Both the White House and Democratic leaders in Congress are discussing the possibility of some sort of economic stimulus package in the wake of a report from the Labor Department showing that unemployment rose in December from 4.7 to 5.0 percent. While the number of jobs increased overall during the month, the private sector shed 13,000 jobs.
The White House has indicated that the President will announce today the broad principles of a stimulus plan, which will likely involve tax breaks rather than increased spending. The President is said to be considering tax rebates similar to the rebate checks mailed to taxpayers in 2001, as well as extending the existing Bush tax cuts. The latter idea has been panned by economists (including Martin Feldstein, former chief economic adviser to President Reagan) since the Bush tax cuts do not expire until the end of 2010 and therefore extending them could not possibly do anything to counteract a recession taking place today. What's more, the resulting increase in the budget deficit would actually hurt the economy overall.
Tax Justice Digest stories about Economic Stimulus
On Thursday, the House of Representatives passed two bills that are part of a housing stimulus package promoted by House Democratic leaders. The first is the Neighborhood Stabilization Act (H.R. 5818), which would make available $15 billion in grants for state and local governments and non-profits to buy up and rehabilitate foreclosed homes, in order to prevent neighborhoods from being adversely affected by vacancies. The second, larger bill is the American Housing Rescue and Foreclosure Prevention Act. This consists of several separate pieces of legislation offered as amendments to replace the language in the housing bill passed in the Senate, H.R. 3221. It includes language that reforms the government-sponsored mortgage funding companies Fannie Mae and Freddie Mac, modernizes the Federal Housing Authority (FHA) and allows the FHA to guarantee refinanced mortgages for homeowners in danger of foreclosure.
Housing Tax Provisions in the House Package
Another piece of legislation included in the larger bill is the $11 billion tax bill approved by the House Ways and Means Committee a month ago. It includes a refundable $7,500 credit for first-time homebuyers that must be paid back in equal installments over the next 15 years, which is the equivalent of an interest-free loan. Eligibility is phased out beginning with taxpayers with incomes of $70,000 (or married couples with incomes of $140,000). It's not clear how helpful this could be, partly because it would not make any money available at the time a downpayment is made but would be claimed afterwards.
The House bill also has a deduction for property taxes for non-itemizers, which is capped at $350 per spouse. Because of the home mortgage interest deduction that is currently available for itemizers, most people with a mortgage currently do itemize their deductions. That means that the main beneficiaries of this provision will likely be homeowners who don't have mortgages -- even though this is a bill that is supposed to address a mortgage foreclosure crisis.
The bill also includes provisions to expand the Low Income Housing Tax Credit and to increase the use of bonds by state and local government to address housing needs.
Senate Bill Widely Panned
A month ago, the Senate passed a housing bill that was widely panned by housing advocates, policy experts, and labor, partly because of its inclusion of a "net operating loss carryback" provision (or NOL carryback). This provision would allow companies taking losses this year and next year to deduct them against taxes they paid in the previous four years (instead of the previous two years, as currently allowed). This would basically amount to a tax break with no strings attached for any company (not just home builders).
It's highly unlikely that this will prevent layoffs of employees as its proponents claim. Companies will always have an incentive to lay off workers if no one is seeking to buy whatever the company produces. Handing the companies a tax break with no strings attached does nothing to change that. Contrary to the claims of backers of the tax break, labor groups have argued that this provision could actually encourage construction companies to dump their excess housing inventory on the market more quickly since the tax break would cushion the losses that result from selling at lower prices.
The Senate bill also includes a $500 per-spouse deduction of property taxes for homeowners who do not itemize their deductions, which is larger than the similar deduction in the house legislation but will still save most families only $150 at the most. This deduction will be denied to people living in a jurisdiction that recently raised its property taxes, discouraging local governments from raising revenue needed to deal with growing fiscal problems.
Also included in the Senate bill is a $7,000 non-refundable credit for the purchase of a foreclosed home, which will do little to make housing more affordable and might actually encourage foreclosure. Unlike the credit in the House version, the Senate bill would not require the credit to be paid back over time, but it would be non-refundable, meaning fewer families could benefit from it. The Senate bill also includes provisions expanding the use of bonds by state and local government, like the House bill.
Unlike the tax provisions approved by the House, the Senate's tax cuts would not be paid for.
Veto Threats from the White House
President Bush opposes all of these bills, arguing that in many cases they reward lenders or homebuyers who acted irresponsibly. The President has threatened to veto the two House bills. White House Press Secretary Dana Perino even attacked the Senate bill, saying it "will likely do more harm than good by bailing out lenders and speculators and passing on costs to other Americans who play by the rules and honor their mortgage debt obligations.” The differing provisions of the House and Senate bills and the opposition from the President make it very unclear what legislation -- if any -- will be enacted to address the housing situation.
Several organizations came together on tax day to call on the House of Representatives to pass legislation dealing with the housing crisis -- and to criticize the Senate for passing a bill that mainly gives tax breaks to businesses. (Click here to view coverage by Lou Dobbs). At the press event organized by the Laborers' International Union of North America (LiUNA), the union's president Terence O'Sullivan and others blasted the Senate bill, which CTJ criticized earlier this month. "To call it pigs at the trough would give a bad name to pigs," O'Sullivan said. Representatives from the Economic Policy Institute, the Center for American Progress, ACORN, the Service Employees International Union (SEIU), as well as a woman facing foreclosure on her home all called for action by Congress, and several noted that most of the action needed would be outside the tax code. CTJ director Robert McIntyre said, "If we gave this issue to the agriculture committees, they'd probably give us farm subsidies, so if we give this problem to the tax-writing committees they give us tax breaks because that's what they do. I'm pretty sure we have committees in Congress to deal with housing."
In the House, that committee is the Financial Services Committee chaired by Barney Frank, who wants to allow the Federal Housing Administration to guarantee refinanced home mortgages. Another provision that many advocates want would allow a judge in some situations to rewrite the terms of a home mortgage, but Democratic leaders in the House have cast doubt about whether this can be passed.
The Ways and Means Committee (the tax-writing committee in the House) approved a package of tax provisions that was an improvement over those passed by the Senate and which may be attached to a broader bill. The Ways and Means bill does not include the very worst provision in the Senate bill, the "net operating loss carryback" provision (or NOL carryback). This provision would allow companies taking losses this year and next year to deduct them against taxes they paid in the previous four years (instead of the previous two years, as currently allowed) even though it is highly unlikely that this will prevent layoffs of employees or do anything for home builders other than encourage them to dump their inventory.
Unlike the Senate legislation, the Ways and Means Committee bill includes revenue-raising provisions to offset the costs of the tax breaks. One would require that brokers of publicly traded securities report the basis of a given security in a transaction to ensure that capital gains taxes are paid properly. Another offset would delay and limit an unnecessary tax break for corporations, "worldwide interest allocation," which hasn't even gone into effect yet. (For more on these offsets, see last week's article on the House legislation.)
Both bills include a deduction for state and local property taxes available to people who don't itemize deductions (currently this is only allowed for itemizers). At Tuesday's event McIntyre pointed out that most people with mortgages are itemizers, so the people most likely to benefit from this are homeowners without mortgages, making it difficult to see how the provision has anything to do with a mortgage foreclosure crisis. Both bills also include a credit for buying a home, but in neither case would the credit be available for a down payment. It would not be received until after after a homebuyer files taxes after the home is purchased.
In the House version, this is a refundable credit of $7,500 of first-time home-buyers, but it must be paid back over 15 years. In the Senate version, it's a non-refundable $7,000 credit for the purchase of foreclosed homes, which actually might encourage foreclosure. The credit in the Senate bill is disallowed to taxpayers in jurisdictions that raise property taxes, which would hamstring state and local governments struggling with fiscal problems from raising revenue to avoid cuts in public services.
House leaders are hoping to have a full bill ready for a floor vote in early May.
On Thursday, the Senate approved the Foreclosure Prevention Act, an $18 billion package of tax breaks and spending that proponents argue will ameliorate the housing crisis, by a vote of 84 to 12. The bill consists of the tax breaks criticized here last week and costing about $10.8 billion over ten years, around $4 billion to be spent through the Community Development Block Grant for local governments to buy or redevelop abandoned and foreclosed homes, and other amendments approved before passage that raised the cost by around $3 billion.
The tax breaks include one provision that would allow companies taking losses this year and next year to deduct them against taxes they paid in the previous four years (instead of the previous two years, as currently allowed) even though it is highly unlikely that this will prevent layoffs of employees or do anything for home builders other than encourage them to dump their inventory.
Another break included is a $500 per-spouse deduction of property taxes for homeowners who do not itemize their deductions, which will probably save families $150 at the most. It will be denied to people living in a jurisdiction that recently raised its property taxes, discouraging local governments from raising revenue needed to deal with growing state fiscal problems. Also included is a $7,000 non-refundable credit for the purchase of a foreclosed home which will do little to make housing more affordable and might actually encourage foreclosure.
The House Moves in a Different Direction
Democratic leaders in the House have indicated that they plan to move in a different direction. On Wednesday the House Ways and Means Committee approved an $11 billion package that does not include the loss carryback provision. It includes a refundable $7,500 credit for first-time homebuyers (of any homes, not just foreclosed homes) that must be paid back in equal installments over the next 15 years, which is the equivalent of an interest-free loan. Eligibility is phased out beginning with taxpayers with incomes of $70,000 (or married couples with incomes of $140,000). The House bill also has a deduction for property taxes for non-itemizers, but ,capped at $350 per spouse, it is even smaller than the one in the Senate version.
Whether these provisions will help many people obtain or keep a home seems questionable. Offering people a small interest-free loan and a tiny cut in property taxes doesn't seem useful for those who are facing foreclosure or for communities that want to preserve their neighborhoods. But at least the House bill does not include the Senate's giveaway to business, the loss carryback provision.
Other changes in the House bill include modifications to the Low-Income Housing Tax Credit and other provisions. Both the House version and the Senate version have provisions to allow increased use of tax-exempt housing bonds by states and localities.
The House bill also has provisions to offset the costs of the bill, and these are provisions that should be passed regardless of Congress's search for revenue. One would require that brokers of publicly traded securities report the basis of a given security in a transaction to ensure that capital gains taxes are paid properly. Very generally, a capital gain is the difference between the price a person pays for property and the price the person sells it for later. The "basis" is the initial purchase price, and if it is not reported correctly, this can lead to an underpayment in capital gains taxes.
Another offset would delay and limit an unnecessary tax break for corporations, "worldwide interest allocation," which hasn't even gone into effect yet. Tax rules already let multinationals take U.S. tax deductions for some of their interest expenses that are really foreign. In 2004, Congress actually expanded this loophole with worldwide interest allocation, a change that is scheduled to take effect starting in 2009.
The final outcome for this legislation is unclear given the disagreements between the House and the Senate and given that the White House has signaled that it has misgivings about the Senate bill.
The Foreclosure Prevention Act introduced in the Senate this week includes several measures that lawmakers argue will address the home mortgage foreclosure crisis and the problems plaguing the home construction industry. Judging from the information we have so far, it appears that the tax provisions in the bill are likely to help large corporate homebuilders and yet do little for ordinary Americans who are either struggling to keep their homes or who are hurt by the downturn in the home construction industry. These tax provisions include:
Net Operating Loss Carryback
Cost: $6 billion ($25.5 billion over 2 years, $6 billion over 10 years)
As a general rule, a company operating at a loss in a given year will not have to pay taxes for that year, because its deductions will wipe out its taxable income. Under current law, if a company has excess deductions beyond its taxable income for the year, it can apply those excess deductions not only against earnings in later years, but also against income taxed in the previous two years. That allows it to get previously paid taxes refunded. The Senate bill would expand this benefit by allowing companies to apply losses in 2008 or 2009 to taxes paid in the previous four years.
This benefit would be available for all companies, but proponents in the Senate have argued that this will particularly ease the pain felt by home-construction companies. Proponents say the loss carryback provision will make it less likely that construction companies will need to lay off workers, and that it will somehow reduce the pressure on them to quickly sell their excess inventory at a loss.
But there is no reason to think that this tax break will have these positive effects. Companies will always have an incentive to lay off workers if no one is seeking to buy whatever the company produces. Handing the companies a tax break with no strings attached does nothing to change that. Contrary to the claims of backers of the tax break, labor groups have persuasively argued that this provision could actually encourage construction companies to dump their excess housing inventory on the market more quickly since the tax break would cushion the losses that result from selling at lower prices.
In terms of its effects on the housing industry, the main effect of this corporate giveaway will be to reward large corporate home-builders who helped perpetrate the sub-prime lending debacle. Other major beneficiaries will be large corporations who use the "bonus depreciation" tax break enacted earlier this year to reduce their taxable incomes below zero, and who will enjoy outright negative tax rates if this NOL carryback provision is enacted.
Non-Itemizer Tax Deduction for State and Local Property Taxes
Cost: $1.5 billion
Currently, homeowners are allowed to take an itemized deduction for state and local property taxes. But less than a third of taxpayers bother to itemize their deductions, because most find it more beneficial to use the standard deduction. The Senate bill would offer non-itemizers a deduction for property taxes on top of the standard deduction this year. The new deduction would be limited to $500 for single taxpayers and $1,000 for married couples.
Proponents of this provision apparently fail to understand the purposes of the standard deduction: (a) to make the tax code fairer and (b) to make tax filing simpler for most people by giving them a simple deduction that is bigger than what they’d get from itemizing.
Right now, the only homeowners who do not itemize their property taxes are those for whom the standard deduction ($10,900 for couples) is bigger than their total expenses for state and local taxes, interest, donations, etc. In effect, non-itemizing homeowners already get to write off more than their total property taxes.
Adding an additional property tax deduction on top of the generous one already implicitly allowed to non-itemizers would make tax filing more complicated and tax enforcement more difficult.
The new deduction would provide little help to those who take advantage of it. Families who have no taxable income already would not be helped at all. For couples with two children, that includes those making less than $25,000. For couples with two children making more than $25,000 but less than $41,000, the maximum tax saving would be only $100. From $41,000 to $90,000 the maximum tax saving would be only $150. And above that level, the vast majority of homeowners already itemize deductions, and would thus get no benefit.
To illustrate how little thought went into the design of this foolish tax break, the new non-itemizer property tax deduction would be denied to taxpayers if their locality raised its property tax rate this year or next. The apparent goal of this strange rule is to punish taxpayers whose state or local governments have mitigated revenue losses caused by declining home values and the economic downturn. The Senate apparently hopes to encourage local government to deal with falling revenues by cutting back on public services such as education instead.
Foreclosed Home Purchase Tax Credit
Cost: $1.6 billion
The bill also includes a $7,000 non-refundable tax credit that can be claimed over two years by people who purchase foreclosed homes during the next 12 months. It seems unlikely that this provision would make foreclosed homes more affordable for buyers who earn enough to take advantage of this subsidy (more than $57,000 for couples with two children). Instead, it will probably lead to higher prices for the foreclosed homes. Indeed, supporters of this provision admit as much. "The $7,000 tax credit for those who buy foreclosed properties should stimulate demand for them and prevent their prices from falling further, said Sen. Johnny Isakson (R-Ga.)," according to the Washington Post (Apr. 5, 2008, p. D1).
The Wall Street Journal's Jesse Drucker explains today using an analysis from Citizens for Tax Justice that the cost of the business tax cuts in the stimulus package passed by Congress last week is over $22 billion over ten years, roughly three times the official estimate of $7.5 billion over ten years.
The official "score," or cost estimate, from the Congressional Joint Committee on Taxation for the entire stimulus package is $124.5 billion over ten years. The cost in 2008 alone is higher -- $151.7 billion -- but part of that cost is recouped later.
That's because the business tax breaks cost $44.8 billion in 2008 but their ten-year cost is officially estimated to be only $7.5 billion, since they consist of moving forward existing deductions for investments (accelerated depreciation and expensing, or immediate depreciation, for certain small business investments). In a technical sense, firms are not getting any new deductions but are just able to take certain deductions earlier.
But Drucker explains, these estimates fail to account for what economists call the "time value of money." Basically, money in your hand today is worth a lot more than the same nominal amount of money in your hand ten years from now, because inflation erodes the value of money over time and because money can be invested at a profit over several years. Of course, business people are perfectly aware of this, which is why they lobbied for this form of tax break in the first place.
The additional cost of the business tax cuts in the stimulus bill can be explained another way: Since the tax cuts are all deficit-financed, they always add to the national debt, resulting in larger interest payments by the federal government (i.e. by the taxpayers). If a deduction is taken now rather than a few years from now, that means we have additional interest we're paying on the national debt over those few years. The table below shows the calculations CTJ made to identify the added interest costs of the business tax breaks in the stimulus bill.
You might ask why the Joint Committee on Taxation doesn't take this extra cost into account. The reason is that the staff of the Joint Committee doesn't take into account any added interest payments that result from tax cuts. All of the provisions of the stimulus bill actually increase interest payments on the national debt since the entire bill is deficit-financed.
Conservative analysts like to ignore the effect of additional interest payments that result from tax cuts, because they generally want the costs of tax cuts to appear smaller. This might be more easily ignored in other situations, but in the case of the business tax breaks that are part of the stimulus package, the additional interest actually triples the costs.
This situation shows that leaving the added interest out of cost estimates for tax breaks can lead to misleading conclusions. Really we should consider the added interest that results from any tax cut proposal as we contemplate its costs. When estimating the costs of a tax cut, Citizens for Tax Justice generally calculates the additional interest payments that result from increasing the national debt and shows how this increases the overall cost of the tax cut. For example, we have calculated that if the Bush tax cuts are made permanent and the costs are not offset (which generally seems to be Republican policy) then the total costs would be just over $5 trillion over the 2011-2020 period, with $954 billion of that in the form of additional interest that results.
The U.S. Senate voted on Thursday to pass a stimulus bill similar to the one the House of Representatives passed earlier and that resulted from negotiations between House Speaker Nancy Pelosi, House Minority Leader John Boehner, and Treasury Secretary Henry Paulson. The final bill, which was quickly approved afterwards by the House and will now be signed by President Bush, is a bit broader than the original House bill because it extends eligibility for rebates to people who have income from Social Security or veterans' disability benefits but little or no earnings.
This came after Republicans in the Senate succeeded Wednesday night in maintaining a filibuster -- by just one vote -- of the stimulus plan that had been passed out of the Senate Finance Committee last week. The Senate Finance bill was broader, most notably because it would have extended regular unemployment insurance benefits from 13 weeks to 26 weeks.
The filibuster seems to be driven by the conservative ideological principle that tax cuts are always good while public spending is usually bad. Republican Senators and the President could agree with Democrats on the need to provide tax rebates, but could not accept extended unemployment benefits. But the entire point of a stimulus bill is to stimulate the economy. Analysts have found that extending unemployment benefits is actually one of the most effective ways to stimulate the economy because it gives money to people who are most likely to immediately spend it. The tax rebates are likely to be helpful in stimulating the economy, but not quite as effective as extended unemployment insurance benefits. In some cases the rebates will not be spent immediately, meaning they will provide somewhat less of a boost to the economy.
Tax Rebates
The bill approved Thursday provides a rebate equal to income tax liability up to a maximum of $600 ($1,200 for married couples) and provides a minimum rebate of $300 ($600 for married couples). The bill also provides an additional $300 per dependent child. Eligibility begins to phase out for taxpayers with incomes of $75,000 ($150,000 for married couples).
The original House bill would have made the rebates available only for taxpayers with earnings of at least $3,000, while the bill passed on Thursday includes the Senate Finance Committee's provision that makes the rebates available for taxpayers whose combined earnings, Social Security benefits and veterans' disability or survivor benefits equal at least $3,000.
Final Bill Narrower than the Bill Republicans Filibustered
Several provisions from the Senate Finance Committee's bill that Republicans filibustered were not adopted in the final version. The Senate Finance bill would have provided $500 rebates to all taxpayers ($1,000 for married couples) under the income limits, whereas the final bill gives taxpayers at the lowest income levels rebates that are only half as high ($300, or $600 for couples) as the full rebate. The Finance Committee bill also included the extension of unemployment insurance, which was a bone of contention between Senate Democrats, who all supported the extension, and Republicans, who mostly opposed it.
The final bill does not include the additional business and energy tax cuts that the Finance Committee added but does include the two business tax breaks in the original House version. The first is so-called bonus depreciation (allowing businesses to immediately write off 50 percent of equipment and other capital) and the second doubles the amount of certain investments that small businesses can immediately expense from $125,000 to $250,000. Since investment usually requires some time for planning and implementation, these are unlikely to provide the sort of immediate boost that is needed to forestall or counteract a recession. The business tax cuts make up less than a third of the total costs of the bill, however, with the rebate provisions making up the rest.
On Monday, February 4, the Senate is expected to vote on an economic stimulus package that was approved by the Senate Finance Committee earlier this week and which includes tax rebate checks mailed out to households as early as May. The more limited House stimulus bill passed on Tuesday reflects a compromise made between House Speaker Nancy Pelosi, House Minority Leader John Boehner and the Bush administration. Democratic leaders in the Senate say enough Republicans will vote for the more generous version to overcome the 60 vote hurdle to approve legislation in their chamber. Failing that, the Senate would likely approve the House-passed version.
Senate Version Sends More Money to People Who Will Use It to Stimulate the Economy
While both versions of the bill include tax incentives for business that have questionable value as a stimulus, over two thirds of the revenues spent in each bill go towards tax rebates for households.
The rebates in the House version would be lower for working people who pay federal payroll taxes but who do not earn enough to pay federal income taxes. Anyone with at least $3,000 in earnings would get a rebate of at least $300 ($600 for couples). Anyone who has tax liability above $300 ($600 for couples) would get a rebate equal to that tax liability, up to a maximum of $600 ($1,200 for couples). The Senate version would simply give all of these taxpayers a $500 rebate ($1,000 for couples). This is probably better as a matter of both fairness and as an effective stimulus, since people at the lower end of the income ladder are more likely to immediately spend any money given to them, pumping it immediately into the economy, boosting demand. Both bills also provide an additional $300 for each child.
The Senate version also takes two other steps that target more money towards the people most likely to spend it right away. First, the $3,000 income threshold for eligibility in the Senate version can be met with both earnings and Social Security, meaning many elderly people and people with disabilities who live on fixed incomes will receive rebates who would not under the House version. Second, unlike the House bill, the Senate version extends the maximum length of unemployment insurance benefits from 13 weeks to 26 weeks, providing a benefit for those who both need it the most and are more likely to spend it quickly.
Senate Majority Leader Nearly Gags
When Senate Finance Committee Chairman Max Baucus (D-MT) first introduced his proposal, most Democrats in the Senate and, reportedly a number of Republicans, were pleased because it looked like a more comprehensive and effective way to ward off a recession. However, in a move that did not please many Democrats, Baucus did away with the provisions to cap eligibility for high-income people, which is included in the version worked out between House leaders and the Bush administration. Senate Majority Leader Harry Reid (D-NV) said this provision "causes me to want to gag," a sentiment that was largely reflected in comments from other Democratic Senators as well.
During the markup of the bill in the Finance Committee, Senator Baucus added provisions that phase out the rebate for taxpayers with incomes above $150,000 ($300,000 for couples). The income limits in the House version are only half as high. But as the Center on Budget and Policy Priorities argues, the Senate bill is still far more progressive overall because of its other provisions.
Negotiations between House Speaker Nancy Pelosi, Minority Leader John Boehner and Treasury Secretary Henry Paulson resulted yesterday in an agreement to spend about $146 billion to jumpstart the economy. About two thirds of that would go towards tax rebates for households, and a third would go towards tax breaks for businesses. The tax rebates would be targeted toward middle-income taxpayers, including working people who pay federal payroll taxes but who do not have enough income to owe federal income taxes. However, the rebates would provide no help for people who do not have earnings (including the unemployed and many Social Security and welfare recipients) even though these people are arguably the most likely to spend any money given to them, thereby pumping the money immediately into the economy.
Some Democrats in the Senate, like Finance Committee Chairman Max Baucus (D-MT) have expressed an interest in adding increased unemployment benefits or food stamps to any stimulus package to reach these people. It appears that Speaker Pelosi felt forced to give up demands for increasing these benefits in order to get the Bush administration to agree to making the tax rebates available for more lower-income people.
The Tax Measures
The rebates would be a maximum of $600 for singles and $1,200 for married couples. For people whose tax liability is below $600 (or $1,200 for couples), the rebate would be equal to tax liability, and a minimum benefit of $300 for singles and $600 for married couples would be available so long as they have at least $3,000 in earnings. Finally, an additional $300 for each child would be available to anyone with any earnings.
The rebates would begin to phase out for singles with incomes of $75,000 and married couples with incomes of $150,000. As a result, they would be more targeted towards the middle-class than any tax bill we've seen during the Bush years.
The tax rebates would be advances on a one-year reduction of the 10 percent income tax rate to 0 percent for the first $6,000 of income for singles or $12,000 of income for married couples for 2008.
The business tax breaks would consist of so-called bonus depreciation (allowing businesses to immediately write off 50 percent of equipment and other capital) and doubling the amount of certain investments that small businesses can immediately expense from $125,000 to $250,000.
The Spending Increases that Were Left Out
Several advocacy organizations have called attention to the fact that the whole point of an effective stimulus is to put money in the hands of people who are most likely to spend that money right away to increase demand and provide an immediate boost to the economy. The stimulus proposal announced yesterday, however, would give smaller tax rebates to those people who work and pay federal payroll taxes but have incomes too low to pay federal income taxes.
Another group who would likely spend any money given to them includes those with no or very little earnings, who could be helped with increased unemployment benefits or food stamps. An expert with Moody's Economy.com has studied the effects of different stimulus measures on the economy and finds that increased UI benefits and food stamps provide the greatest increase in demand for each dollar spent. Business tax breaks, on the other hand, produce relatively little demand for each dollar spent. Investment usually takes quite a while to plan and implement and most investment is made by businesses that would not have tax liability anyway.
These aspects of the plan are very troubling, but they are not sufficient reason for members of the House to oppose it. The plan does provide some help for low-income and middle-income people, and House passage could be followed by a much improved bill in the Senate. Hopefully, this could lead to a final bill that does more for the economy and for Americans who need help.
Democratic leaders and several economists point out that spending could be very effective in stimulating the economy and certain types of tax breaks could be as well, if they were carefully structured. A recent forum on this topic sponsored by the Brookings Institution included Feldstein, former Treasury Secretary Robert Rubin and other economists. They all agreed that any stimulus should be "temporary, timely and targeted." Democratic House Speaker Nancy Pelosi, Ways and Means Chairman Charles Rangel and several other Democratic leaders have echoed these three principles.
The Democratic and Republican House leadership met on Wednesday to discuss the possibility of a bipartisan effort to enact a stimulus package. No deal was reached, but both sides have suggested they could work together to pass legislation quickly. Some House Republicans have indicated that they might offer amendments that would extend the Bush tax cuts but that they will not make their support for a stimulus package conditional on passing such an amendment. Meanwhile, Rangel has said that he is open to including some business tax breaks, even though he may not agree with them, in order to get a bill passed.
However, some dark clouds appeared to form over the discourse on the stimulus package on Friday morning. It was reported that the White House was considering $800 rebates for income tax payers in the 15 percent bracket. Taxpayers in the 10 percent bracket would get only part of the benefit the President is proposing, and those not even in the 10 percent bracket would get nothing.
However, some dark clouds appeared to form over the discourse on the stimulus package on Friday morning. It was reported that the White House was considering $800 rebates for income tax payers in the 15 percent bracket. Taxpayers in the 10 percent bracket would get only part of the benefit the President is proposing, and those not even in the 10 percent bracket would get nothing.
Meanwhile, the top three Democratic presidential candidates all have their own stimulus plans, although it's not entirely clear how influential they will be on the issue.
A recent paper from the Center on Budget and Policy Priorities explains that stimulus legislation must be "temporary, timely and targeted." Tax breaks or spending should be temporary because if they are permanent, they could actually harm the economy, particularly if they result in ongoing increases in the federal budget deficit. The point is to stimulate demand and utilize excess productive capacity in the economy, but this is not needed after demand picks up again and the recession ends.
The stimulus should also be timely. Legislation that is passed when a recession is starting to abate, or that does not lead to an immediate increase in consumer spending or other immediate economic activity, is probably useless.
Any stimulus also must be targeted to those who are likely to spend whatever money is given to them. Low-income people are far more likely to immediately spend any extra money they receive in the form of a tax rebate or extended unemployment insurance, for example, whereas higher-income people may be more inclined to save or invest any extra money they receive, meaning it will be a long time before it has any palpable effect on the economy. Targeting the tax cuts or spending might be particularly difficult for members of Congress, who naturally want as many voters and contributors as possible to get benefits.
The Center on Budget paper explains that certain measures have a much higher stimulative impact on the economy because they benefit those who will immediately spend any money they receive. For example, extended unemployment benefits provide $1.73 worth of increased demand for every dollar spent. On the other hand, a tax break for capital gains and dividends provides only 9 cents of increased demand for every dollar of revenue reduced.
Immediate, one-time tax rebates are on the list of measures favored by the experts at the Brookings forum earlier this month, but they may have to be targeted to low-income families to be truly effective. A survey done in 2001 found that less than a quarter of taxpayers planned on actually spending their rebate checks. The rest would save it, which provides no immediate boost for the economy overall.
Any stimulus also must be targeted to those who are likely to spend whatever money is given to them. Low-income people are far more likely to immediately spend any extra money they receive in the form of a tax rebate or extended unemployment insurance, for example, whereas higher-income people may be more inclined to save or invest any extra money they receive, meaning it will be a long time before it has any palpable effect on the economy. Targeting the tax cuts or spending might be particularly difficult for members of Congress, who naturally want as many voters and contributors as possible to get benefits.
The Center on Budget paper explains that certain measures have a much higher stimulative impact on the economy because they benefit those who will immediately spend any money they receive. For example, extended unemployment benefits provide $1.73 worth of increased demand for every dollar spent. On the other hand, a tax break for capital gains and dividends provides only 9 cents of increased demand for every dollar of revenue reduced.
Immediate, one-time tax rebates are on the list of measures favored by the experts at the Brookings forum earlier this month, but they may have to be targeted to low-income families to be truly effective. A survey done in 2001 found that less than a quarter of taxpayers planned on actually spending their rebate checks. The rest would save it, which provides no immediate boost for the economy overall.
The Congressional Budget Office issued a paper on Wednesday that also argued that any stimulus should be timely and targeted to those most likely to spend any money given to them. It cites some studies suggesting that people would spend the majority of a rebate check, especially those with low incomes. Other types of stimulus -- particularly tax breaks for business -- are argued by the CBO to be unlikely to provide any immediate boost to the economy. Tax breaks for investment, for example, are not immediately effective because business investment usually requires a lot of lead time. Lowering the corporate tax rate might actually encourage corporations to delay investment since their deductions will be larger when rates go back up. Several Republicans have mentioned accelerated depreciation, but the CBO finds that the same measure in 2002 and 2003 had a small effect on output compared to other possible measures.
