ataxingmatter

Links worth noting

There are a number of very interesting postings about things economic on the web that merit your look.  I'll just list them here, as I occasionally do.

JCT revenue estimate for House-passed economic stimulus package, Jan. 30, 2009

Bipartisan Senate passage of the Children's Health Insurance Program Reauthorization Act of 2009 (which now goes to conference to iron out differences with the House-passed version); see BNA for early version of the news release on Senate action approving $32.8 billion for the program on a vote of 66-32.

Healy & Uchitelle, Steep Slide in U.S. Economy as Unsold Goods Pile Up, New York Times, Jan. 30, 2009

Roger Ehrenberg, I Just Don't Get it, Jan. 28, 2009 (hat tip to Angry Bear)

Dan Shaviro, So far, so good?, Jan. 29, 2009 (taking solace in the fact that the stimulus bill at least didn't include a number of the proposals put forward by various business lobbies for even sillier business tax cuts)

Citizens for Tax justice, Less than a quarter of the House GOP's tax rate reduction proposal would go to the poorest 60 percent of taxpayers, Jan. 28, 2009

Mark Thoma at Economist's View, An Ideological Turf War, Jan. 28, 2009 (a good discussion about the competing views within macro economics over the last 30 or so years)

Robert Waldmann at Angry Bear, Commenting on Thoma commenting on Blanchard commenting on Lucas, Jan. 29, 2009 (more on the competing economic views between "freshwater" marketarians and "saltwater" keynesians)

Andrew Leonard, How the World Works: How to lie about tax cuts, Jan. 28, 2009 (describes "the House Republican strategy going forward [as] lie, misrepresent, and obfuscate.")

Bruce Katz and Robert Puentes, Brookings, Memo to the President: Invest in long-term prosperity, Jan. 12, 2009

Spencer at Angry Bear, New Deal--Objective Research?, Jan. 27, 2009 (more exploration of the current trend to misrepresent the New Deal as failing to create an economic stimulus--shows taht Alan Brinkley's article in the New Republic makes incorrect assertions about real New Deal gains in employment, economic activity, and duration of growth cycles)

National Women's Law Center, How the American Recovery and Reinvestment Plan Addresses Women's Needs, Jan. 28, 2009

Dani Rodrik, Looking Forward to 2009?, Dec. 31, 2008 (always a good idea to step back and think about the big picture issues that are of concern, even if we may not agree with everyone's view of the ideal solution)

And I leave you with this optimistic comment (available in full here) on economists view about the possibility of change under our new president.

Skeptics abound. Old wounds are never old. Folks who are comfortable with the way things are will feel threatened by change. Wealth will fight against anything that will diminish their standing and power. Until proven otherwise, many will assume government will simply screw things up, making them worse not better. The hurdles are huge.

But President Obama does represent a fresh approach to preparing for the future. He has the bully pulpit, and some powerful levers he can pull from his position.

Fair Taxes for the 400 richest Americans?--new IRS data

The IRS report on the 400 highest income Americans for 1992-2006 (based on adjusted gross income, which of course will not include some forms of income that are not subject to taxation and thus is a good bit lower than the disposable income that these individuals enjoy)  shows some disconcerting, though not unexpected, news.

The average tax rate paid by the richest 400 Americans fell by a third to 17.2 percent through the first six years of the Bush administration and their average income doubled to $263.3 million, new IRS data show.  The 17.2 percent tax rate in 2006 was the lowest since the IRS began tracking the 400 largest taxpayers in 1992....  The drop from 2001's tax rate of 22.9 percent was due largely to ...Bush's push to cut tax rates on most capital gains to 15 percent in 2003.  Capital gains made up 63 percent of the richest 400 Americans' adjusted gross income in 2006... Ryan Donmoyer, Richest Americans' Income Doubled as Tax Rate Slashed, Bloomberg News, Jan. 30, 2009.

Here are a few more interesting statistics from the IRS tables.

• The average AGI of the 400  (remember, this is not all of their economic income) was $263 million.
• In 1992 when this report was first initiated, average salaries were about $13.4 million and comprised about 25% of AGI, whereas in 2006 average salaries were about $23.4 million but only accounted for about 7.4% of AGI.
• In contrast,capital gains subject to preferential rates averaged about $15.8 million in 1992, or about 33% of AGI but had risen substantially by 2006, averaging  $169 million and accounting for 63% of AGI.
• In 1992, net business income accounted for about 1/20th of the AGI reported, whereas by 2006, it was less than one percent of the AGI [there goes that idea that it is the wealthy who are the entrepreneurs.....]
• Itemized deductions for these top 400 increased from an average $4.6 million (0.38% of the total itemized deductions on all returns)  in 1992 to an average $41 million (1.33% of the total) in 2006
• Average deduction for taxes paid (property taxes, etc.) was about $2.7 million in 1992, and $11.5 million in 2006. [See my Congress Fiddles article for a discussion of the benefit derived by the most affluent from itemized deductions, especially the property tax deduction for high taxes paid on multiple multi-million dollar residences]

Organizations frequently report that America's richest Americans pay more in taxes now than they did a decade ago.  That's correct, but not of much relevance.  These super-rich taxpayers receive a disproportionately large slice of the income, and that slice has grown disproportionately compared to the slices of other income sectors.  Even with lower rates, that means that there is much, much more to pay taxes on, so the amount paid in taxes is more than when they got a smaller share of the pie.  They are still getting an unfairly generous benefit from the Bush tax cuts--in particular, the cuts on capital gains and dividends.

Economic Stimulus (Part VIII): Senate Finance Text Available

The Senate Finance Committee has just released the official text of its version of the economic stimulus package.

Economic Stimulus (Part VII): tax cuts + entitment cuts = /= a sustainable economy, but ending (senses of) entitlements maybe?

[edited 1/30/09 to correct payroll tax description]

The right-leaning think tanks and commentators have long claimed that the long-term solution that will guarantee a viable U.S. economy involves two things--tax cuts and entitlement cuts.    Look at the Cato Institute, Heritage Foundation, Claremount Institute, Tax Foundation, Americans for Tax Reform, or any of the many other right-leaning "think tanks" .  Some of these claim to be nonpartisan, but are nonetheless clearly right-leaning in the positions espoused.  Many of these "think tanks" might better be called "dogma distributors".  In my view, these proposals distort the options and misrepresent the likely results.

I. Re Tax Cuts:

Right-leaning proposals for tax cuts argue for two types of reductions of government revenues that are especially beneficial to the affluent:  cuts on capital income (low taxation of capital gains, treatment of dividends as capital gains, low taxation on stock options as compensation, treatment of "carried interest" as capital gains even though it is most clearly compensation income, etc.) and cuts on corporate business taxes (across the board lowering of rates, accelerated depreciation and expensing provisions, advantageous treatment of stock option compensation to high-paid executives, allowance of cross-crediting of foreign income that can drastically reduce the US tax rate, allowing repatriation of foreign income with little or no taxation, advantageous transfer-pricing, sourcing, apportionment and treaty rules for highly manipulable types of income like royalties for intangible properties developed in the US but moved to other countries , etc.). 

The justifications offered for these tax cuts are usually couched in language about entrepreneurship and the American way.  They say that cutting taxes on capital puts money into the hands of entrepreneurs, creating new businesses and jobs; that cutting taxes on corporations lets them compete better in the world markets; and similar "American dream" friendly language. But the justifications don't hold water.  The investor class tends to hoard its assets in order to enrich itself, with little concern about broad-based economic growth.  The assets may end up in secret Swiss bank accounts, fraudulently hiding from US taxation and doing nothing to create new businesses or jobs.  Conversely, the real entrepreneurs (Bill Gates in his garage, not Bill Gates in his multimillion dollar mansion outside Seattle) are struggling with the bits and pieces of savings and loans that they can pull together from friends, family and local banks--they're not benefitting from the capital gains cut for the affluent.  Similarly, the justifications for corporate tax cuts espouse greater productivity and jobs creation but support dividends to affluent owners and high bonuses to affluent managers, low paychecks for typical workers and destruction of worker pensions and other benefits.  Corporate expensing isn't likely to result in purchase of excess equipment, and funds freed up from corporate tax cuts are about as likely to be invested overseas (in low-tax jurisdictions where tax credits that are cross-credited amount to a further tax break at home) than to be invested in new job creation here at home.  Competition may be enhanced, but where and to what purpose? Likely the tax breaks provide even more impetus for the big multinationals to beat out the little businesses here and abroad, a trend that may not be part of a sustainable global economy in the long run.

Of course, another impact of government revenue reductions in the form of tax cuts for the affluent is the reduced monies available to spend in areas of the greatest need--urban mass transit programs, support for medicaid for the poor, etc.  So tax cuts for the affluent are likely to end up being simultaneously translated into benefit cuts for the poor and lower middle class.  That is especially true when one realizes that most proposals for zero taxation of capital gains and corporate income also propose reduction of "entitlements" that are particularly important for the elderly and poor among us.

2. Re Entitlements

Entitlement changes, cuts or outright elimination is a long-term goal of most of the right-leaning think tanks.  Privatization of Social Security and even further privatization of health care benefits are explicit goals, moving the systems to ones that generate profits for insurers and others while cutting benefits for the sick and elderly poor. 

Entitlements, when it comes to the poor, is read broadly.  Being able to earn any income and not pay any income tax because of the standard deduction and personal exemptions and earned income tax credit amounts to such an entitlement.  The claim is that, in order to be invested in America and "responsible", every American, even those at the very low end of the income distribution, should pay at least some percentage of their earned income in taxes (some suggest a minimum of 5% from those at the bottom who struggle for their daily bread. 

Of course, the most conspicuous arguments about "entitlements" are directed towards Social Security and Medicare, social safety net programs that are funded through regressive payroll taxes, in the case of Social Security, taxes that are assessed on every dollar earned up to about a $100,000 cap-- an amount that puts the earners into the upper 30% of the income distribution--while dollars above that cap are not assessed anything to support Social Security.  Statements abound that Social Security is already insolvent or bankrupt.  Of course, those statements are wrong, since Social Security is still running a surplus that has been used to mask the depths of the federal deficit (which handily helps justify tax cuts for the affluent).  Health care costs are skyrocketing, though it is not clear that the "entitlements" problem and the "health care costs" problem are inseparable.  We might well use government clout to intervene in a poorly performing market where health care profitmakers are permitted to make life-or-death decisions about care available based on their profit taking goals.  Or we might well decide that spending a larger proportion of the US gross domestic product on providing accessible and decent health care to every American is an appropriate goal, so that we should make changes in our health care delivery system, such as moving to a single-payer, single-provider system that acknowledges that health care provision is at least a quasi-government utility.  But the entitlement naysayers distort both the current situation (claiming inevitable bankruptcy) and the future options (failing to provide clear information about most western democracy's universal health care) in order to push the dogmatic agenda of privatization and cutting of government benefits provided through these "entitlement" programs.

For all these reasons, and more, item 1 plus item 2 does not equal (=/=) a sustainable economy.

But there is another type of entitlement that we ought to be talking about, that tends to be completely disregarded when those right-leaning think tanks mention entitlements.  It shouldn't be.

3.  The other type of entitlement.....

Meanwhile, there is another type of "entitlement" that is completely disregarded by the same proponents of "welfare reform", "entitlement reform" and generally cutting benefits aimed at those in the non-affluent income groups.  That can be best understood by looking at the way the TARP funds (troubled asset relief program) were administered by Paulson and the Bush administration.

TARP came about as an idea for dealing with the credit crunch and the huge losses on the books of banks that had issued subprime mortgages without appropriate risk analysis, securitized those mortgages in vehicles that made it more and more difficult to track how defaults affected the financial system, gambled with credit default swaps built on a rickety foundation lacking appropriate assumptions about risk, and packaged it all with a speculative mentality that grabbed for huge profits without exercising appropriate judgment.  Bankers and shareholders got rich (or richer) out of the risky speculation.  Investment bankers and traders on the floors hauled home million-dollar bonuses annually, considering it their just reward for their high-flying risk-taking abilities.  They were gambling and making millions, bragging about it and browbeating lawyers who  dared to get in their way on a risky deal that they wanted treated a certain way for tax purposes.  (I know from personal experience--I was a Wall Street tax lawyer from late 1995 through the first half of 2001.)  Those bankers--all of them, not just the CEOs making multimillion pay packages for taking risks and ultimately running their banks into huge losses--were  part of a speculative, get-rich-quick, greed-is-good, we're-the-king-of-the-world culture that dominates Wall Street.

Why do I say "dominates"?  Didn't the credit crunch and near collapse of the financial system take the starch out of their collars and teach them proper humility?  Haven't they recognized that their profligate ways have had a huge negative impact on their country, their fellow countrymen, and the world in general--especially the poor and lower middle class? 

Apparently not.  First, Paulson exercised none of the power that he should have and could have exercised in doling out $350 billlion of taxpayer money to these same loser banks. There were almost no strings attached to the bailout.  A few limitations on executive compensation for those at the very top was about it.  Dividends or multibillion dollar bonuses could still be paid.  Banks were not required to use their lending power to support ordinary Americans' ability to stay in their homes and small businesses' ability to keep operating. 

And they haven't.  Banks have scoffed at any obligation to the public interest.  Instead, banks with big handouts from the government have seen those handouts as just another way to carry on their "greed is good" agenda.  Several of the bailout recipients are helping Pfizer buy Wyeth--creation of a bigger Big Pharm that will have even more control over pricing of essential pharmaceuticals worldwide.  Not likely, in my view, to be a consolidation that promotes the public good.  But none of the bailout recipients are doing much to help ordinary Americans avoid foreclosure.And they are paying dividends and huge bonuses, in spite of running up huge losses and receiving huge government handouts.  The headline in today's New York Times tells it all: What Red Ink? Wall St. Paid Hefty Bonuses, Ben White, NY Times, Jan. 29, 2009, at A-1. 

[Wall Street financial companies paid out] an estimated $18.4 billion in bonuses for the year.  That was the sixth-largest haul on record. ...Wall Street workers still took home about as much as they did in 2004, when the Dow Jones Industrial Average was flying above 10,000 on its way to a record high.  Some bankers took home millions last year even as their employers lost billions.

Later in the article, White notes that New York's comptroller, Thomas DiNapoli, has calculated that the brokerage units at New York financial companies lost $35 billion in 2008. 

The acceptance of taxpayer bailout monies and payout of bonuses--even at less extraordinary amounts than during Wall Street's recent heyday-- is hard to justify-.  It is even "disconcerting" says Lucian Bebchuk at Harvard.  There is no "performance reward" argument for payouts--in fact, there's a strong argument for clawing back "performance" bonuses based on the phantom gains from earlier years.  There is no "need to pay more to retain them" argument for payouts--in fact, there's a buyers market for brokers these days, as layoffs and financial wreckage continue to cause enormous job loss.  Why would you pay to retain the guy that took the gamble that got you into the soup in the first place, anyway?  As Bebchuk said "This was neither the sixth-best year in terms of aggregate profits, nor was it the sixth-most-difficult year in terms of retaining employees."

 Whether bailout monies went directly to pay the bonuses or not is irrelevant, in my view.  Money is fungible.  Bonuses paid by companies that take taxpayer monies are insupportable.  Period.

So are those Wall Street bonus recipients embarassed by their awful performance, the need for their companies to recieve bailout monies, and their absurd bonuses and ready to turn it back to the companies in chagrin?  Not one whit. Here's the conclusion to the Times article.

On Wall Street, where money is the ulimate measure, some employees apparently feel slighted by their diminished bonuses.  A poll of 900 financial industry employees released on Wednesday by eFinancial Careers.com, a job search Web site, found that while nearly eigght out of 10 got bonuses, 45 percent thought they deserved more.  Id.

Now, there's an entitlement I would feel very comfortable eliminating.  It's not just because of my memory of the bullying culture that predominates on Wall Street, or the hubris of the sense of entitlement that permeated every encounter with the typically arrogant young white males who raked in million-dollar bonuses for thinking up schemes to help taxpayers avoid paying taxes.   It's the fact that the culture that pays those bonuses to people who think they deserve them for risk-taking creates a systemic risk for the entire financial system, which ultimately burdens ordinary Americans in their daily lives.  It's time to really end that arrogant, speculative culture.  Requiring any company that receives TARP funding to forego any payments of bonuses or dividends until the American taxpayers are 100% repaid would be a start. 

Tax Patents: cert is filed in Bilski business method patent case

[edited 1/30/09 to add link to AALS panel podcast]

For those tax aficionados who have been following with interest the treatment of business method patents generally, and tax strategy patents in particular, you are aware that the decision by the Federal Circuit in Bilski appeared to take a hard line to patent eligibility that might--depending on the ingenuity of patent lawyers--make tax strategy "inventions" and many other business method "inventions" ineligible for patenting.  See earlier ataxingmatter postings on this issue here and here, and this earlier 2007 posting, for example.

The Federal Circuit put forth a test in Bilski for business method patents that required either a "machine or transformation" for patentable subject matter.  The opinion seemed, even for someone in favor of a ban on tax strategy patents, not  very well written, in that it claimed a rigid Supreme Court test where language in the cited cases made clear that the Supreme Court hadn't yet reached that conclusion, and its description of the test it proposed left many questions both about manipulability and rationality of the distinctions it required. 

At a recent special panel on business method patents at the 2009 annual meeting of the American Association of Law Schools, several colleagues and I spoke about the meaning of Bilski.  See "Tax Patents, Surf, and Sun" on Info/Law for more on the Jan. 9 panel.  A podcast of the discussion, which primarily concerned the development of business method patents and the Bilski case, with speculation about the status of business method and, in particular, tax strategy, patents after Bilski, is available at this link on the AALS website.

The panel concluded that it was a difficult case to read, that manipulation of the eligibility standard might or might not be possible by claiming a requirement for specialized computer implementation (or perhaps even reaching for a tangible commodity at the bottom of the patent, like real estate--or even coins or oil at base of various financial derivatives?), and that it would be helpful for the Supreme Court to review the case so that a clear and strongly reasoned opinion could guide the law on this issue.  That panel was in early January, so we did not know if a petition for cert would be filed or not.  We've been waiting with bated breath ever since.

The wait is over.  A petition for cert has been filed: Bilski Petition for Writ of Certiorari.  The petition raises two questions:  whether the Federal Circuit erred in holding that the test for patentability of a claimed process invention is the "machine or transformation" test put forward and whether that test "contracdicts the clear Congressional intent that patents protect 'method[s] of doing or conducting business.' "

More on this will be forthcoming in the days and weeks ahead.

Economic Stimulus (Part VI): media matters

This one deserves an "economic stimulus part" to itself--the continuing failure of the mass media to present accurate information about economic and tax issues, perhaps reflecting the concentration of ownership of media by large corporations with their own agendas and ideologies (well, of course, those of the largest stakeholders in those corporations--their high-level managers and high stakes owners).

Without accurate information about legislation, supporters' and opponents' positions, and administrative actions, ordinary Americans cannot make good decisions about communicating with their representatives in Congress or voting at the ballot box.  Journalists have two central obligations to their audiences: (i) accuracy, without distortion, of their description of facts, texts, statements and positions of important players; and (ii) transparency, without deception, when they are sharing their own opinions rather than providing objective facts. 

Media matters reports the continuing advancement of "myths and falsehoods" on the "details and effects" of President Obama's economic stimulus plan.   See Myths and falsehoods surrounding the economic recovery plan, Media Matters.org, Jan 28, 2009.  Here's a sample:

• incorrect assertion that CBO study found that the majority of the money would not be spent for 18 months whereas in fact the report cited was only a partial analysis that reached no such conclusion and a full CBO cost estimate report concluded that 64% would be spent by end of fiscal year 2010 (that's prior to the end of calendar year 2010);
• incorrect assertion that funding for food stamps and unemployment insurance payments will not have a stimulus effect whereas in fact even Mark Zandi, a conservative economist and reportedly a McCain economic adviser, says that "extending food stamps are [sic] the most effective ways to prime the economy's pump";
• incorrect assertion about the New Deal, along the lines that "everybody agrees that the New Deal failed" (Fox News' Brit Hume) or that FDR's New Deal was ineffective in reducing unemployment during the Great Depression (Fox News' Chris Wallace and others who have "cherry-picked data from the Bureau of Labor Statistics") whereas "In fact, unemployment fell every year from 1933 until 1938";
• incorrect assertion that the Japanese fiscal stimulus policy played no role in helping Japan recover from its 1990s era recession whereas in fact various prominent economists concluded that the stimuls package produced solid growth but was not as effective as it could have been because it was temporarily abandoned in an attempt to reduce the deficit;
• incorrect assertion that ACORN (a community activist group that the GOP has at the least mis-described (possibly libeled) on other occasions) would receive $4.19 billion whereas in fact the bill neither mentions ACORN nor provides any possibility that the funding for neighborhood stabilization activities--$3.44 billion of which is allotted to states, local governments, and nonprofits--could go in its entirety to ACORN, since the distribution of the 3.44 billion is to be through competitive processes that allot no more than $750 million to nonprofits;
• incorrect assertion that Robert Reich proposed at a congressional forum to exclude white males from any jobs created by the stimulus whereas in fact Reich stated that he favored a plan that was inclusive of "women, minorities and the long-term unemployed".

See also a number of other postings on the Media Matters website, including:

Politico advanced GOP claim about stimulus plan's effect on job growth

http://mediamatters.org/items/200901290007

Economic Stimulus (Part V): House Action

The House voted today (Wednesday) 244-188 to approve an $819 billion stimulus package of tax cuts and spending, without any Republican support.  See  House Passes Stimulus Plan Despite GOP Opposition, NY Times, Jan 28, 2009.  

What this vote seems to show is that the Republicans--for all their talk about bipartisanship--are going to go for hardline positions.  They disliked a tax credit that was refundable to workers who "earn so little that they do not pay income taxes, even though they are subject to the payroll taxes."  Id. They complain about the spending--because they wanted more of their own tax cutting approach.   The chair of a Republican study group that put forward a GOP alternative of tax cuts (see below), Tom Price of Georgia, had the hutzpah to claim that "after a year of bailouts, rebates and taxpayer-funded backstops, it should be clear to all that the approach of throwing huge sums of money at the problem has utterly failed."  Rowland, GOP drafts ideas on stimulus plan, Washington Times, Jan. 19, 2009.  There is a sad irony here, given the result of granting tax cut after tax cut for eight years without benefiting the economy.

The GOP proposals are more of the same policies that have dominated discussion for years.  See the GOP proposal for the Economic Recovery and Middle-Class Tax Relief Act of 2009, for example, that proposes making the low capital gains rate permanent (a benefit for the most affluent who own most of the financial assets), adding a new, 5% cut "across the board" in income taxes (of primary benefit to the most affluent), and a 10% cut in the top corporate tax rate (a primary benefit for the most affluent corporate managers and shareholders, as well as of some benefit to tax exempts that own considerable stock, if passed on to shareholders rather than "soaked up" by managers), as described in Rowland, GOP drafts ideas on stimulus plan, Washington Times, Jan. 19, 2009.  See also the discussion of a "tax and entitlement cuts" starve-the-beast version on the Heritage Foundation site, Foster & Beach, Economic Recovery: How Best to End the Recession, Heritage Foundation, Jan. 7, 2009 (appearing to suggest that the economy is recovering on its own  (I guess they aren't counting all the government intervention already required in AIG and other instances that threatened total collapse of the financial system?), and proposing making Bush's 2001-2003 tax cuts permanent or at least extending them another 5 years, reducing the top tax rate on individuals and businesses by 10 percentage points (from 35% statutory rate to 25%, even though the effective tax rate is clearly much lower than the statutory rate already), while of course making significant cuts in "entitlement" spending (by which the Heritage Foundation means Social Security and Medicare, not the percentage depletion allowance or other "entitlement" tax expenditures that benefit Big Oil and other big money).  

The Republican vote in the House seems to say that either the GOP will support the old failed policies or they will not support anything.  Fine.  It seems that a strategic response to this strategic positioning by the Democrats would be to no longer cater to the GOP wishes as was apparently done in the initial design of the stimulus package to include so many wasteful business tax cuts (like bonus depreciation).  In the future, the Dems should realize that sweetening the pot a little won't attract the bitter GOP, so they should not bother to try.

Economic Stimulus (Part IV): infrastructure

In my first posting about the "basics" of an economic stimulus plan Economic Stimulus (Part I), I said that the heart of the problem we face is a recession in which ordinary Americans lose jobs, homes, savings and hope, so the stimulus should be designed both to "jumpstart" the economy to reach the people that need help the most and to support programs that will create a long-term sustainable economy that will serve the American people well. 

In my second posting, Economic Stimulus (Part II): AMT?, I noted that the same old AMT "patch" that Congress has enacted year-in, year-out since the huge tax cuts of the 2001 and 2003 legislation, in particular, resulted in a gradual downward bracket creep of the AMT should not be enacted again this year.  We should recognize that those with hundreds of thousands of income are not "middle class" but the affluent, and we should not be offering tax cuts to the affluent as a claimed economic stimulus.  That's what the Republicans did for 8 years (an annual AMT patch, along with annual reductions in corporate taxes, all in the name of creating even more economic stimulus and job growth), but the result they got was a anemic job recovery from the post-9/11 recession and what growth there was directed at the affluent, not at the ones who needed its benefits.

In my third posting, Economic Stimulus (Part III): class warfare, income inequality, and--tax cuts as economic stimulus?, I suggested that class warfare underlies the dogmatic free-market policies of tax cuts  as implemented generally from Reagan on.  A policy of tax cuts for capital income combined with deficit spending that requires borrowing to be paid back, without tax changes, by wageearners shifts the benefits of society to the affluent and shifts the burdens to those who are not affluent.  It  was not by accident, that is, that inequality in income distribution increased significantly from 1980 to 2007, with the top 5% moving from garnering a share of income equal to 3 times their proportionate share to one equaling 4 times their proportionate share in that period.  Economic stimulus requires broadly shared economic growth, not the anemic, concentrated-in- the-rich growth that tax cuts may engender.  Tax cuts that go to the affluent and Big Business are just more of the same policy that got us into this economic mess.  Instead, I said, do tax cuts for individuals at the bottom, and do it through payrolls so that it is spent in those individuals local neighborhoods.  "Everything else should be carefully targeted public infrastructure (both tangible and intangible) spending that focuses on the type of infrastructure that will move us into a more sustainable future." Id.

So just what types of infrastructure should be getting a boost through any economic stimulus plan?  Three key areas come to mind in terms of tangible infrastructure:  public mass transportation systems, public school systems, and maintenance of older infrastructure (highways/roads/public buildings). 

• Mass transportation expenditures serve so many policy goals at once that they are an incredible boon as part of an economic stimulus package.  They create jobs both temporary (construction of rail projects, for example) and permanent (drivers and toll takers, for example).  They assist with our goal of reducing our impact on global warming by cutting back wasteful and inefficient single-rider automobile transit that burns fossil fuels inefficiently.  They assist with our goal of moving to new, high-sustainability technologies by providing an impetus to entrepreneurs to build the companies that will build the transit structures.  They serve our goal of helping ordinary Americans who need jobs and viable local economies, by providing a secure and affordable means of transportation to jobs. 
• Public school expenditures can be similarly advantageous.  They also create jobs both temporary (construction of new schools) and permanent (teachers and staff).  If appropriately targeted (to poor communities, especially, rather than to affluent ones), they assist with our goal of increasing human capital in ways that expand opportunities for productive lives that bring those on the margin of society into the economic system as producer/consumers who help ensure a sustainable economy.  If appropriately designed (and the stimulus should rightly ensure that this is so), they provide further support to our goal of moving to new, high-sustainability technologies by providing opportunities for entrepreneurs who design more energy efficient structures that provide a better learning environment.
• Maintenance of existing infrastructure is also important.  Maintenance expenditures can be put into place quickly, thus helping the "jumpstart" function of the stimulus package.  They put people to work and if appropriately targeted (to the neediest areas,  to the most decayed infrastructure, to infrastructure that is most vital), they boost the ability of the local area using that infrastructure to be productive and increase economic activity. 

Note, however, that using a stimulus package to build unneeded roads in areas where no one has thought about what directions we should be moving in  would be a mistake--no stimulus, limited impact on jobs, and staying in a mistaken rut instead of forging a new path.  So maintenance of infrastructure makes sense, but only with appropriate consideration of the priorities for maintenance, and "new" infrastructure doesn't make sense if it is just more of the same without regard for genuine need.  Questions need to be asked, like: is light rail more important here than another road?  is the resulting air pollution too much to make this project worthwhile?  is this money mostly going to be pocketed by no-bid contractors making exorbitant sums for doing shabby work because that has been the trend in prior projects undertaken by this authority?

What about "intangible" infrastructure?  There are a number of areas here, as well, where economic stimulus spending could in fact achieve a long-term economic stimulus effect.  The most important, I think are

1) probably the most important, supporting basic research within the academy and government institutions that further understanding and ability to create sustainable technologies (e.g., in alternative energy, health, communications, transportation);

2) creating, maintaining and/or improving institutions that support universal health care, such as supporting states' funding abilities for state-administered programs, and

3) creating, maintaining, and/or improving institutions that support human capital creation, such as supporting higher education opportunities.

 The proposals currently under consideration are not terrible, measured by this yardstick, but do fall short of what one might have hoped for from an Administration and Congress elected in a clear vote for change.  See David Leonhardt, A Stimulus with Merit, and Misses Too, New York Times, Jan. 27, 2009.

Economic Stimulus (Part III): class warfare, income inequality, and --tax cuts as economic stimulus?

In this third posting on the effort to create an economic stimulus package, let's consider the status quo of income distribution, as described in an October 20, 2008 congressional research service paper (under the Bush regime, at a point just shortly after the credit crisis implosion and before the devastating impact it would have on jobs was obvious to all).

Between 1967 and the late 1970s, the bottom fifth experienced a slight increase in its income share, while the share accruing to the top 5% of households in the  distribution fell. Since 1980, however, the share accruing to the bottom fifth has fallen, and the shares accounted for by both the top 20% and the top 5% have risen.  Between 1967 and 2007, the share of income accounted for by the three middle quintiles fell from 52.3% to 46.9%. Brian W. Cashell, Inequality in the Distribution of INcome: Trends and International Comparisons, Congressional Research Service, Oct. 20, 2008, at 7.

Note that in pre-Reagan 1980, the bottom quintile's share of total household income was 4.2% , the second 10.2%, third 16.8% and fourth 24.7%, while the top quintile's share was 44.1%.  The top 5% had three times their proportionate share of the income or 16.5%.  In 2007, those percentages had changed, with the bottom groups losing out on shares of income as income shifted to the top, with ONLY the top quintile gaining:  bottom third 3.4%, second 8.7%, third 14.8%, fourth 23.4% (all less of a share than in 1980) and the top fifth with 49.7% (more).  Now the top 5% has 21.2% (much more--now four times their proportionate share of the income).  Id. at 8.  

That means that inequality increased significantly from 1980 to 2007. 

That is the period of neo-liberal, free marketarianism representing class warfare in which policies by and for the benefit of the wealthy were legislated through a combination of tax cuts (lowering capital gains taxation on the wealthy, lowering business taxes for profitable multinational corporations such as through permitting cross-crediting of taxes against low-taxed income, thus subsidizing in the tax code the companies' foreign operations to which they may be shifting jobs from the US), tax loopholes (think various estate tax devices; excessive flexibility in pass-through regimes such as the S-corp gambit that purportedly permitted Senator Edwards to avoid paying payroll taxes on most of his compensation), special privileges (think no-bid military contracts to companies with no special qualifications, such as those given to Blackwater's company of mercenaries in Iraq) and direct subsidies (think payments from the US government to "farmers" who own land and do not farm but receive sometimes hundreds of thousands of dollars for doing nothing, including of course some of our very representatives in Congress). 

Taking stock we see that jobs vanished and inequality increased, with the wealthy getting a larger share of the  pie and all the rest ending up with a smaller slice.  We've found that tax cuts for business don't deliver the goods the Republican pushers of those tax cuts promised.  Instead of booming growth "trickling" down to everybody, we have an economic bust, with  the bad times even hitting some of the high rollers.  Instead of robust job creation from all that tax relief to capital, there are no jobs and one company after another is laying off workers.  Instead of the merger and acquisition industry leading to robust job growth and a better life for ordinary Americans, we have the spectacle of banks that received TARP funds failing to use them to help ordinary Americans stay in their homes (many of the CEOs even saying that they have NO obligation to pursue the public good) but lending the money instead to support the merger of Big Pharm Pfizer with Big Pharm Wyeth, which will result in the consolidated huge entity 1) laying off thousands of workers that are now "surplus" and 2) cutting back on the basic research to develop new technologies and advances in medicine, in order to 3) make lots more money (for shareholders and managers) from already existing technologies in the pipeline.  See Jack Healy, Wall Street Waffles as It Searches for Direction, New York Times, Jan. 26, 2009 (noting continuing spate of job layoffs, and the $68 billion dollar takeover of Wyeth by Pfizer);  Pfizer CEO: Wyeth Takeover Will Be Different, BusinessWeek (Jan. 26, 2009) (indicating plans for the "different" merger to result in elimination of 20,000 jobs, the closing of 5 of 46 Pfizer manufacturing plants, and acquisition for Pfizer of a new pipeline of drugs that it hasn't been able to create on its own, yet claiming that the layofss can be done this time "without harming morale and productivity"--obviously, he doesn't mean the morale of the 20,000 laid-off workers).  Most of the debt for the Pfizer deal is coming from banks that got TARP funds--Bank of America Merrill Lynch, Citigroup, Goldman Sachs, JPMorgan Chase and Barclays are providing $22.5 billion in debt.  Is that basically the taxpayer money heading over to support Pfizer's acquisition?

We've had bonus depreciation and additional expensing in the tax bills passed under the Bush regime, all with the promise that these business tax breaks would lead to incredible growth and new jobs.  But jobs under Bush didn't even keep up with the ordinarily expected expansion based on population growth, much less ever show the robust expansion promised by the hucksters shilling for big business.  And now we've landed, as a result of those policies, in the worst recession since WWII and maybe something that will approach the Great Depression that our grandparents lived through.

So tell me.  When we are spending money we haven't got to try to dig us out of this economic mess that the Bush Administration dug us into, why would anyone in his or her right mind who was elected by the American people to undo the mess, listen to the same old Republican wags like John Boehner  (R-Oh) who cares about Wall Street and not Main Street and "demands"  the same old business tax cuts or Republicans won't play at the economic stimulus party--i.e., bonus depreciation, expensing, or anything else for business and more tax cuts for the upper income quintiles (the AMT "patch" in a version to bring "relief" to those making hundreds of thousands of dollars annually)?  

See, e.g., Boehner to GOP: Vote Against Stimulus, Politico, Jan. 27, 2009; Obama won't compromise on tax cuts, politico, Jan. 27, 2009 (noting that Republicans object to tax cuts for the lower-income level as welfare);  Boehner: Treasury's Bailout Package Should Help Only Wall Street, Not Main Street, ThnkProgress (re Boehner's appearance on ABC's This Week in September 2008); Bob Herbert, The Same Old Song, New York Times, Jan. 26, 2009 (asking the same question that I am asking).

When the G.O.P. talks, nobody should listen. Republicans have argued, with the collaboration of much of the media, that they could radically cut taxes while simultaneously balancing the federal budget, when, in fact, big income-tax cuts inevitably lead to big budget deficits. We listened to the G.O.P. and what do we have now? A trillion-dollar-plus deficit and an economy in shambles. Id. (Herbert op-ed).

And I just saw my fellow tax prof blogger Jim Maule, over on Mauled Again, has asked the same question, here.

So here are some points on the tax cuts proposed as part of the economic stimulus package and various recommendations.

1)  The minority party should not demand more of its same policies as the cure for the crisis that those policies created for us, and the majority party should have the strength of will to stand for policies that benefit ordinary Americans--those who voted overwhelmingly for change after seeing the economic mess resulting from the Bush regime's tax cut policy.

2)  The proposed tax cuts for business should be eliminated from the economic stimulus package, and at the least they should not be expanded.To the extent that any tax cuts for business are retained as part of the package, they should be clearly temporary and set to expire within two years and that expiration should be as firmly built into the system as possible to prevent the claims that the temporary cut should be made permanent. (In case you haven't noticed, that's another frequently used strategy of the business lobby--once you have a bird in hand, you fight like hell to keep it even if everyone agreed at the outset that the birds were supposed to be set free). 

For example, because of the declining value of corporate debt, some businesses may be able to buy back their debt at a much decreased cost, reaping a significant economic gain.  They won't have the outstanding obligation, and they will save the interest payments they had expected to make.  Buying back the debt decides some of the questions about valuation, benefiting to some extent those who hold the debt on their books (though the discount guarantees a significant loss). 

Should Congress also enact a temporary provision letting debtors repurchase their debt in this way without having to pay the tax piper?  Currently, such repurchase results in debt forgiveness in the amount of the discount and that cancellation of debt (CoD) income is subject to tax. 

Of course, businesses would relish getting the big savings from repurchasing at a discount while at the same time getting tax relief from not having to pay tax on the CoD income.  But is CoD income relief for businesses a wise step for Congress to take as part of a stimulus package?  I don't think so.  Businesses that can afford to buy back their debt at the discounted rate likely are not suffering a liquidity crisis.  While tax relief is always welcome (businesses tend of course to think no tax is a good tax), it isn't essential to make the debt buyback efficient for the business.  That means there wouldn't be much of a stimulus impact from including such a provision.  Like most of the other business tax cut proposals, it's just a giveaway to business in the guise of economic stimulus.  Businesses will pretty much buy the equipment they were going to buy anyway (not much, if they think a long recession is at hand), but they'll be glad to take the "bonus depreciation" and pay less taxes.  By the same token, businesses that can afford to do so will go on and buy their debt back at the huge discounts now available; but if the tax relief is there so that the buyback is even cheaper, they'll be glad to take it.  It won't create jobs; in fact, by encouraging liquid businesses to use their excess liquidity to buy back their debt rather than engage in productive activities,  a tax forgiveness provision might, if anything, negatively impact job creation. 

 The U.S. Chamber of Commerce is lobbying for permanent exclusion.  See Everett Ehrlich, Temporarily Suspending the Recognition of Income from the Repurchase of Below-Par Business Debts, January 2009.   Baucus and the Senate Finance committee included it, and even Kent Conrad (D) is pushing it. 

Senator Conrad, according to Donmoyer's post on this on Bloomberg.com, calls the debt forgiveness income "fictional".  But that it is not.  The companies who buy back their debt at a lower amount have gotten the difference in outright cash--e.g., principal amount of debt loaned to them $100,000, cash used to pay off that face amount $20,000--that's $80,000 of cash that was not included in income when received because there was an obligation to repay it, that now should be included in income because there is no longer an obligation to repay it.  That's not fictional income.  It's real income (and is quite different from a purchase money mortgage for ordinary homeowners--see below).

This is just another opportunistic attempt to reap "rents" from the economic crisis.  The idea that Congress should be focussing on is planning for a sustainable economic future. Those plans have to include increased taxes on the wealthy and a reform of the corporate tax to prevent the ability of multinational corporations, in particular, to fail to carry their share of the economic burden in return for their enjoyment of the benefits of the economy (including privatization of profits and socialization of losses, as managed by the big banks).  A two-year suspension of the tax on CoD income would surely benefit the corporations that buy back their debt, but there's no reason to expect buybacks would lead to job creation.  Furthermore, once granted, corporations would push for making the temporary exclusion permanent, finding one further way to push for paying a lesser share of their profits to the government.  It's a lose-lose proposition for all the taxpayers who would have to pick up the slack.

Should the fact that Congress enacted a provision to forgive the tax on households that renegotiate the face value of their mortgages be relevant?  Not really.  That provision should have been even more limited than it was, but extending a bad idea further isn't a good idea.  And at least the debt forgiveness provision for homeowners was, at heart, an attempt to help ordinary Americans who restructure their mortgages when their homes become worth less than the loan taken out to purchase them.  Those are real people facing tough times in the midst of an economic crisis.  They are the ones the government should be most focused on helping to deal with the tough times.

2) The AMT should be "patched" only to protect those in the bottom four quintiles of the income distribution from its reach--those who've been shafted by the free market policies that have wrecked our economy. [Read my article on this, Congress Fiddles, available on SSRN, here.  In short, I say retain the AMT, but fix it so that it doesn't reach the taxpayers with incomes below $100,000 (or maybe $150,000) and make a few other changes, including treating the capital gains preference as an AMT preference so that the AMT gets more tax from those who make lots of income from capital gains but have very little other income.]  

(Of course, the train already left the station on another part of the AMT, when ReformAMT got its stock option relief as part of the hastily thrown together bailout package in October, as described on the Pappastax blog, here.  I'll just refer you to my discussion in Congress Fiddles, linked above, about the various reasons why the coalition of people who gambled on getting deferral and capital gains from their stock options should not have been bailed out --at a cost of $2.3 billion--in the Emergency Economic Stabilization Act of 2008.  Congress gives to those who manage to lobby it the most.....)

3) The tax cuts for individuals should at the least be payroll based and for the benefit of the lower-income quintiles. 

4) Some assistance needs to go to the states and other programs that relieve ordinary Americans in ways that get spent within the economy to build neighborhoods (unemployment compensation, medicaid, etc.). 

5) Everything else should be carefully targeted public infrastructure (both tangible and intangible) spending that focuses on the type of infrastructure that will move us into a more sustainable future--public transit, public schools, alternative energy, research into sustainable alternatives, etc.

I think In responding to the extensive business lobby's pressure from more tax cuts like the ones delivered to business on a silver platter year after year under Bush, with promises that business tax cuts would leat directly to job creation, Congress should not forget that old saying: "fool me once, shame on you; fool me twice, shame on me."

NB:  Even most economists, except those free marketarians at the Cato Institute and similar groups, agree with my priorities on income support for the poor, aid for the states, public works spending in general, and targeted tax cuts that will stimulate spending and that will stimulate the economy (though some might be more supportive of the business tax cuts than I am).  Thus, the House package gets a vote of confidence from most economists.  See Kevin Hall, GOP may vote no, but economists back Obama stimulus, McClathcy, Jan. 27, 2009. 

Economic Stimulus (Part II): AMT?

The Senate Finance Committee, headed by Max Baucus, has voted by a voice vote today (Tuesday, Jan 27) to add an expensive AMT patch to the already too-excessive tax cut provisions of the economic stimulus package.

The AMT has served to claw back some of the benefit from the 2001-2008 Bush tax cuts, gradually affecting lower income households because of rate creep in the regular tax (indexed) compared to fixed exemption amount and broader base in the AMT (except for the "patches" that have raised the exemption amounts annually since the 2001 tax bill).  The impact of the AMT was well-known at the time the huge Bush tax cuts were passed, and the fact that it clawed back some of the revenues was relied upon by the Republicans putting the bills together as a way to make the bills look like they had a lesser impact than they actually had on the government.  Republicans were quite frank in saying they intended to make all the tax cuts permanent in spite of the 10-year instant death written into the bill--in other words, it was just a gimmick to pretend that the revenue impact wasn't so big; and that they intended to do something to make the AMT less effective.

Patches to the AMT have been passed every year since--sometimes early and sometimes late, but always too big.  The argument has been that the AMT shouldn't impact the middle class.  That's not a very good argument, and it wasn't applied very reasonably, since the main group hit by the AMT's clawback, in terms of any amount of additional tax more than a de minimis hundred or so dollars, has mostly been those makeing several hundred thousand annually--ie, a group that in anybody's book should be treated as the rich in America. 

Now, the Senate Finance Committee, in spite of the huge deficits we are running and the importance of spending every penny wisely (whether directly spent or as a "tax expenditure"), is proposing "patching" the AMT to provide tax relief primarily for those making from $100,000 to $500,000, at a cost of $70 billion.  See Donmoyer, Bloomberg.com.

The AMT patch-train is a train that needs to be derailed.  Republicans have insisted on tax cuts after tax cuts that benefit the upper income class.  They have have been practicing class warfare for the full 8 years of the Bush administration, and the people spoke in the election saying that we want change.  We should not waste money patching the AMT for anyone making hundreds of thousands a year in a time of acute economic distress for many ordinary Americans barely scraping by with incomes in the low 30 or 40 or 50 thousands.  Let the upper income classes pay the AMT taxes.  An AMT patch for them is a new tax cut that cannot be justified.  It does not go to the ordinary Americans at the bottom of the income distribution for whom tax cuts are important and whose tax cuts will have a multiplier effect in stimulating the economy.  (See part I of my postings on the economic stimulus.).  Any AMT patch, in fact, should ONLY be for those making about $100,000 or less--or at most, those making $150,000.  Everyone else should pony up their fair share of a somewhat higher personal tax burden to help finance the important spending that must be done to get us out of this economic mess.

Are you listening, Senators?  Let the Republicans vote against the economic stimulus if they will only vote for it when it continues the same, tired, old, wrong policies of the past eight years that got us into this mess.