Archive for the ‘taxes’ Category

Critics of the President’s State of the Union address noted it did little to promote bipartisanship. Yet, it has already stimulated bipartisan agreement on one of the President’s education proposals.

In the State of the Union, President Obama proposed free community college:

“I am sending this Congress a bold new plan to lower the cost of community college—to zero.

…Whoever you are, this plan is your chance to graduate ready for the new economy, without a load of debt. Understand, you’ve got to earn it—you’ve got to keep your grades up and graduate on time. Tennessee, a state with Republican leadership, and Chicago, a city with Democratic leadership, are showing that free community college is possible. I want to spread that idea all across America, so that two years of college becomes as free and universal in America as high school is today.”

One detail that failed to make it into the State of the Union address: The funding for the program would come by effectively killing the 529 college savings accounts, that exempt earnings from taxation if used for educational expenses.

This fact stimulated bipartisanship, albeit not the kind the President anticipated. As Jonathan Weisman (New York Times) explains:

President Obama, facing angry reprisals from parents and from lawmakers of both parties, will drop his proposal to effectively end the popular college savings accounts known as 529s, but will keep an expanded tuition tax credit at the center of his college access plan, White House officials said Tuesday.

The decision came just hours after Speaker John A. Boehner of Ohio demanded that the proposal be withdrawn from the president’s budget, due out Monday, “for the sake of middle-class families.” But the call for the White House to relent also came from top Democrats, including Representatives Nancy Pelosi of California, the minority leader, and Chris Van Hollen of Maryland, the ranking member of the Budget Committee.

Although this means of funding the community college proposal seemed particularly tone deaf, it does illustrate that bipartisanship is possible when protecting tax expenditures. Imagine if reformers focused on even larger tax expenditures (e.g. the $212 billion exclusion of employer-provided health insurance, the $176 billion expenditures for pensions and 401(k)s, or the $101 billion deduction of mortgage interest)? A new era of bipartisanship might bloom.

Related: See Josh Kraushaar in National Journal for an interesting piece on the SOTU and the implications for Hillary Clinton 2016.

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Ezra Klein (Wonkblog) has a brief interview with Georgetown’s David Super on how poorly programs for the poor have functioned (and how good HealthCare.gov appears by comparison).  The alternatives discussed include outsourcing to private contractors (bad) and implicitly providing more resources (good).

One alternative that is not discussed:  providing benefits through a fractional negative income tax (NIT). If one assumes that the government has some responsibility for providing for the poor, the NIT has a number of advantages. It minimizes administrative costs and complexity, government paternalism, and the disincentives to work. Milton Friedman—credited with first bringing the NIT into the policy debates—does an excellent job of explaining the basic features of the proposal in a 1968 episode of Firing Line.

For those interested in placing Friedman’s fractional negative income tax proposal in the larger context of social policy, a useful resource is a recent intellectual biography of Milton Friedman by William Ruger. Those unacquainted with the negative income tax—and some of the difficulties that are intrinsic in the proposal—might enjoy the overview by Jodie Allen at the Concise Encyclopedia of Economics.

Given that President Obama is emphasizing the issue of income inequality, both parties seem convinced that we need significant tax reform, and there is a fair amount of experience with the Earned Income Tax Credit, perhaps there will be a window of opportunity to revisit the NIT.

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A Grand Bargain?

Tuesday, President Obama proposed a “grand bargain” as part of his jobs tour (a tour that marks the third anniversary of Vice President Biden’s “Recovery Summer” tour). The grand bargain is relatively simple: corporate tax cuts (to 28 percent), including a one-time lower tax on profits earned overseas that would arguably entice firms to repatriate these funds and provide a temporary spike in revenues. These revenues, in turn, would be used to promote additional stimulus projects (a White House fact sheet can be found here). As President Obama explained (White House transcript):

But if we’re going to give businesses a better deal, then we’re also going to have to give workers a better deal, too.  (Applause.) I want to use some of the money that we save by closing these loopholes to create more good construction jobs with infrastructure initiatives that I already talked about. We can build a broader network of high-tech manufacturing hubs that leaders from both parties can support. We can help our community colleges arm our workers with the skills that a global economy demands. All these things would benefit the middle class right now and benefit our economy in the years to come.

Oddly enough, the New York Times was unimpressed: “only the packaging was new. The president essentially cobbled together two existing initiatives that have been stalled in Congress: corporate tax changes and his plan to create jobs through education, training, and public works projects.”


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There is a wonderfully sad piece in the WSJ on the support for crony capitalism that were central to the fiscal cliff deal. A brief excerpt:

In praising Congress’s huge new tax increase, President Obama said Tuesday that “millionaires and billionaires” will finally “pay their fair share.” That is, unless you are a Nascar track owner, a wind-energy company or the owners of StarKist Tuna, among many others who managed to get their taxes reduced in Congress’s New Year celebration.

There’s plenty to lament about the capital and income tax hikes, but the bill’s seedier underside is the $40 billion or so in tax payoffs to every crony capitalist and special pleader with a lobbyist worth his million-dollar salary. Congress and the White House want everyone to ignore this corporate-welfare blowout, so allow us to shine a light on the merriment.

After providing some rather striking examples of cronyism, we get the core lesson:

The great joke here is that Washington pretends to want to pass “comprehensive tax reform,” even as each year it adds more tax giveaways that distort the tax code and keep tax rates higher than they have to be. Even as he praised the bill full of this stuff, Mr. Obama called Tuesday night for “further reforms to our tax code so that the wealthiest corporations and individuals can’t take advantage of loopholes and deductions that aren’t available to most Americans.”

The article reinforces one of the key features of American politics: wherever you find Baptists, you will also find bootleggers.

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The Fiscal Cliff has been averted postponed, if not made worse.

Big takeaways:

  1. Senate Majority Leader Harry Reid has once again proven himself to be incapable of leading the Senate.  Is there any stronger rebuke than McConnell’s appeal to Biden as he searched in vain for a negotiating partner in the Senate?
  2. The Democrats have done what was once unimaginable: they made permanent the much-decried Bush tax cuts for all but the wealthiest households. The talking heads spent much of the last few months noting that if Obama had any mandate from the 2012 elections, it was the mandate to raise taxes on those making about $250k. So much for mandates.
  3. A Republican controlled House is not much of a counterweight. Let us assume that McConnell was successful in getting the best deal he could out of this Senate (recall the tax cuts). The GOP-controlled House could have responded with a bill that combined the tax cuts with significant spending cuts, thereby forcing a compromise. But Boehner et al blinked (and Ryan, once believed to be a force for fiscal stability, no longer has a claim to this title). Ah yes, but they lived to fight another day. Of course, is there any real evidence that their capacity to fight will improve with a reduced majority?
  4. In terms of long-term fiscal sustainability, the Congress arrived at the worst possible solutions: tax cuts and increased spending. Although there were early discussions of entitlement reforms—ranging from means testing Medicare to changing the calculation of the cost of living adjustment for future benefits—in the end, Congress made matters worse by preventing scheduled reductions in rates paid to doctors under Medicare. And although there were early discussions of cutting tax expenditures, a series of existing expenditures were extended.
  5. By placing a two-month hold on forced sequestration, Congress not only made things worse but also assured that the winter and early spring will look remarkably like the past few months. I am somewhat surprised that Biden negotiated, and Obama accepted, this decision.  Whatever chances the President had to make some significant policy changes in the early days of his second term seem diminished greatly. Immigration reform, assault weapon bans, etc., will be difficult to achieve when all attention is focused on the next fiscal cliff and the debt ceiling. Moreover, if there were any belief that this would somehow help the economy, it is ill founded. There is little to suggest that the credit rating agencies, investors, or firms looking for regime stability will find anything resembling a silver lining in this deal. Quite the opposite.

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The fiscal cliff debates seem to be at a standstill as we approach the end of the year.  On the spending side, the proposal to change the indexing for Social Security seems to be quite positive. The use of the CPI-W has fueled growth in the real value of benefits and the substitution of a more realistic measure of inflation (or some kind of progressive indexing) is a change that could make a significant difference over time.  Republicans are likely correct in their dissatisfaction with tax increases today in exchange for significant cuts in the future since no Congress can effectively bind the hands of a future Congress.

The tax side is particularly interesting, and I wonder if the GOP understands what a victory any agreement would be that made the Bush tax cuts permanent for the vast majority of the population. Regardless of whether the taxes increase for households making $250k, $400k or some other number, the overwhelming fact is that the significant tax cuts introduced under George W. Bush are likely to become permanent. For the GOP, this is no less a victory than the 1996 elimination of AFDC, which essentially consolidated many of the reform efforts of the past 15 years.

Zachary Goldfarb (Washington Post) has an interesting article reinforcing this position. A few excerpts:

R. Glenn Hubbard, dean of the Columbia Business School and an architect of the Bush tax cuts, said it is “deeply ironic” for Democrats to favor extending most of them, given what he called their “visceral” opposition a decade ago. Keeping the lower rates even for income under $250,000 “would enshrine the vast bulk of the Bush tax cuts,” he said.

And, due to the progressivity of the US tax system, even the wealthy would continue to reap benefits when compared with the expiration of the tax cuts when taken as a whole.

The first $250,000 earned by even the wealthiest families is subject to lower rates. For this reason, Obama noted last month that under his proposal, “every American, including the wealthiest Americans, gets a tax cut.”

For instance, an individual taxpayer earning between $200,000 and $500,000 a year would pay an average of $515 more in taxes next year if the Bush tax cuts for the wealthy expire, according to the nonpartisan Tax Policy Center. But if all the Bush tax cuts were to vanish and the rich had to pay higher rates on all their income, their tax bills would shoot up by an average of $6,000. The very richest — the top 1 percent of earners — would pay much higher taxes if solely the upper-income tax cuts expire, because the savings from extending the rest of the rates would be relatively negligible.

Bottom line: regardless of where you draw the line on taxes for upper income earners, the proposed deal on the fiscal cliff locks in the Bush tax cuts—a clear victory for the GOP, particularly given the poor Republican performance in the 2012 elections, candidate Obama’s commitment to reversing the Bush tax cuts,  and the fact that the Democrats are firmly in control of the White House and the Senate.

Of course, I would not argue that a victory for the GOP is a victory for the nation given the long-term fiscal imbalances. In my view, we need higher taxes (let’s begin with the elimination of all tax expenditures, beginning with those that lavish subsidies on the top two quintiles). We also need significant reductions in expenditures, particularly in our largest entitlements, the defense budget, and various forms of corporate welfare (including agricultural subsidies).

But there is little question that the Obama administration is willing to hand the GOP a significant victory. It only has to accept the gift.

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This is not helpful. Erick Erickson, a man of excessive influence among conservative Republicans, is pressing Republican Speaker John Boehner to take any increase in tax rates off the table in the fiscal cliff negotiations with Democratic President Barack Obama. This is unhelpful for two reasons. First, rates will go up anyway if a deal isn’t reached, and Obama has made clear that some increase in rates is a deal-breaker. Second, every spending cut is a tax cut in the long run! The GOP should be willing, if necessary, to allow statutory tax increases, including rate increases, if they can get credible, significant spending cuts. By “credible” I mean cuts that will take effect automatically in the medium term (2-3 years from now), that are specific, and that will be difficult for Congress to overturn.

Everyone knows rates will go up eventually anyway. The US fiscal path is unsustainable. Whatever the government spends now it will have to pay back with tax dollars. Certainly, real interest rates on federal bonds are low or negative now, but that is a result of turbulence in Europe and slow growth at home. That situation won’t last forever. Large, immediate spending cuts are undesirable because the economy is still soft, but we really cannot be sure that we are not at or near the peak of the business cycle. The last recession started five years ago, and NGDP growth has puttered along at about 4% over the last two years. So spending cuts two to three years from now seem desirable.

How the tax code affects the productivity of the economy does not have very much to do with the average rate of taxation specified by statute, but the distortions brought about in the tax code (and poverty relief programs). Very high marginal rates of taxation can indeed kneecap labor supplymost of this type of distortion actually affects those with incomes under 200% of the federal poverty level. And of course, the corporate income tax code is riddled with distortionary tax expenditures (credits and deductions); getting rid of those is a free lunch: more revenue, more productivity.

Should Republicans use marginal tax rates on the wealthy as a bargaining chip to get bigger spending cuts? Of course. But that means keeping them on the table.

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