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.
Tax Forms, Complexity, and Tim Geithner
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.
For most workers, paying payroll taxes is simple because employers withhold both the employee and employer portions. Self-employed people and those with income from partnerships or farms must report their incomes on Schedules C, E, or F. Those forms have a line for payroll tax (called self-employment tax) and refer taxpayers to a Schedule SE to compute this tax. Tax software performs these calculations, completes Schedule SE, and reports the tax owed automatically.
But employees of international organizations (and some others, including clergy) live in a tax never-never land. Their employers aren’t required to pay
Here’s where the fun begins. There is no place to remit this payroll tax on Form 1040, where employees report their wages. Instead, the employee must complete Schedule SE even if he has no self-employment income or any other reason to complete a schedule (C, E, or F) that would direct him to Schedule SE.
Ready for some more fun? Line 2 of Schedule SE lists the types of income that must be reported for SE tax and also specifies: Ministers and members of religious orders, see instructions for amounts to report on this line. Who would guess that these instructions also apply to
As the Senate Finance Committee report on the Geithner matter states, the IMF prepares a booklet for its employees detailing their tax responsibilities and sends its U.S. employees quarterly wage statements that show how their earnings are grossed up to cover the cost of state and federal income taxes and payroll taxes they must pay. So Mr. Geithner had a lot more to go on than just the IRS tax forms. Still, the chances of an error would have been lower if the tax forms had clearly pointed to the right result. And I and some of my colleagues who have consulted for the IMF have ourselves been confused about whether to report our IMF income as wages or self-employment income for tax purposes, with some of us “tax experts” paying too much self-employment tax in past years.
No tax form can clarify every possible wrinkle in the tax code, and the number of taxpayers involved probably doesn’t warrant a special form for income from international organizations or another line on the 1040. But it is not hard to see why we need so many tax forms.
Maybe, however, there is some benefit to this embarrassing episode. Having stumbled in the overly complex maze that is the Internal Revenue Code, maybe Treasury Secretary Geithner will have some sympathy for those who want to simplify it.