[Edited for typos 1/16/09]
The Democrats today revealed their plans for an $825 billion stimulus plan, the "American Recovery and Reinvestment Bill of 2009," which will include a number of tax provisions.
Appropriation measures include a wide range of provisions, from numerous defense and military expenditures to funds for Natural Resource Conservation Service Watershed and Flood Prevention projects, Rural Water and Waste Disposal projects, NASA climate research, NSF research grants, and Bureau of Reclamation projects, the Army corps of engineers, energy, Pell grants, and subsidized student loans, roads on tribal lands and roads across the country, rail and intercity transit systems.
The bill includes a projected $275 billion of tax provisions. (That's less than the more than $300 billion originally expected, but not by enough.) Among them, according to the press release by Charles Rangel for the House Ways & Means Committee, are the following:
- refundable tax credit of $500 per worker/$1000 per couple (up to $200,000 income)
- expansion of EITC
- expansion of child tax credit
- simplification of education credits and making the credit partially refundable
- turning the $7,500 repayable credit for first time home buyers during 2008 into a subsidy (no repayment requirement)
- increased expensing for businesses
- increased bonus depreciation for businesses
- increased (5-year) carryback of net operating losses for businesses
- "prospective" repeal of Treasury's illegal section 382 ruling (Notice 2008-83).
I suspect that, like the TARP program, we will realize after passage that there is a great quantity of chaff in with the wheat in this spending "stimulus." I am, I admit, prone to be suspicious of the amount of funding siphoned through the Defense department, which already eats an inordinate share of the federal revenue buffet with too little accountability and too much for the military contracting companies that seem to make more money than they should from whatever contracts they get. (I can't get out of my head the gloating of the military supply company CEOs pictured in Michael Moore's documentary when they were licking their lips in anticipation of the wonderful boon that Mr. Bush's pre-emptive war on Iraq promised them.) I must admit I like the idea of using some of these stimulus funds to support mass transit--particularly light rail. Climate research facilities are a no-brainer, as are uses of the funds to accelerate already planned agricultural research facilities and similar projects.
But many of the tax provisions are especially worrisome. The expansion of the earned income tax credit and child tax credits probably makes sense--that gets money into the pockets of those who most desperately need help. But making the home buyer provision a subsidy? Hard to justify that on fairness grounds or efficiency grounds, especially to the extent it goes to anyone above the 40% income distribution. Providing another tax cut like the stimulus checks (albeit indirectly this time, through the worker credit) for 95% of American workers doesn't make sense either. Couples with almost $200,000 in income don't need and shouldn't receive a $1000 credit. We should give more tax cuts to people at the bottom and none to people with such high incomes. (In fact, we should be preparing everyone with incomes more than about $50,000 per capita for an inevitable significant tax increase that will be necessary to pay off the huge debts due to the recession and unpaid-for Bush wars.)
By the way, I heartily approve of dispensing with Treasury's invalid Notice 2008-83 announcing that it did not intend to enforce the law under section 382(h) as far as banks acquiring loss banks was concerned. But why make it only prospective, rather than void ab initio?
Apparently, there is still talk about whether to include a $70 billion AMT patch again this year, in order to keep many upper-middle class taxpayers from paying taxes under the AMT at a slightly increased rate over what they would otherwise pay under the regular tax system. Readers know my views on this (or should). See various ataxingmatter postings on the AMT here (Extenders, Sept. 24, 2008) and here (Digging a Deep Hole, July 25, 2008), here (Ed Kleinbard on the AMT, Mar. 23, 2008), and here (What Congress should do about the AMT--part of a 6-part series based on my extensive AMT article published in 2005). We should be glad that we have the AMT as a back-up system to ensure that we are collecting appropriate taxes from those who do have the ability to pay. The wealthiest taxpayers should be "caught" by the regular tax, except when they have so many cumulative preference items that they are caught by the AMT, which is a good thing. The upper middle class (those taxpayers in the $200,000 to $500,000 income range) are the group that is most likely to see increased taxes under the AMT without a patch. Let those taxes increase. Even some taxpayers down to about the $75,000 income range may see some relatively small additional tax from the AMT. Various scholars have proposed changing the way the AMT works to exempt its reach down into those lowest levels, so hopefully Congress will keep that in mind if it considers any kind of an AMT patch this year.
The Republicans have already proposed H.R. 470--a purported stimulus proposal consisting entirely of tax cuts. Jim Jordan (R-Ohio) who is one of the 12 co-sponsors claims this is a "proven" method of stimulus. What? We've had 8 years of tax cuts under Bush, and we've witnessed the near-collapse of the economy, accompanied by an even greater mal-distribution of economic resources. Broad-based growth has not been the product of the Republican policies of tax cuts (especially for the wealthy) and increased expenditures (especially for the military) and privatization. There is no reason to expect tax cuts--especially of the kind proposed by the Republicans in Congress in H.R. 470 or even those business tax cuts in the Democratic package--to be an appropriate stimulus at this point. What are the Republicans proposing? Stale ideas like making the cut in the capital gains rate to 15% permanent. Nuts. That won't do a thing to stimulate the economy. It will just put more money in the pockets of the owners of capital--mainly wealthy Republican supporters. What else does the GOP propose? Allowing businesses to "expense" 100% of the costs of new equipment. The Democrats aren't much better on this one--expensing and bonus depreciation are also included in their bill. Expensing is another one of those favorite hobby horses of the GOP, but it won't do much to help growth. Businesses that were going to buy new equipment will still buy it, and pay even less revenues over to the cash-starved government. Businesses that are doing poorly and don't need equipment won't buy it just because of the expensing--or worse, if they do, it is a poorly directed subsidy of spending by the government that isn't likely to increase the businesses' long-term viability and is likely to DECREASE the expenditures on labor, which is the opposite of the jobs-creation effect that is needed from any stimulus package. The GOP also wants to "make the R&D credit permanent." Again, this won't do a thing to increase growth or jobs but it will continue the low revenues the government gets from successful businesses. The GOP wants to extend the net operating loss carryback to 7 years, even more than the 5-year carryback proposed by the Obama team. Carrybacks are, of course, another way to give businesses that aren't currently making much money a cash infusion from the government (like the TARP, just a bailout in a different form). They are unlikely to jumpstart growth. In fact, none of these business tax cut provisions--whether the more overboard GOP variety or the smaller package included in the Democrats' bill-- are likely to have any significant positive impact on economic growth while they may, in fact, have a negative impact on labor hires.
Most think that a number of the business tax cuts included in the Democrats' package are primarily to buy Republican votes. Would the GOP members of Congress really vote against an infrastructure spending package without those giveaway business tax cuts? If so, it must mean that the public's clear rejection of Bush administration economic policies hasn't registered.
Various sources of information include:
- this article in the NYTimes, Jan. 15, 2009
- this article in US News & World Report, Jan. 15, 2009
- this article on Bloomberg News, Jan 14, 2009
- the House Appropriations Committee bill setting forth the various infrastructure expenditures contemplated Download 2009.StimulusBill
- Rangel press release on Ways and Means tax provisions.