Posted on 01/10/2009 8:56:24 AM PST by SeekAndFind
Despite their political appeal, $500 per worker tax credits will do very little to actually boost the economy.
We know that tax cuts are coming—the only question is what kind. Earlier this week, President-elect Barack Obama suggested that 40 percent (about $300 billion) of his proposed economic stimulus package should come in the form of a tax cut. At least half of that tax relief is expected to be aimed at helping middle- and low-income individuals. Obama advisers have begun outlining a “temporary” $500 per worker tax credit. Aside from being temporary, this Obama policy seems nearly identical to the “Making Work Pay” tax credit he supported during the campaign.
Meanwhile, many prominent conservatives, including columnist George Will and economist Larry Lindsey, are advocating a big payroll tax cut. Indeed, both liberals and conservatives favor tax cuts targeted to low-income workers that would be implemented through a change in the employer tax withholding system. While there are differences in the details of each side’s approach, a surprising degree of bipartisan support for such tax cuts has emerged.
Sadly, this new policy, despite its obvious political appeal, will do very little to actually boost the economy. What it will do is create short-term compliance headaches for millions of employers and increase the long-term fiscal burden on future generations.
We have heard many arguments in favor of the proposed tax relief. Some claim that a worker credit will give additional income to those people who are most likely to spend it. Others say that a payroll tax cut will reduce the cost of labor and the disincentive to work, and that alleviating the burden of these taxes is a quick and easy way to grow workers’ paychecks and help stimulate demand.
In terms of the politics at play, most Democrats want tax relief for low-income households, but they don’t want to replicate the failed “rebate check” strategy used by the Bush administration in 2001 and 2008. Faced with the reality that even many middle-income households do not pay any federal income tax, Democrats are trying to offset the burden of payroll taxes on low- and moderate-income workers.
However, a refundable income tax credit is still an outlay and not truly a tax cut. Furthermore, the federal government already provides a tax credit to offset the payroll tax for low-income workers. It’s called the earned income tax credit (EITC). As former House Ways and Means Committee chairman Al Ullman said of the EITC in 1975, “we are in effect rebating to the low-income groups below $6,000 most of the payroll tax they have already paid.”
There is no real evidence that a temporary tax policy change does a lot for the economy.
Republicans have been raised on the belief that a tax cut is often the best way to jumpstart a slumping economy. While they realize that proposing a cut in the tax on capital is a losing proposition, they believe that reducing the tax on workers is both politically feasible and economically advisable.
But how effective, timely, and administrable is a $500 worker tax credit or a temporary suspension of the payroll tax likely to be? Unfortunately, there is no reason to believe these tax cuts will do much to boost the ailing economy and plenty of reason to think they will wind up proving very costly down the road.
First, from the perspective of creating demand-side stimulus, this policy is identical to the failed rebate check strategy. There is no evidence that altering the delivery mechanism will result in markedly different behavior by consumers. The rebate checks that were sent out in 2008 failed to work because a significant majority of them were either saved or used to pay off debt. Given how much the economy has declined since then, workers are now even morelikely to save any tax break.
Second, the only significant difference between rebate checks from the Treasury and a change to employer withholding schedules is that the administrative burden of the tax withholding change is far more costly. Millions of employers will be forced to rush into their accounting department and implement a payroll change for more than 150 million workers. That will raise a series of awkward questions: What is the penalty for failing to make the withholding change on time? What is the impact on the self-employed? How quickly can these changes be expected to occur? What is the consequence of failing to change the system back again when the “tax holiday” is over?
Simply put, this will be an administrative nightmare. While many large employers with sophisticated payroll systems are likely to make this change with only modest costs (assuming the major payroll administration companies can implement the change for all their clients), smaller employers will face a much more difficult and time-consuming task.
Finally, while the objective of the tax cuts is to boost consumer demand and rejuvenate the economy, how likely is it that these tax cuts will be temporary? When it becomes clear that an economic recovery has begun, will Democrats really raise taxes on low- and moderate-income Americans? It’s doubtful. Therefore, the true cost of this proposal is likely much greater than the advertised cost, yet the near-term economic benefits are small at best.
Is there a better way for the federal government to swiftly deploy $800 billion and get the economy back on track? Maybe not. There is no real evidence that a temporary tax policy change does a lot for the economy. Furthermore, while a modest-sized stimulus package may be cost effective, there will be a diminishing return to any stimulus plan as it grows in size, regardless of whether the plan is implemented through tax cuts or spending increases. The current bidding is at $775 billion and the cost could rise to $1 trillion or more.
Congress would be well advised to err on the side of caution and take time to ensure that the stimulus policies being advocated are likely to work. U.S. lawmakers should focus on the most effective and most appropriate infrastructure spending. They should seek to improve those tax policies that adversely affect the most taxpayers.
Republicans have taken a step in the right direction by calling for an open and transparent process, and their calls have been echoed by Democrats. The next step is to focus on the principles of growth—including long-term growth— and to think carefully about the details, not just the sound-bites.
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Alex Brill is a research fellow at the American Enterprise Institute. He previously served as senior adviser and chief economist at the House Committee on Ways and Means.
OK, it wasn't this simple. We built a house of cards on bad mortgages and ARMs (Dems with ACORN pushed, GOP went along), outsourcing (both sides, why didn't we listen to Perot?), debt secured by overpriced houses, as well has paying for the WOT. Everything had to be right to keep at this level. When the ARM rates kicked in, the borrowers defaulted, and the artificially high housing prices dropped, the proverbial house of cards fell in.
That brings us to what you said here.
you need something positive with the negative messages.
I agree with that (time to think of a new tagline). Offering some solutions to go along with "the Democrats don't have any answers" would have been a better message.
He didnt ring the fire-drill on the phony boom because he wanted credit. Democrats wanted affordable housing but they had nothing to lose.
He taught America the gravy train is endless, that we can borrow forever.
He encouraged us to buy after 9/11, rather than allow the terrorists to defeat us. We overdid it.
With the bailouts and massive gov contracts he prepped american for Obama;s “they got theirs, now you will get yours”.
I agree with you about the bailouts, but they, and the economic problems they addressed, resulted from the housing mess that the Democrats helped create (OK, and the GOP failed to stop).
He didnt ring the fire-drill on the phony boom because he wanted credit. Democrats wanted affordable housing but they had nothing to lose.
I saw all those videos before the election. I said more than once, Barney Frank and democrats had nothing to lose everything to gain. And as Barney is able to say as he does now, Bush had his own congress in 2003.
In 2008 Bush got on TV and demanded 700B from congress. But it was too late. He did not demand more regulation in 2003. He had other priorities.
Democrats also have him on the deficit because him and Cheney pushed for massive spending. Sure democrats came along in 2006 and racked up more, on the GWB credit card. And the bailouts too. It worked so good Obama will try to blame 2009 spending on GWB too, to get us ready for big tax increases.
As you pointed out, the GOP had something to lose, and lost it. I hope they learned that playing nice will get them nowhere with the Democrats and the MSM.
In 2008 Bush got on TV and demanded 700B from congress. But it was too late. He did not demand more regulation in 2003. He had other priorities.
Like the WOT and getting the US out of the recession that followed the tech bubble burst (which he and the GOP did).
Democrats also have him on the deficit...
Wrong! If the previous administration had kepts its promise after numerous attacks from Bin Laden instead of leaving that mess for Bush, 9/11 wouldn't have happened, the WOT would not have been necessary, and our deficit wouldn't be any where near what it is.
"WOT ": He pushed us into a new war, sales pitch of a lifetime, Iraq. He put all his political chips on Iraq and lost. Probably the single most thing he did to destroy his presidency. He went from loved to hated. Even blacks liked him between Sept 11 and Iraq, a gift from God he threw away.
"tech bubble burst" : Using that argument Obama gets a free pass for eight years for the Bush/Republican housing bust.
Ignoring the fact that thousands of AQ have been killed Iraq without killing us over here, the fact remains that that AQ was a mess left by the previous administration. It's hard to balance the budget when you have to do the previous president's job in addition to yours.
"tech bubble burst" : Using that argument Obama gets a free pass for eight years for the Bush/Republican housing bust.
Nonsense! The recession that Bush inherited ENDED on his and the GOP's watch, in spite of that other mess left by the previous administration, Bin Laden. Besides, the housing crash occurred because of policies the Democrats supported. Even if the GOP failed to act against some of their reckless ideas, that doesn't clear the Democrats.
“Try looking at the goods in Walmart for where they are made. This cut will put people to work.. Unfortunately they will be Chinese, Japanese, Vietnamese, and Mexicans.”
Ha! Good point!
Any consumption-side stimulus will do the same - stimulate more trade deficit consumption, but not USA production per se.
The obama plan is “Keynesianism on crack”.
This is the most important point made so far about the Obama plan - read and understand and you will ‘get it’ as to Obama’s full game plan:
http://travismonitor.blogspot.com/2009/01/obamas-team-sandbags-jobs-numbers.html
Great argument. “ There would have been a great invasion of USA by all those shooting at americans in Iraq if we hadn't invaded. ” Few or no countries have the lawlessness and and total anarchy that your hero created in Iraq under “winning the WOT” There is no way you can equate the mess we had to fix after creating in Iraq to some alternative future we might have had. Nothing could have been worse than that. That is why GWB thew away approval ratings in 90s for 20s and a big part of Pelosi Obama's wins.
RE “ Nonsense! The recession that Bush inherited ENDED on his and the GOP’s watch, in spite of that other mess left by the previous administration, Bin Laden. Besides, the housing crash occurred because of policies the Democrats supported. Even if the GOP failed to act against some of their reckless ideas, that doesn't clear the Democrats. ”
Those "heads I win tails you lose "arguments can be used by democrats swapping party names to excuse their future failure, and more effectively too. Because Clinton left the economy in a much, much better shape than GWB left it for democrats, which benefits democats. If republicans have all three branchs don't expect to win elections by blaming democrats for their own inaction.
These all sound like Hannity arguments
Whew! I am glad there is going to be a tax hike. I was worried that Obama was actually going to use “logic and reason”.
This is going to get more interesting as the months roll on.
It doesn't surprise me that you completely evaded the point of my comments, which was that if Clinton had taken care of AQ when he could have, there would have been no 9/11 and no WOT.
As to whether AQ would have come over here to attack us, isn't that what happened on 9/11? And isn't that what was thwarted at Ft. Dix?
Oh, and that is Americans, with a capitol A.
Those "heads I win tails you lose "arguments can be used by democrats swapping party names to excuse their future failure, and more effectively too. Because Clinton left the economy in a much, much better shape than GWB left it for democrats, which benefits democats. If republicans have all three branchs don't expect to win elections by blaming democrats for their own inaction.
Clinton left the country heading into a recession from the tech bubble burst. The GOP WH and Congress took over that economy and left Pelosi with DJA 14,000+ and unemployment at 4.5% in 2006. It is Pelosi and company, who with control of the Congress have control of the purse strings, that have left the incoming administration with DJA 9000 and unemployment at 7.2% and climbing. If the economy doesn't turn around, those numbers will speak for themselves.
Well, I have to laugh. I think the drones that voted for this fraud thought their house amd gas payments were going to paid for by the messiah?
*snicker*
I glossed over this point, but it's a good one.
I agree that we can't blame the Democrats for the GOP's failure to act against them, but we can demonstrate that the policies promoted by the Democrats have a lot to do with our current problems.
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