Senate Passes Tax Cut

The Senate republican tax plan, which passed yesterday, will phase-in a dividend tax cut, and then repeal it after three years.
The Senate plan calls for the dividend tax will be cut by 50% this year, and fully eliminated for 2004, 2005, 2006 and then reinstated for 2007 and beyond.
The sole reason for this gimmick is to reduce the cost below the previously agreed $350 billion, and hence to make the bill filibuster-proof. The true cost of the permanent tax reform is thus much greater than $350 billion.
The additional problem is that the phase in is terrible economics. As a company, will you pay out dividends this year, when they will be taxed at 50%, or next year, when they will not be taxed at all?
The likely result is a large reduction in dividends this year – exactly when we need economic stimulus.

Senate Approves Tax Cut Proposal (washingtonpost.com)
The Senate bill actually is more generous to corporations and investors than either the House-approved tax cut package or the president’s original proposal — at least until 2007. It would exclude half of all dividend income from taxes this year, then would shield all dividends from taxes until 2007, when the tax cut disappears altogether.

Filed under: Economics, Economy, Fiscal Policy, Policy, Politics

CEA: Bannished and Vacant

The Washington Post reported today that the Council of Economic Advisors (CEA) is physically being booted off the White House grounds, and is being relocated to 18th and G streets (along with other heavy hitting departments such as the Office of Presidential Correspondence.)
In addition, two of the three CEA positions are vacant, and Mankiw has yet to be confirmed.
The Council of Economic Advisors has, for many years, and as long as I can remember, been seen as the part of the White House economic team that provides (relatively) unbiased and non-political economic advice and analysis to the president and other members of the administration. The most visible product of the council is the Economic Report of the President, but the council has, historically, produced other reports that make their way to the president’s desk.
Its chairman and three members (as well as supporting researchers) are usually drawn primarily (if not exclusively) from academia. The past and future chairs, Glenn Hubbard and Greg Mankiw, for example, are well respected economics professors from Columbia and Harvard. (Both of whom happen to go by their middle name… hmmm… just a coincidence? or is there something nefarious going on.) Paul Krugman, for example, served in the CEA under Ronald Reagan!
I hope the change in location does not indicate a reduced role for the CEA. Good economic policy must be based on honest, competent economic policy assessment; and the CEA under past administrations have strived to provide this kind of analysis, and strived to be largely independent of politics.
However, from what I hear, proximity is often an indication of influence in the inside-the-beltway political game. The decline in the influence of the CEA in the current administration is a potentially troubling turn of affairs.

‘CEA You Later,’ Bush Says (washingtonpost.com)
The Council of Economic Advisers is going into exile.
Beginning Wednesday, President Bush’s economists will pack up their files and move out of the White House complex, an eviction after more than 50 years, and enter new space a couple of blocks away at 1800 G St. NW.
The official line is that this is not a demotion for the CEA. “Absolutely not,” said White House spokeswoman Ashley Snee. “It’s a space-management issue.”
Bush aides are well aware, however, that few people in town are going to accept that explanation. In the White House, where proximity is power, an eviction from the Eisenhower Executive Office Building is the political equivalent of being sent to Elba. The CEA will be sharing space at 18th and G with such crucial functions as the Office of Presidential Correspondence.
Heightening suspicion is the state of upheaval at the CEA, where two of the three seats are vacant and the third is soon to be.
The organization is without a chairman; Greg Mankiw has not been confirmed to replace Glenn Hubbard, who announced his resignation Feb. 26. The seat vacated last fall by Mark McClellan is still empty (Bush plans to nominate Princeton’s Harvey Rosen). The only sitting member of the CEA, Randall S. Kroszner, is due back at the University of Chicago; unofficial word is he’ll be replaced by MIT’s Kristin Forbes. The office is also getting a new chief economist, the third in that job this year.

Filed under: Economics, Economists, Economy, Fiscal Policy, Metro DC, Policy, Politics

OMB Director Daniels Resigns

The head of the Office of Management and Budget today announced his resignation.
According to the AP, he is the last of Bush’s original economic team.

Yahoo! News – Bush Budget Director Daniels Resigns
WASHINGTON – Budget director Mitch Daniels moved toward an expected run for Indiana governor, announcing Tuesday that he will leave President Bush (news – web sites)’s administration within the next 30 days.
…
Daniels has been a favorite of conservatives for his frequent clashes with Congress over spending. Assigned the role of keeping the price tag of spending legislation in check, he has had testy relationships with lawmakers of both parties from the House and Senate committees that oversee expenditures.
…
Daniels has held the budget post since the beginning of the Bush administration, and his departure will mean that the president’s entire initial economic team is gone. Fleischer said no decision had been made on a successor.

CQ TODAY MIDDAY UPDATE
Published by Congressional Quarterly and CQ Today
http://www.CQ.com
Tuesday, May 6, 2003 – 2:09 p.m.
DANIELS RESIGNING AS WHITE HOUSE BUDGET DIRECTOR
The White House announced today that budget Director Mitchell E. Daniels Jr., a combative administration voice on congressional spending habits, is stepping down. Daniels has been contemplating running for governor of his native Indiana, and his resignation would pave the way for such a bid. The leading candidate to replace Daniels, said a congressional budget official, is Clay Johnson. President Bush nominated Johnson as deputy budget director earlier this year, though he has not yet been confirmed. Throughout his tenure as director of the Office of Management and Budget (OMB), Daniels was a consistent if not always successful advocate for restraint on spending. He invariably took a hard line during the congressional appropriations process, which often raised hackles with powerful members such as Senate Appropriations Chairman Ted Stevens, R-Alaska, who once snapped that the best way for Daniels to improve his relationships with lawmakers would be to “go back to Indiana.”

Filed under: Economics, Economists, Fiscal Policy, Policy, Politics

Homer’s Budget

[Update 6pm: The House passed the not-quite-reconciled budget by 5 votes, and passed the Senate by the tie-breaking vote of VP Cheney.]
The Congress is today voting on two version of a $2.27 trillion federal budget. For those not familiar with the usual process (and the unusual trick employed this week), I though I would illustrate with a quick example: The case of the Simpsons (Father Homer, wife Marge, son Bart, and daughters Lisa and Maggie).
The basics of their budgeting go something like this. Suppose that, for several years, the Simpsons have been running up credit card bills. One night they sit down and decide that they should really get their finances in order to start to pay-off their credit cards (or at least try to stop the debt explosion).
So, in an effort to restrain the family budgetary excess, Homer and Marge get together to try to come up with a budget. They lay out generally how much will be spent spend on things like food, allowances to the kids, car payments, slushies at Apu’s, etc., and agree to stick to the overall plan. They often have different ideas about how much to spend on various items, but they compromise and come up with a solution they can both agree to.
Makes sense so far, right? The federal government (usually) does roughly the same thing every year by passing a budget “resolution” which lays out the general overall budget amounts for spending and taxes. (Actual spending on specific areas is done via various appropriations bills).
Now, just like Homer and Marge sometimes differ initially, the House and Senate often pass different versions of bills. When this happens, representatives from each group get together in a “conference” to write a final version of the bill, which is often (but not always) a compromise between the house and senate version. This final version is then voted by the House and Senate before being sent to the President’s desk.
Now here’s where it gets weird. Suppose Homer and Marge, when making up thier budget, each have their own idea about how much to earn and spend. Most years, they get together to agree on a single number. This year, however, they can’t agree on a compromise and go about making their decisions separately, each using their own numbers!
Congress is playing some similar games with the current budget. The House of Representatives initially passed over $700 billion in cuts, primarily in the form of a dividend tax cut, white the Senate passed $350 billion. These bills went to conference, and what came out was… well… not so much of a compromise.
The “reconciled” bill gave a $550 billion figure to the House, and a $350 billion figure to the Senate. Huh?
It looks like the reason for the strange hybrid was a bid to delay the tough decisions until moderate Republicans (who are balking at greater revenue reductions) can be convinced to change their votes. (Attached were also a set of rules to make it likely that the final result would be closer to the $550 billion number.)
Now, I realize that this kind of a procedural maneuver is primarily the concern of inside-the-beltway types (like myself!), but what should be clear to everyone is that there are a lot of gimmicks being employed to try and force through a controversial budget. (See article below)
[Update: 4/12 12pm. The NYTimes is reporting that the budget passed only “…when Senator Charles E. Grassley, the Iowa Republican who is chairman of the Finance Committee … promised on the Senate floor that he would not permit, under any circumstances, a law this year that would reduce taxes by more than $350 billion over 10 years.”]
Now back to the Simpsons.
Suppose both that, this year, Homer and Marge decide it’s ok to run up some extra credit card debt – say because Homer has worked fewer overtime hours at the power plant recently, plus Bart got into a fight with Nelson, the local bully, and there were some unexpected medical bills to pay.
Sounds reasonable. When the economy goes into recession, overall tax revenue is lower, and expenditures are higher, so it makes sense to run a temporary deficit.
Now here’s where it gets weird again. In typical Homer fashion, he decides the best strategy is to work less and thus take in less income – for the next 10 years and beyond, with the hope that perhaps they might spend less money in the future. However, they know that there are going to be additional expenses coming up soon (Bart needs braces, Lisa keeps talking about going to college, and Maggie’s eating more everyday).
What will be the result of this action on the Simpson’s household budget? At best, huge credit card debts probably delaying Homer’s retirement. At worst, a repossessed car, no college for Lisa, and Bart’s overbite stays.
What about the economy? While a temporary deficit is OK in times of recession, current policies will drag the budget into deficit into the distant future. These deficits caused by revenue reductions, measured in the hundreds of billions, are especially concerning since there are important and necessary expenses on the horizon. Iraqi war and reconstruction costs, prescription drug benefits, and social security reform, to name a few, will cost many hundreds of billions. In addition, the deficit itself is a drag on private investment.
(A recent NYTimes editorial by Concord Coalition members Bob Kerrey, Sam Nunn, Warren B. Rudman, Peter G. Peterson, Robert E. Rubin, Paul A. Volcker: No New Tax Cuts provides a better summary ot these arguments.)
I’m afraid Homer would be proud of the current budget!

GOP Leaders Strive for Unusual Deal On Budget (washingtonpost.com)
…
Under the proposed deal, the House and Senate would pass a $2.2 trillion budget resolution by week’s end calling for a $350 billion tax cut in the Senate and $626 billion in the House. Late last night, however, GOP leaders were warned that the Senate parliamentarian might not allow the unorthodox deal to go through as planned, two GOP aides said. A senior House GOP leadership aide said it could fall apart at an emergency meeting of top Republicans this morning.
A final decision is expected today. Never before has Congress passed a budget resolution with different tax numbers for the two chambers.
House and Senate members must settle on one number before they can send a tax cut bill to Bush for his signature. The easiest way for Republicans to achieve a big tax cut is to approve a budget resolution, which would set the parameters for spending and tax cuts for 2004. Under Congress’s budget rules, Republicans would need 50 votes in the 100-member Senate for a tax cut if a budget resolution has been passed. Without a resolution, they would need 60 votes, a dubious proposition in the narrowly divided chamber.
Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) accused his GOP colleagues of simply “passing the buck” because budget writers couldn’t “figure out” a compromise between conservatives who want large tax cuts to spur economic growth, and liberals and moderates who want smaller tax reductions to keep a lid on budget deficits.
Most Democrats oppose the GOP’s unorthodox solution. “There will be an uproar of some magnitude if somebody tries to do this,” said Senate Minority Leader Thomas A. Daschle (D-S.D.). The Republicans’ strategy is twofold: They want to appear fiscally responsible by passing a budget resolution by the April 15 statutory deadline and providing Bush more time to woo four Senate Republican opponents of his tax cut plan. It now will take Congress weeks, if not months, to settle on a final tax number.
…

Filed under: Economy, Fiscal Policy, Policy, Politics, Recession

Ignoring War

In case you were paying attention to the war, you might not have noticed the successful attempts today to pass over $700 billion worth of tax cuts and significant reductions in domestic programs.
The House today passed, by 3 votes, these cuts in taxes and domestic programs. The largest component the tax reduction is the elimination of the tax on dividend income. The Senate voted to remove $100 billion from the proposal, but also rejected an attempt to cut the proposed tax cuts to $350 billion.
*UPDATE: As of 3.26.03, the Senate has reduced the tax cut provisions to $350 billion and has passed the resolution. The resolution will now go to conference where it will be reconciled with the House version.
Republican John McCain was quoted as saying: “We cannot cut taxes and raise spending until we know what the cost of the war is.”
I agree.
It seems to me that, whether you are for or against these particular tax cuts, this does not seem to be an appropriate time to pass fiscal policy changes that will have a very significant impact on the budget for years to come, and especially when the costs of the war and reconstruction are unknown.
The attention of the US public is rightly focused on the war and our troops that are in harm’s way. Now is not the time for the US Congress to enact a large and controversial change in tax policy while the country is distracted.
Congress ought to sit down and turn on CNN like the rest of us.
House Approves Bush’s $726 Billion Tax Cut (washingtonpost.com)
Senate Votes to Shave New Bush Tax Cuts by $100 Billion (washingtonpost.com)

Filed under: Economy, Fiscal Policy, Policy, Politics

More Letters for Economists to Sign

It’s been a while since I have seen so much political activism from the economics profession. This past month, there have been three major sign-this-statement pushes trying to get economists to speak out.
Currently circulating is an anti-war Statement by US Economists on Iraq by ECAAR. (Over 100 have already signed).
Two statements on Bush’s economic proposal were also presented this past month.
Economists’ Statement Opposing the Bush Tax Cuts, Feb. 10 (Around 450 signers.) For a critique of the letter (but not the substance), see Don Luskin’s comments.
In response, a short letter to Bush was drafted: Economists Endorse President Bush’s Jobs and Growth Plan Feb. 12 (Around 250 signers.) For a critique, see DeLong’s Thoughts on the Republican Economists’ Letter.

Filed under: Economics, Economists, Economy, Fiscal Policy, Policy, Politics, Recession

Economic Report of the President

An email from Bruce Bartlett alerts me to the recent release of the Economic Report of the President.
Looks like I have some weekend reading to do!

Filed under: Economics, Economy, Fiscal Policy, Policy, Politics, Recession

Double taxation of dividends

President Bush yesterday proposed eliminating the tax on dividend income at an estimated total cost of $300 billion over 10 years.
The dividend tax has been called a “double tax” since corporations sometimes* pay an income tax, and then if/when the profits are distributed in the form of dividends to stockholders, they are sometimes** taxed as income.
*Note that many coporations do not pay taxes due to shelters, loopholes, tax breaks, etc. See below.
**Note that dividends paid on stocks in 401k plans are not taxed as regular income.
In his speech, Pres. Bush said “Double taxation is bad for our economy. Double taxation is wrong. … It’s not fair to double-tax by taxing the shareholder on the same profits. …I’m asking the United States Congress to abolish the double taxation of dividends.”
The rhetoric is clear – if taxes are bad, double taxation is, well, double bad.
I’m not quite sure about this argument – there are plenty of things in the economy that are taxed multiple times.
Examples:
1) Income tax on your wages –> sales tax on the stuff you buy.
2) Federal/state/local income tax.
3) Property taxes. First you pay a sales tax on your car, then every year you make a property tax payment. Talk about multiple taxation!
**looking at it this way, a dividend tax is very much like a property tax on stocks.
4) Tariffs – one tax when the good is imported, and another sales tax later. (Why no “double taxation” argument when talking about steel tariffs?)
5) Income and payroll tax.
What matters are not the number of times something is taxed, but rather the total tax burden. One tax of 40% is clearly worse than two taxes of 5%.
Bottom line:
The main argument for a dividend tax is that it might be an effective way to target wealthy citizens – and hence one way to tax the idle rich who receive a large part of thier income through means other than labor wages.
The argument against the dividend tax can be either that the tax is a bad way to target the wealthy, or that the tax system is too progressive and that the wealthy currently pay too much in taxes.
“Double taxation” has nothing to do with it.
Other notes:
1) Elimination of the dividend tax has nothing to do with stimulus. It may be good long run policy (and it may not), but it is not an effective way to boost the economy in the short-run.
2) Dividend taxation may provide an incentive for companies to provide returns in other ways – like through capital gains. Elimination of the dividend tax would remove this disincentive effect.
However, it should be noted that the benefits to investors of the elimination of the tax depends upon the degree to which companies (and individuals) have not been able to get around the tax. If companies are already dodging the tax by, say, using stock repurchase plans rather than paying dividends, then there would be only modest gains for individuals from the dividend tax elimination.
3) The first half of the double tax can be quite low (even less than zero). While the statutory marginal tax rate on corporations is 35%, corporations also benefit from many loopholes, tax shelters, subsidies, etc. Effective tax rates vary by industry and by company, but, overall, effective tax rates are around 22% (according to a study of over 250 companies over 3 years 1996-1998. The rate is likely lower today.) For some companies, the effective tax rate is less than zero as they receive many benefits from the government.
4) The benefits of the tax cut go overwhelmingly to the wealthy: 65-70% of the benefits go to people earning in the top 5% ($130,000 and more). See CTJ or TPC.

Filed under: Economics, Economy, Fiscal Policy, Policy, Politics, Bush, dividend, double taxation, tax

Dividend Tax Cut

Raw numbers on the elimination of the dividend tax can be found at the Tax Policy Center.
Revenue and Distribution Tables
“This page contains estimates of the impact of selected current and recent tax proposals on the distribution and level of tax revenues. ”

Filed under: Economics, Fiscal Policy, Policy, Politics, Recession

Bush’s New Economic Team

The new economic team is set:
* Treasury Secretary: John W. Snow, railroad executive (CSX)
* Economic Advisor: Stephen Friedman, investment banking exec (Goldman Sachs)
Bush Picks CSX Corp. Chief for Treasury
New Team To Sell Policy on Economy

Filed under: Economics, Policy, Politics