Book Probes Tax issues Facing the Next President and Congress, Offers Policy Lessons
Eugene Steuerle’s Contemporary U.S. Tax Policy, second edition, details how federal tax policy since the 1950s has evolved and trains an expert’s eye on its considerable successes, shortfalls, and problems. He prefaces his account with an explanation of important tax policy principles and an overview of the main actors and their changing roles. Steuerle closes his engaging narrative with a perceptive analysis of President George Bush’s unsuccessful second-term efforts to use commissions to reform Social Security and to rewrite the tax code.
It is About Credit Markets, Not Just Stimulus
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.
Yet, this entire squabble may be missing the point. If Washington is going to help dig the economy out of its very deep hole, it must do more than just stimulate demand. It must also restore the health of the credit markets.
That is not to say that designing a good stimulus bill is not important. It is. But we need to recognize the limits of what all this government spending and tax cutting can do.
For now, Washington is falling back on recipes that have been tried many times before with only limited success. On the tax side, proposals such as allowing businesses to write-off capital costs more quickly, or giving cash payments to workers, have been tried repeatedly in past recessions. As a new TPC report card shows, there are no magic bullets here. While some pieces of the tax stimulus working its way through Congress will be better than others at jump-starting the economy, none will have a major impact.
The same goes for spending. A new CBO report concludes it will take years for the proposed new outlays to work through the economy. For instance, CBO figures only about one-third of $30 billion in proposed highway money could be spent within the next 20 months.
My sense is that, at best, the stimulus package will keep things from getting worse. Necessary, as they say, but not sufficient for recovery. The IMF recently published an interesting paper that noted the importance of both stimulus and credit market reform, even as it called for massive efforts to boost demand. Christy Romer, a key adviser to President Obama and a highly respected economic historian, has argued that New Deal fiscal policy did almost nothing to end the Great Depression.
Think of stimulus as a life preserver. It may keep the economy from drowning, but won’t do much to get us back on a course of sustained economic growth.
It will be up to the Fed and the much-maligned TARP (and its costly progeny) to accomplish that. The problem, of course, is that when it comes to fixing the credit markets, we are sailing in unchartered waters. Do we create a “bad bank” that will offload toxic loans from troubled financial institutions? Do we nationalize some brand-name banks? In desperation, we find ourselves looking to the experiences of Sweden or Japan for answers that are not obvious.
After a lot of arguing, we’ll enact a nearly $1 trillion stimulus. It will help, though much of the money will inevitably be wasted. But keep your eyes on what the Fed and the Obama Administration do to get the credit markets working again. That, more than tax cuts and spending, will be key to how quickly the economy gets back on track.
Will Obama “Bend the Curve” on Entitlement Spending?
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.
It is not the idea of a summit that is so critical—we’ve seen plenty of those in recent years. Nor was it his vow to use some of his copious political capital to confront the controversial issues of Medicare, Medicaid, and Social Security. We’ve heard that promise before too. It was just four years ago that George Bush made precisely the same vow to tackle Social Security. And we all know how that one ended up.
No, it is neither the summit nor the confident commitment that is so important. It is instead, the language he used in his meeting with The Post.
In his discussion of Medicare, for instance, Obama was channeling Peter Orszag, his nominee for Budget Director. When he says, “You can’t solve Medicare in isolation from the broader problems of the health-care system,” that is pure Orszag. So is his talk of “bending the curve” of medical spending (econo-speak for sharply slowing the rate of health cost growth).
Orszag’s (and now Obama’s) diagnosis is on the mark. The cure, however, will be exceedingly difficult.
And it will take a lot more than fine words.
On Social Security, for instance, Obama breezily told The Post, “Social Security, we can solve.” No problem.
Well, he’ll have to do a lot more than what he promised in the campaign, when his plan centered on rising payroll taxes for a handful of wealthy workers—two years after the end of his second term. That is no way to fix Social Security.
By now, I’m sure Obama knows that in any bipartisan deal, reducing promised future benefits will have to be part of the mix. Period. And that is going to seriously antagonize his friends on the left. On the other hand, Obama is correct when he recognizes that Social Security is the easy bet in the entitlement trifecta.
When it comes to Medicare, “bending the curve” means rationing care. It means, somehow, convincing Americans that the most expensive treatment is not always (or even often) the best care. It means telling them, for example, that Medicare is not going to pay for that back surgery because exercise and anti-inflammatory drugs work just as well, and at far less cost. That is going to anger patients and doctors.
Long-term fiscal reform also means sensible tax policy. And by promising to exempt anyone making up to $200,000 from any tax increases, Obama has built himself something of a fiscal box. I’m sure Orszag and others have told him that by now as well.
Still, the post-election Obama sounds like he gets it, or, at least for now, he’s listening to people who do. Let’s all hope it lasts.
Great Expectations
I’ve been reading up on the Great Depression (never say those of us at TPC don’t know how to have fun) and am struck by one overriding thought: Even with the benefit of 80 years of hindsight, economists still can’t agree on either what went wrong or how the economy got back on track.
There is an important lesson here. Famously impatient, Americans not only expect government to fix today’s economic crisis, they demand it. Barack Obama, I suspect, will have about a year to turn things around before the public turns on him. Yet, if we still don’t know what happened in 1929, how can we expect policymakers to truly understand—and correctly address—events happening in real time today?
Here is the dirty little secret: Obama doesn’t know how to fix the recession. Nobody does. It is easy (though wrong) to say Herbert Hoover failed to grasp the enormity of the Depression. But in truth, FDR had little better idea of how to respond to the crumbling economy. In fact, Roosevelt was famous for trying one solution after another until something seemed to work.
There is broad agreement on what government should not do, such as run a tight monetary policy or restrict trade. But there is much less consensus on what it should do. How much will pulling fiscal levers boost demand? Is massive new government spending really such a good idea? Will tax cuts get people and businesses spending again?
When credit markets collapsed earlier this year, George Bush turned to his group of wise men for advice. They included Fed Chairman Ben Bernanke, a highly-regarded student of the Depression. President-elect Obama has now chosen his team, including Christy Romer, another expert on that era. They are very smart, and have access to far better data than their counterparts had in the 30s.
But today’s data are not that good. And there is no magic bullet. For instance, Treasury Secretary Hank Paulson has been roundly criticized for his on-again-off-again use of the TARP. First, he insisted on using the $700 billion to acquire bad assets, then he decided to pump liquidity into financial institutions, and now he is giving $13 billion to the auto companies. This seems incoherent because it is. But trial-and-error is as inevitable in economics as in medicine—another field based more on art than science.
Obama’s stimulus plan, which by some accounts will cost $850 billion or more, will include its share of bad ideas. Some initiatives may at first seem to make perfect sense but will inevitably have dreadful unintended consequences. And there will be good ideas that should be in the plan but fail to make the cut.
Those of us who kibbitz from the sidelines will identify mistakes and demand better alternatives. But we should have no illusions. Getting a huge, complex, and still poorly understood economy back on track is not going to be simple and it will take time. Obama, despite the stratospheric expectations he’s raised, is going to make errors. We will, and should, call him on those poor choices. But we’d be fools to expect perfect diagnosis and treatment from the incoming Administration.
TaxVox’s Lump of Coal Award: The Ten Worst Ideas of 2008
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.
And, of course, it was an election year. Thus, the opportunities for dumbness increased exponentially. Campaign promises veered from the improbable to the unworkable to the truly bizarre. With so many bad ideas to choose from, picking the lowlights was not easy. Nonetheless, here is TaxVox’s list of the 10 dumbest fiscal policy ideas of 2008.
10. Barack Obama’s plan to exempt seniors making $50,000 or less from tax. Most already pay nothing. Besides, anybody know why a 65-year-old should get a tax preference over a twenty-something making the same income? Senior discounts should be left to restaurants and movie theaters.
9. Hillary Clinton’s and John McCain’s summer gas tax holiday. Tell me again how we are going to end global warming? Obama gets extra credit for passing on this one.
8. Obama’s windfall profits tax for oil companies. Unfortunately, he couldn’t resist this bad idea.
7. The TARP. A $750 billion blank check. And after giving hundreds of billions to banks, Treasury neglected to make them lend the money to anyone. Polishing their balance sheets may help in the long-run, but hello….
6. Patching, but not fixing, the AMT. It may be a Golden Goody, but this failure of political leadership still smells. We used to worry about the cost of true reform, but that was so 2007.
5. Treasury unilaterally letting banks buy the tax losses of the financial institutions they acquire. The Wells Fargo rule is not only a terrible policy, but Treasury probably had no legal authority to adopt it. Otherwise, a heckuva good idea, as the current president might say.
4. Obama’s proposal to raise Social Security taxes on high-income earners—two years after the end of his second term. A new chapter in Profiles in Courage.
3. The Democrats definition of Middle Class: Obama says anyone making $250,000 or less belongs. Has anyone told him the median income is $61,500? Senator Barbara Mikulski (D-Md), wants to give a tax break to the same folks who borrow up to $49,000 to buy an American-made car. Cadillac owners unite! You have nothing to lose but your On-Star.
2. Extending the Bush Tax Cuts. Did I miss the day Congress etched these on stone tablets? McCain vowed to make them permanent. Obama said he’d repeal many of these breaks, but then assumed they’d last forever—a budget gimmick intended to make his own trillion-dollar promises seem less costly.
1. And the TPC Lump of Coal Award for the single worst idea of 2008: Fred Thompson’s plan to allow people to pick their own tax system. Choice is nice, but this puppy would cut government revenues by $7 trillion over 10 years. McCain and other Republicans all tinkered with this absurd idea, but we’ll give Thompson credit for being the first to raise it in the Presidential campaign. Happy 2009 to all.
Obama’s Loose Change
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.
It has become a drearily familiar formula: Democrats want to increase spending. Republicans want to cut taxes. So they compromise–by doing both. And arithmetic being what it is, the deficit explodes.
We may, in fact, be about to create the mirror image of what happened during the Bush Administration. In 2001, an ambitious new president rolled into Washington faced with a slowing economy, and armed with an aggressive new economic agenda and a promise to change the tone in the Capital. George Bush, of course, wanted to cut taxes. The then out-of-power Democrats wanted to spend more.
What happened? Democrats bowed to big tax cuts, and, according to CBO, revenues as a share of GDP fell from 20.9 percent in 2000 to 16.3 percent by the end of Bush’s first term. Despite his tough talk about bloated government, the President abandoned efforts to control spending. As a result, outlays ballooned from 18.4 percent of GDP to 20 percent. All the Inside the Beltway players came away winners, and the modest surplus Bush inherited turned into a deficit of 5 percent of GDP.
Oh, and by the way, only about half of that new spending was for the military. The rest went to domestic discretionary programs and entitlements such as Medicare and Medicaid.
Now the roles are reversed—the Democrats are in charge and the GOP is in the minority. And, to be sure, the economy is worse. But the story line is looking eerily familiar.
Obama suggests it will be different this time. He says that budget reform will fix all this—later. Today he appointed a White House aide to seek out waste and abuse. Sadly, we’ve heard all that before too. I await change that I can believe in.
Obama-nomics: Written on a Word Processor
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.
But not only is Obama’s stimulus what Jackie called the “the paperless plan,” his proposals themselves seem infinitely flexible. For instance, the Obama people let it be known that a key element of the stimulus would be a tax credit to encourage businesses to hire new workers. But when that idea ran into resistance, Obama, as they say, threw it under the bus.
By this morning, Obama aides put out the word that the jobs credit was A) dead or B) about to be significantly retooled. In its place, perhaps, new energy credits. Energy. Employment. Whatever.
It all reminds me of Don Regan, who was Reagan’s Treasury Secretary. The morning Treasury rolled out its detailed version of Tax Reform (known back in the day as Treasury I), Regan was questioned by reporters about some particularly controversial provisions. Not to worry, Regan shrugged, it is all written on a word processor. His clear implication: It was easy enough to rewrite. Btw, for those too young to remember, a word processor was something like a laptop, only it couldn’t get you on the Web.
Obama is coming to Washington with much the same attitude. He’s being even more clever when it comes to the exceedingly unpopular TARP. The incoming president wants Congress to authorize the second $350 billion of this bank bailout money, but instead of asking for the funds himself, he let George Bush do the heavy lifting on his behalf. Poor Bush, I’m sure, would rather be packing.
Don’t get me wrong. I had real doubts about the jobs credit. But the are serious economists who do not. It would have been nice if Congress, say, held a hearing to hear both sides of the argument.
Similarly, there is nothing wrong with a proposal as complex as the stimulus getting tweaked along the way. And, as Reagan showed, a certain amount of flexibility makes for excellent legislative politics.
But sooner or later, Obama, who voted present so often in the Illinois legislature, is going to have to get his hands dirty and take responsibility for unpopular, but necessary initiatives. That, after all, is why they let you stay in the big white house and use the fancy office.
VATs Next?
Is it time for the U.S. to consider a Value Added Tax? More and more tax experts think so. But the politics isn’t yet getting easier.
One problem: While more specialists are joining the VAT fan club, they can’t agree on what to do with the money. TPC’s Len Burman has proposed a VAT to supplement the income tax and pay for health care. Michael Graetz, once a top tax aide to the senior George Bush, would use one to get most Americans off the income tax. At the TPC/Tax Analysts tax reform conference on Dec. 5, Pam Olson, who was a top tax aide to the today’s President Bush, endorsed the levy as a way to buy down corporate tax rates. Once the tab comes in for the trillions of dollars Washington is spending to stimulate the economy and bail out the financial markets, I am certain others will propose a VAT simply to help pay the bills.
$13 Billion Down the Drain
George Bush just spent $13.4 billion of your money to kick the automaker mess into the Obama Administration. Funny how easily so many billions slip through our fingers these days.
Seemingly unable to decide whether to let Chrysler and GM reorganize in bankruptcy or engineer a full-blown government bailout of the deeply troubled automakers, President Bush tried to split the difference. He is offering a $17.4 billion loan–$13.4 billion upfront and another $4 billion in February. The deal is filled with demands for cosmetic concessions such as limits on executive comp and corporate jets—none of which are financially meaningful in any way. The White House calls this a loan, but don’t count on a dime ever being repaid.
This plan is supposed to give the automakers time to restructure themselves. It won’t. In truth, besides getting Bush out from under the mess, this plan won’t accomplish a thing. Bush says it would be dangerous for the auto companies to fail while the economy is in crisis. Does he think things will be any better in three months? Unless the economy miraculously turns around in the first quarter of 2009, Detroit’s collapse won’t be any easier to take.
As far as Chrysler is concerned, its majority owner, the private equity firm Cerberus Capital Management, has reportedly refused to put up any additional cash to help save its own investment. The Cerberus investors understand better than anyone the futility of doubling down now. But they are perfectly happy to let taxpayers do it for them. Chrysler is a goner. It will either be acquired (for little more than the value of its access to a government loan) or it will die.
GM may survive, but only as vastly restructured and downsized company. That will mean throwing tens of thousands of employees out of work and drastically cutting the wages of those who stay. It will require the company to offload dozens of underperforming lines and cut loose hundreds of dealers. Bush insists that plans for all of this be in place in 90 days. He, of course, will be gone in 30.
GMs loudest objection to bankruptcy has been its claim that consumers won’t buy cars from a company in Chapter 11. But why would they be any more likely to purchase from a producer living hand-to-mouth on a short-term government loan, with bankruptcy still far from foreclosed. Bush is only prolonging the uncertainty.
It was not surprising that GM stock rose on the Bush announcement. This is the new game for speculators: betting on whether or not Obama will let these companies go. In the end, shareholders, who would presumably lose everything in a bankruptcy but not in a government rescue, may be the only winners in this game.
The Audacity of Campaign Promises
Barack Obama gave four speeches last night. The first was the same optimistic cry for change that has carried him so far in this Presidential season. The second was a tough, frontal attack on the economic and foreign policies of both George Bush and John McCain. The third was a (Bill) Clintonesque bit of social policy triangulation—we can all work together to find solutions to such hot button issues as abortion, guns, gay marriage, and immigration. The fourth was a recitation of his economic agenda—a long list of promises that is familiar to readers of TaxVox by now.