land values would sink, which would cause an even greater LVT rate.
I live in a medium to lower value condo in a garden complex in the DC area. Land is assessed at about half the value of our holding (down from 2/3rds). Once you lock in an LVT land will go even lower, but the cost of my mortgage will not change in my favor. We are at about the medium in income, possibly a bit higher in the near future, so our income taxes will increase due to what I hope is impending success.
Ending income taxation and instituting a federal LVT would simply shift around how our tax bill is collected – it would not decrease it. It also removes the ability to pay the tax as a critereon for collection. My neighbor, who has two children more than I do would pay the same LVT under the scheme you advocate. As a result, he may be better advised to walk away from his home – hardly a social justice solution unless making everyone pay regardless of ability is your idea of social justice.
It doesn't really matter where the tax is taken from, it will slow down that part of the economy. And at the same time, when the government spends the collected money, it will speed up that other part of the same economy. The overall effect is nil although there are some people who like Robin Hood think it is smart to rob the rich and pay the poor from the proceeds. These ends do not justify the means, whether the act is by a popular folk-hero (who died for his crime) or a national government who will simply loose votes due to it. We have no right to judge from whom to steal!
But when our opportunity to earn is being held out of use by land-lords and land speculators as well as their associated banks, then we have the right to demand social justice. With the introduction of Land-Value Taxation instead of production-based income, purchase and corporate taxes, the system is stimulated by throwing more land into use and by the reduction of the tax brake on production and consumption.
TAX TAKINGS NOT MAKINGS!
Under current law, EITC tax filers can adjust their withholding to not get a big lump sum at the end of the year. With a stroke of the pen, Obama could increase everyone's income by directing that the IRS adjust withholding schedules to end large refunds.
What will really grow the economy is a tax increase on the wealthy, which will take money out of speculative investment and put it into government spending – or into debt reduction – which will reduce net interest as well (which is an injection into the savings sector and therefore contractionary).
To really increase consumption, boost the EITC and Child Tax Credit, making the latter refundable for more people and again, changing withholding. A migrant worker with 6 kids needs enough money so that the kids have decent housing and food. While workers may earn differential base pay due to their marketability, there is nothing that justifies that the children of one worker have a better life than the children of another worker. Neither child adds anything to the productivity of the employer or economy. If anything, the children of rich kids with a sense of entitlement are a drag on society.
Compare the last five presidents. Two were wealthy as youth (the Bushes) and three were not (Reagan, Clinton, Obama). The jury is still out on Obama, but I think the comparison is meaninful.
When regular taxes are cut the government has less income and can employ fewer workers and officers. The service that it provides is necessarily reduced and the greater untaxed earnings will need to be spent to cover this loss (and not for increased demands, since now there are more unsatisfied needs). Thus the overall effect of the tax cut on the whole system is nil.
Are we to expect that the Government has the money to continue to employ the same numbers and to provide the same services? If so, then from where does this money come?
In my opinion there is only one way to improve the present situation and that is to create more opportunity to earn by legislating against the holders-out-of-use of natural resources. By transferring taxes off earners and onto land-holders, speculation in this resource would be eliminated and production costs lowered due to the cheaper (unspeculated in) land that is now more freely available. With the land being used properly and the ground-rent being collected instead of our earnings to pay for the government expenses, then there would be a hope for a better future.