Do not squander America's stimulus on tax cuts (Stiglitz / FT)

[struggle4progress]

By Joseph Stiglitz
Published: January 15 2009 19:48 | Last updated: January 15 2009 19:48

... What is clear is that tax cuts will not help much. When Barack Obama, president-elect, last week proposed to use nearly 40 per cent of the stimulus for tax cuts, he was rightly told this would be less effective than, say, spending on infrastructure. It has been surprising, then, to see President George W. Bush’s former economic advisers, including Greg Mankiw, argue that tax cuts are the way forward.

Tax breaks for business may prove to be a sink-hole as bad as the troubled assets relief programme. Particularly worrisome are rumours that companies will be allowed to set off their losses against profits made in the past five years to get tax rebates – a big gift to those who mismanaged risk, including banks such as Citibank. Some suggest that, having exhausted the more transparent bail-out strategy, banks are seeking less transparent help through the tax code. We learnt the lesson from Tarp: we need to link handouts to changes in behaviour. We should have insisted banks commit to more lending. Now we should insist any tax breaks for business are linked to investment.

Similar caution needs to be exercised in evaluating each element of the stimulus package. The Obama team has issued a report projecting its potential for job creation. In estimating the impact of offering relief to the states, it assumed, based on experience, that 30 per cent of the relief would be used to stall tax increases that would otherwise have occurred. (States are facing a shortfall of perhaps $150bn a year.) But with property values plummeting, there is pressure to cut property taxes. And, in any case, state taxes are more regressive than federal taxes – more of the burden of taxation is borne by those with lower incomes. This means that if tax cuts come partly at the expense of state relief, and states are forced to raise taxes, the net effect on the economy is likely to be negative.

There is a more fundamental point that the Bush team missed. Tax cuts have increased our national debt. They encouraged America to live beyond its means, increasing our liabilities without commensurate increases in assets. Further tax cuts would do the same. Good accounting looks at assets and liabilities. Spending on infrastructure, education and technology create assets; they increase future productivity ...

http://www.ft.com/cms/s/0/a78e69a4-e30d-11dd-a5cf-0000779fd2ac.html

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[customerserviceguy]

1. There's one tax cut that would help the hardest hit areas immediately

Stop taxing unemployment compensation. And make that retroactive to January 1, 2008, so that people filing taxes can get a refund of the ten percent that was withheld from their checks, if they so designated it.

The money would flow into those areas already most troubled from closing factories, offices shuttered because of mergers, and retail establishments on the brink of disaster.

[hay rick]

2. Great suggestion. nt

[Danascot]

11. You won't be surprised to hear that taxing unemployment benefits

was a GOP idea. The rationale was that taxing benefits would discourage a tendency to remain on unemployment rather than seeking a new job. The GOP never misses an opportunity to avoid distributing money to the less fortunate.

[bemildred]

12. Putting a floor under the FICA tax would be very helpful too.

Paying 14% on EVERYTHING you make as a small-time "entrepreneur" puts a lot of people out of business.

[bemildred]

3. Tax cuts is pretty much how we got here, so I agree with Mr Stiglitz.

What we need, among other things, it to restore the high progressive tax system we once enjoyed, and then to spend the resulting revenue on something useful, like people or jobs or schools or infrastructure.

[exboyfil]

5. What would be your suggestion for the top

marginal rate and where should it start?

[bemildred]

6. I think things were pretty OK here in the 50s and 60s, but there is a lot of room to twiddle. nt

[exboyfil]

4. Looking through the evidence of GDP growth and top

marginal rate is is difficult to come away with the opinion that going form 40% to 35% did anything for the economy. Even before this crash Bush's GDP growth was not nearly as good as Clinton's with the higher marginal rate. I think Obama should increase the top rate to 40% again.

He also might want to look at two other possibilities:

1. Eliminating the child tax credit or phasing it out at lower income levels. I do pretty well with my income, and, by using it, 401(k)s, and HSAs; I am able to reduce my Federal tax burden to less than my Social Security payments. My marginal tax rate is deep into 15%. Right now a family of four doesn't start paying Federal income taxes until they reach $43,585.

2. Not capping the top income on Social Security, but allowing that income to participate in the system at the same rate as the income from $50K-$102K (15%). I would like this to be revenue neutral and allow for a percentage reduction across the board (it might only amount to 1%/1% reduction).

[hay rick]

7. Tax cuts as ransom.

Tax cuts for the rich and businesses are probably being included to buy Republican votes. The calculus: a stimulus plan that sacrifices some bang-for-buck on the altar of tax cuts is better than a purer stimulus plan that gets filibustered into oblivion.

Republicans are busy shoring up their arguments for tax-cuts-as-stimulus. A couple links:
http://www.realclearpolitics.com/articles/2008/01/an_honest_stimulus_tax_cuts_in.html
http://online.wsj.com/article/SB122757149157954723.html

Maybe this is what "bipartisan" means to Obama- pay the ransom and get the best deal you can get.

Puzzled by one Stiglitz statement: "Particularly worrisome are rumours that companies will be allowed to set off their losses against profits made in the past five years to get tax rebates..." It's not a rumor, it's a notice issued by the IRS on September 30 and is credited as a major factor in changing TARP money into merger/acquisition funding for banks.

[struggle4progress]

8. Well, the Rs lost a filibuster attempt a few days ago, so maybe the threat of being painted

as obstructionists will keep them in line

[alarimer]

9. I agree.

Have they learned nothing from the last 8 years? Trickle-down DOES NOT WORK!

[Just-plain-Kathy]

10. "Error: you can only recommend threads which were started in the past 24 hours"

:kick:

[yurbud]

13. better than tax cut for rich or middle class: raise minimum wage to living wage & permanently index

it