More information has come to light regarding the soon-to-be-pending stimulus bills in Congress. The plans being discussed sound better than the recent comments from Obama advisor David Axelrod led us to hope. From the WSJ:
President-elect Barack Obama and congressional Democrats are crafting a plan to offer about $300 billion of tax cuts to individuals and businesses, a move aimed at attracting Republican support for an economic-stimulus package and prodding companies to create jobs…
Republicans and business leaders hadn’t seen specifics of the proposals Sunday night, but welcomed the idea of basing a bigger proportion of the stimulus plan on tax cuts. Their response suggests the legislation could attract relatively broad support, and it highlighted the Obama team’s determination to win backing from varied interests…
William Gale, a tax-policy analyst at the Brookings Institution think tank in Washington, said the scale of the whole package is larger than expected. He called the business offerings a true surprise, since most attention has been focused on the spending side of the equation, especially the hundreds of billions of dollars being discussed for infrastructure and aid to state and local governments.
"On the other hand, it was hard to figure out how they were going to spend all that money in intelligent ways, so it makes sense to do more on the tax side," Mr. Gale said.
As Mr. Gale notes, working from the tax side, even though it’s a surprise development, makes good sense — which is why we’ve been advocating it for some time. The quality of these measures is yet to be known, but at least resources are being pushed in that direction now.
More generally, the current approach indicates that policymakers have learned from experiences with the recent tax stimulus:
Economists of all political stripes widely agree the checks sent out last spring were ineffective in stemming the economic slide, partly because many strapped consumers paid bills or saved the cash rather than spend it. But Obama aides wanted a provision that could get money into consumers’ hands fast, and hope they will be persuaded to spend money this time if the credit is made a permanent feature of the tax code.
Of course, as we’ve been pointing out, household consumption simply isn’t in the cards. We’re in for a long cycle of balance sheet repair, i.e., higher savings and lower consumption, and there’s a pressing need for global trade and capital flows to rebalance. Stimulating consumption in the U.S. would only be counter productive to this process.
As for the business tax package, a key provision would allow companies to write off huge losses incurred last year, as well as any losses from 2009, to retroactively reduce tax bills dating back five years. Obama aides note that businesses would have been able to claim most of the tax write-offs on future tax returns, and the proposal simply accelerates those write-offs to make them available in the current tax season, when a lack of available credit is leaving many companies short of cash.
This is a good measure, although the claim from Obama aides is suspect — businesses are not allowed to carry operating losses forward indefinitely, and when those losses expire, they represent a loss of wealth (carried losses are a financial asset to a firm, since they can be used to lower future tax expense).
A second provision would entice firms to plow that money back into new investment. The write-offs would be retroactive to expenditures made as of Jan. 1, 2009, to ensure that companies don’t sit on their money until after Congress passes the measure.
Another good measure and well designed, at least insofar as the retroactivity goes.
Another element would offer a one-year tax credit for companies that make new hires or forgo layoffs, which could be worth $40 billion to $50 billion. And the Obama plan also would allow small businesses to write off a broad range expenditures worth up to $250,000 in 2009 and 2010. Currently, the limit is $175,000.
This is OK — it certainly pushes in the right direction given the employment outlook — but it has some problems. First, as Mr. Gale notes in the article, this may simply reward actions that would have been taken anyways (it’s reasonable to assume that few or no firms are going to hire simply because of the tax credit). Second, it’s well short of the mark as far as corporate tax overhaul goes. The US code is still not as competitive as it once was, and it continues to distort many business decisions.
The following section is interesting as well, as it shows that the problem of free riding is not confined to the personal tax code:
Business lobbyists are pushing hard for Congress to allow companies that haven’t paid corporate income taxes to get a break, too. Start-up companies, alternative-energy firms and large corporations that have been swallowing losses for years — such as automotive and steel companies and some airlines — have already begun lobbying for such "refundability."
They argue that a provision to claim losses on back taxes will have little effect on the economy if firms that need it most — struggling companies that weren’t obligated to pay any taxes — can’t benefit from a tax break.
Mr. Obama, however, doesn’t back payments to companies that haven’t paid taxes, aides said. Instead, businesses that haven’t been paying taxes would be able to get payments from tax credits they would have taken in 2008 and 2009 for incentives offered by Congress, such as the production tax credit offered to renewable-energy firms. These amounts would likely be relatively small.
To be fair, some of this lobbying may be driven by past (or expected, in the case of startups) expirations of carried tax losses; it’s also true that for industries or firms that have not incurred any significant tax hits in the past five years, this measure would have little or no value. Perhaps it would be worthwhile for Congress to consider getting rid of tax loss expirations permanently. We would also point out that a broad improvement in the corporate (and business) tax code would also enhance — at least marginally — the prospects of all businesses, including many troubled ones. That’s preferable to having government prop up failing firms or dying industries.
Finally, the article fleshes out some of the principles at work in the coming stimulus bills:
"We’re working with Congress to develop a tax-cut package based on a simple principle: What will have the biggest and most immediate impact on creating private-sector jobs and strengthening the middle class?" said transition-team spokeswoman Stephanie Cutter. "We’re guided by what works, not by any ideology or special interests."
Despite (or perhaps because of) their lack of detail, we find Cutter’s words more reassuring than Axelrod’s. We’ll be keeping an ear to the ground as the stimulus plans develop.