This will surprise nobody who follows what is optimistically called the budget process, but the economic stimulus package wending its way through Congress has become the vehicle for an astonishing array of stuff. It’s become even better than emergency supplemental appropriations, which have been used to fund decidedly predictable items, like the decennial census and continuing outlays for the Iraq war (long after the initial shock and awe had worn off).   more »

Washington has kicked off a perfectly predictable donnybrook over stimulus. Democrats, who spent the past eight years bashing George Bush for turning a Clinton-era surplus into a big deficit, are now defending what will be nearly $1 trillion in new tax cuts and spending. Republicans, who presided over decades of deficits, suddenly are worried about the debt we are leaving to our grandchildren.   more »

My TPC colleagues—most having taught at some point in their careers—couldn’t resist. They’ve given grades to the major tax provisions of the stimulus bill now working its way through Congress. While you can argue over the specific grades (and we surely did), the benefit of this exercise is that it forces you to look at the relative value of each of the elements of the plan. For a first pass, TPC graded the Ways & Means bill, and concluded that the best proposals of the bunch are those that give temporary tax relief to low-income families. It makes sense, since they are the most likely to spend the money they receive. As I noted in a recent post, even these are far from perfect, but they should help to get the struggling economy get back on its feet.    more »

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.    more »

I am sure Barack Obama will deliver a stirring Inaugural address tomorrow. However, Obama’s most important remarks since his election came in an interview the other day with The Washington Post. There, he promised to convene a bipartisan fiscal summit in February. This has the potential to be the most important step of his Presidency. Yes, at least as important as fixing the immediate economic mess.    more »

People often measure our tax system’s complexity by counting tax forms as if the documents, not the law, are the culprit. But my former IRS colleagues used to remind me that forms actually help taxpayers. Imagine if people were required to read the Internal Revenue Code to figure out how much they owe. This truism leapt to mind when I read about Treasury Secretary-designate Tim Geithner’s tax problems. While employed at the IMF, Geithner failed to report liability for about $34,000 in payroll taxes. After the IRS audited his 2003 and 2004 returns, he paid the back taxes with interest. Recently, he also remitted payroll taxes for 2001 and 2002, even though by then the statute of limitations had expired.    more »

The stimulus plan unveiled by House Democrats today includes a little something for everyone. With an eye-popping price tag of $825 billion, I suppose it should. The plan, written in close consultation with the incoming Obama Administration, includes $275 billion in business and individual tax cuts, and $550 billion in direct spending for everything from smart appliances to repairing hiking trails in national parks. A huge chunk—roughly half—would be direct assistance to state and local governments.    more »

Last week’s travel section of the New York Times lists the top 44 vacation destinations for 2009. Neither Bermuda nor the Cayman Islands were on the list. And it looks like neither will make the top destination list for the headquarters of U.S. multinational corporations. The “hot” tax haven this year is cool Switzerland. In the last few months, three large U.S. businesses that are currently chartered in Bermuda have announced that they are packing up and moving to Switzerland. Meanwhile, former hot spot, The Cayman Islands, seems to have lost its allure. Two U.S. companies incorporated there have announced headquarter moves to Switzerland and one plans to reincorporate in Ireland in 2009.    more »

Policy makers are rightly focused on boosting demand as a way to pull us out of the current recession. The proposals offered so far will help, but none directly target the price of goods and services that people buy and all will add to our alarming budget deficits. So here’s a simple suggestion. Why don’t we promise future price increases so consumers will have an incentive to spend more now. Enact a value-added tax (VAT) that phases in starting in 2010. (A VAT, common throughout the rest of the world, is basically a sales tax that is collected in stages from producers and retailers.) If the VAT started at a 5-percent rate, that would push retail prices up by 5 percent (assuming the Fed lets the money supply grow), providing an incentive for consumers to make purchases in 2009 rather than postpone them.    more »

Barack Obama is channeling Ronald Reagan. Not in policy (his proposed tax cuts are not that big) but in tactics. The question is: Can the president-elect convince Congress to spend well over $1 trillion without leaving any fingerprints. Having learned from Reagan’s legislative successes—notably the Tax Reform Act of 1986—and from Bill Clinton’s failures—see health reform—it appears Obama will never propose any specific economic stimulus legislation. Instead, he is merely sending Congress ideas, and leaving the dirty work of writing a proposal to the Hill. The New York Times Jackie Calmes did a nice post on this the other day.    more »

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.   more »

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.    more »

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.   more »

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.    more »

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.    more »