And here the LA Times's Peter Gosselin has an interesting take on why non-economists' reactions to the Bush Administration non-stimulus proposals has been unenthusiastic:
Posted by DeLong at January 17, 2003 10:27 PM | TrackbackWASHINGTON DISPATCH: Arguments for Tax Cuts Weaker Than in the Past
By Peter G. Gosselin
Times Staff WriterJanuary 17 2003
WASHINGTON -- When it comes to judging big policy proposals, the simplest questions are often the best. In the case of President Bush's recently released "jobs and growth" plan, here's one: Can Washington really think of nothing better to do than cut taxes -- again?
After all, taken together with the administration's already approved $2.1-trillion tax package, the new plan makes tax cuts the single biggest public policy initiative the president has pushed since coming to office. Bigger, according to Congressional Budget Office figures, than the likely size of the defense buildup. Bigger than expected new spending on homeland security. Bigger than either Republican or Democratic proposals for a prescription drug benefit for retirees. Vastly bigger than Bush's much-touted education reforms.
And the new plan comes at a time when arguments for tax cuts have weakened since the national tax revolt began with Ronald Reagan's election, if only because the top income tax rate and the tax burden on average families already have been substantially reduced.
The combination is giving even some friends of the latest proposal pause. As Reagan-era Treasury official and respected tax economist C. Eugene Steuerle put it: "The federal government can't possibly exist solely to reduce taxes."
White House officials continue to vigorously defend their plan, arguing that Washington must do something to help the struggling economy and that tax cuts still pack an economic punch. They say the president's call for eliminating the personal tax on stock dividends, in particular, would fix a problem that economists of all political stripes have complained about for years.
"Productive activity is taxed twice, once at the corporate level and once when profits are distributed in the form of dividends," Assistant Treasury Secretary Richard H. Clarida said. "There's a real cost to the economy of this double taxation," he added, one that the president's plan would correct.
But even here, the case for tax cuts is not as strong as it once was. In part, that's because in shrinking income tax rates, presidents from Reagan to the current Bush have automatically shrunk the tax on dividends. In part, that's also because Americans have largely shifted how they own dividend-paying stocks from taxable, direct holdings to tax-protected pensions, 401(k) plans and the like.
Of course, none of this discourages tax-cut advocates. Groups such as the conservative Americans for Tax Reform picture what has happened to taxes over the last two decades as only a first step in a grander agenda. "If your goal is to reduce the size of government, we still have a long way to go," ATR President Grover Norquist said.
But such assessments minimize how much tax-cut advocates already have won. And they miss how their victory shifts the ground under arguments for still more tax cuts. Consider:
* Between Reagan's election in 1980 and today, the top income tax rate has fallen from 70% to 38.6%. The top rate is generally considered a proxy for the burden taxes impose on the economy: It's the bite that Washington takes from the last dollar top earners make and so measures how much they are discouraged from working and saving more.
Although the top rate did creep back up under the president's father, former President Bush, and Bill Clinton, what remains of the decline still erases more than two-thirds of the economically damaging effects of the tax, according to the way experts measure these things.
* By the time Reagan arrived in Washington in 1981, the typical family of four -- one with an income in 2001 dollars of $63,250 -- was paying 11.8% of its income in income taxes, a post-World War II high, according to the Tax Policy Center in Washington. By 2001, a family in the same economic position was paying only 6.7%, a 44-year low.
"The notion we haven't made any progress limiting the distortive effects of taxes on the economy is just bunk," Brookings Institution economist William G. Gale said.
The extent to which taxes already have been reduced may help explain why a public that once clamored for cuts now seems comparatively indifferent to them.
A long-running Gallup poll found that the percentage of Americans who think their federal income taxes are "too high" has dropped from almost 70% in the years before Reagan's election to 47% earlier this month. The same poll found that the fraction that believes its taxes are "about right" has climbed from one quarter to one half.
The size of the additional cuts that would be needed to have anything like the economic effect of those already made may account for much of the doubt about Bush's latest proposal.
For example, analysts estimate that for the nation to enjoy as big a bump as it got from cutting its top tax rate from 70% to 38.6% would require a further reduction to about 20%. That's a level not seen since Calvin Coolidge was president and the income tax system was barely a decade old. And it is one that many think unwise at a time of war and rising security needs.
From the excerpt: "The notion we haven't made any progress limiting the distortive effects of taxes on the economy is just bunk," Brookings Institution economist William G. Gale said.
(apparently talking about income taxes, since the entire article is about income taxes)
Grrrr. Of course, income tax is arguably one of the least distorting taxes, because it takes the money off the top. Unlike taxes that disproportionately hit one activity or another (gasoline taxes, cigarette taxes, specific tarrifs, fees, etc...) which discourage people from specific purchases and economic activities. Income taxes are probably the least distortive of all taxes, with a possible exception of payroll taxes (the preference depending on whether you prefer regressive or progressive taxation, at least under the current implementation of such taxes.) So, if limiting economic distortions is what you want to do, perhaps you should be pushing for more money to be raised through income taxes?
Posted by: Ian Welsh on January 17, 2003 11:04 PMWell, at least some economists like Bush's non-stimulus plan...
"A letter signed by 110 economists, including three Nobel Prize winners, urges Congress to support the main elements of President Bush's $647 billion tax-cut plan..."
http://washingtontimes.com/national/20030118-349048.htm
I love it when people are quoted out of context. E.g:...
>> respected tax economist C. Eugene Steuerle put it: "The federal government can't possibly exist solely to reduce taxes." <<
... just as if Steuerle is against eliminating the double tax on dividends.
In fact, Steuerle debunks the idea that any meaningful fiscal stimulus at all being enacted by Congress is plausible... "the main stimulus to the economy from fiscal policy comes from the shortfall in revenues that usually accompanies a slowdown" ... and notes that the $370 billion drop in the current budget position by itself provides a stimulus so large that any realistic proposal to come out of Congress "will pale in comparison".
So all argument from *both* sides about whether the tax cut is/isn't a "stimulus" is political posturing not reflecting economic reality (not at all unlike how the all argument about how NAFTA would destroy/create vast numbers of jobs had precious little to do with the real economics of NAFTA).
We might also mention how so many econ textbooks (that I had at least) are so dubious about using Congressionally-enacted fiscal counter-cyclical policy because it *always* arrives late, is subject to capture by special interests, and can never be timed to the economic situation. As an example we need look back no farther than the Clinton Admin's proposed stimulus package that would have been enacted years after the recession was over, was stuffed to the brim with favors for political supporters, and would have stretched into the boom years -- running completely counter to that Administration's later proclaimed "Rubinomics" policy of deficit reduction. Lessons from textbooks and experience seem to have a very short half-life once they come into contact with politics.
Steuerle thinks fiscal policy is for addressing long-term considerations, and that eliminating double taxation on dividends is just such a thing -- noting the long-term eventually becomes the short term, and if a change like this had been enacted back when Treasury first considered it (as per Hubbard) it might have taken some of the steam out of the stock market bubble, and we'd all be better off now.
Steuerle would certainly rather see a balanced budget, and even surpluses, today than not, and if he had his druthers he'd like to see dividend reform enacted on a revenue neutral basis with some other balancing revenue increase.
But that's not because of any small effect that deficits have on interest rates, but rather because of the *large* effects previously incurred deficits may have in reducing political and fiscal ability to respond with flexibility to the unknown challenges of the future, after the *big* deficits arrive with the aging of the baby boomers.
Yet looking at the relative effects that tax policy and entitlement policies have on those future deficits, and noting that unfunded entitlements have the *much* larger effect, he's a lot tougher on those who won't reform entitlement policy than those who won't reform tax policy. E.g, Clinton's sinking, for partisan political reasons, of Sen. Breaux's bi-partisan commission on Medicare reform could add a lot more to future deficits than Bush's dividend tax repeal.
So anybody who wants to talk about using taxes to close deficits surely ought to be willing to talk about entitlement reform to reduce deficits. But do the people who claim to be so worried about deficits talk much about that at all?? Or do they react to proposals for entitlement reform by creating advertisements showing Dubya pushing people in wheelchairs off of cliffs.
Anyhow, Steuerle on dividend reform...
~~
So a case can be made for integration, and it can be tied to many of the corporate problems that are surfacing recently. The double taxation of corporate income provides a strong incentive for debt over equity. This adds juice to the creation of phony or misleading partnerships as devices to build up debt without affecting debt-to-equity ratios.
But it also plays out in industries like airlines, which are perennially facing bankruptcy problems. With assets that can easily be sold off like airplanes, the industry is able to borrow more than other risky industries. Once highly leveraged, it often doesn't take very much change in the economic cycle, passenger usage, or level of competition to make some firms unprofitable. If larger percentages of their capital were in equity rather than debt, bankruptcy would be much less frequent.
In the case of highly leveraged firms, moreover, there develops a number of heads-I-win, tails-you-lose incentives. The turnaround executive with big payments in stock or stock options won't share in the losses that might develop from his decisions, as the value of the stock and stock options can't fall below zero. The executives' share of those losses, perhaps due to mismanagement, get shifted off to wage earners, bondholders, banks, and others. But if the firm succeeds for a few years, the executive will be likely to share more fully in the upside. This creates a lot of incentives for gambles that are not economic -- where there are expected losses for the activity but expected gains to some shareholders and top executives. In an extreme example, a 50-50 chance of making or losing $1 billion gets translated into a 50 percent chance of these stakeholders gaining $1 billion and a 50 percent chance of wage earners and banks losing $1 billion.
Thus, the administration's interest in corporate integration is meritorious...
~~
C.E.S. writing in Tax Notes.