U.S. multinational corporations want another tax holiday. (Who doesn’t?). Under current law, U.S. multinational corporations can defer U.S. income tax on profits earned abroad in their foreign-owned subsidiaries until they bring them home as dividends from the foreign corporation to the U.S. parent. The American Jobs Creation Act of 2004 provided them with a “one-time” chance to bring home these profits at a greatly reduced tax rate. Instead of paying the normal rate of 35 percent (with a credit to offset taxes paid abroad), Congress allowed firms that filed a “domestic reinvestment plan” to bring back funds at an effective rate of just 5.25 percent. To get the benefit of the lower rate, U.S. companies could not use repatriated profits from their foreign subsidiaries to distribute cash to their shareholders either as stock redemptions or dividends, so that the money would be available for domestic investment. The argument back then was that the holiday would stimulate jobs and investment in the United States by allowing firms to access profits trapped abroad by the U.S. tax on repatriations. However, this ignored the well-known adage that “money is fungible”—i.e., that if we require companies to reinvest repatriated profits, it will free up other cash that they can redirect as they wish.

Good to see comments on the New Jobs Tax Credit from two authors of papers on the subject, Timothy J. Bartik of the Upjohn Institute and John H. Bishop of Cornell. In response to my criticism of Barack Obama’s call for an employer credit to encourage hiring, both argue that the Carter-era version of this idea—the 1977-78 New Jobs Tax Credit—succeeded in creating as many as 700,000 new jobs in the first year.

Emil Sunley was the Deputy Assistant Secretary for Tax Analysis at Jimmy Carter's Treasury in 1977. In a 1980 Brookings volume, he recounted the history of this credit, which had morphed into a very complicated and largely ineffective subsidy as it worked its way through the legislative process. It is a cautionary tale for the Obama team and its allies in Congress.

CBO says the deficit will reach $1.2 trillion this year. President-elect Obama says the red ink will continue to flow at this rate or faster “for years to come” unless policymakers “make a change in the way Washington does business.”
Obama is right, of course. And his words echo the message he used so successfully throughout the campaign. Change, he promised, that you can believe in. The problem is that the stimulus bill Obama is preparing mimics exactly the sort of cynical business Washington has been doing for decades.

CBO just posted its latest budget update. The headline number is a $1.2 trillion deficit in fiscal year 2009. That’s indeed alarming—especially considering that it excludes the $750 billion or so in additional stimulus that president-elect Obama promises.
But beyond the next couple of years, things don’t look that bad. The economy recovers, the Bush tax cuts expire, and by 2018, the budget deficit weighs in at a svelte $188 billion. Admittedly, this is still a big reversal from previous forecasts, which held out the promise of surpluses (not to mention the actual, real surplus on the books when President Bush took office). But a sub-$200 billion deficit doesn’t look too scary compared with the current situation.

Yes, you heard that right. The time is perfect in this abysmal economic environment to beef up the IRS.
IRS audit resources have never fully recovered—in relation to the workload the IRS faces—from the IRS-bashing of the late 1990s. That’s too bad because IRS internal studies show each dollar spent on an additional examiner brings in on average 4 to 5 dollars of additional revenue. Fortifying enforcement would seem to be a “no-brainer” when we have a tax gap of at least $400 billion. (The last estimate, for tax year 2001, was a gap of $350 billion.)

Senator Mitch McConnell proposed over the weekend to cut the 25-percent tax bracket to 15 percent as part of the economic recovery package. This might make sense politically, but it’s a pretty dubious economic stimulus.
On the positive side, the proposal wouldn’t cost much compared with the hundreds of billions bandied about by the president-elect. Total cost: $18 billion in 2009. But it’s so cheap because it would throw 5 million taxpayers onto the AMT, boosting AMT revenues by almost 80 percent. (More middle-class taxpayers fall prey to the shadow tax system because the lower tax rate pushes regular tax liability below the AMT threshold.)

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.

It was quite a year. Taxpayers are now shareholders in most major U.S. banks, a massive insurance conglomerate, and three failing car companies. After years of debating whether the government was implicitly or explicitly guaranteeing Fannie Mae and Freddie Mac debt, Washington settled the argument by buying the mortgage giants. I know George Bush liked to talk about an ownership society, but I never imagined this is what he had in mind.