The Pete Davis Archives

Thanks To Stan!

Pete Davis — Fri, 30 Dec 2011 18:26:22 +0000

Before I sign off, I just wanted to say thanks to Stan for facilitating my entry into the blogosphere. I learned a lot and have heard from readers who did too. I have no plans to blog on my own, but I may send him a comment now and then, particularly on tax reform. I'm very happy to hear from anyone who wants to dialog with me via email. Just use the CG&G contact form as usual. If I get inundated, I may reconsider blogging on my own. Happy New Year, and all the best to Stan!

Paying For The Payroll Tax Cut

Pete Davis — Fri, 09 Dec 2011 23:18:45 +0000

Late next week, Congress will extend the present law 2% payroll tax cut for another year. This is a good way to sustain our fragile economic recovery. The additional take home pay each pay period is more likely to be spent than a lump sum would. How it's paid for matters too. Rather than borrowing another $120 billion from China and $35 billion to extend unemployment insurance and $38.9 billion to avoid slashing the Medicare physician reimbursement rate by 27%, several items previously agreed to, but never proposed by the Super Committee, will almost pay for them over the next decade. This afternoon, the Congressional Budget Office scored the House Republican version of the payroll tax cut, H.R.3630. It's $25.2 billion short of balance FY12-FY21. It starts out with a deficit increase of $166.8 billion in FY12, $71.6 billion in FY13, and $9.3 billion FY14, a total of $247.7 billion (assuming it's not extended late next year), before reducing the deficit by $222.5 billion over the rest of the decade.

The pay fors in order of size are: Medicare spending cuts, $38.4 billion; increased federal employee retirement contributions, $36.7 billion; increased Fannie Mae and Freddie Mac mortgage insurance rates, $35.7 billion; other health care offsets, such as cuts in the PPACA prevention fund, $33.4 billion; FCC spectrum auction, $16.5 billion; and other, $36.6 billion.

Aside from the recession driving down revenues and raising unemployment insurance and other federal benefits, rising health care costs, mostly in Medicare and Medicaid, have been the largest drivers of our rising deficit, so it makes sense to look there for spending cuts and revenue increases. Federal employees will pay more for their pensions. I don't know how generous those pensions are projected to be in comparison to contributions. Anybody? Certainly, under-priced Fannie Mae and Freddie Mac mortgage insurance was a big contributor to the real estate bubble that preceded our recession, so this pay for makes a lot of sense. Health care spending will be a battleground for a long time. How much cost savings would have resulted from the PPACA prevention fund? I don't know, so this one depends on how effective or ineffective that spending would have been. We probably will never know. I don't object to assuming some revenue from FCC spectrum auction, but I would note that past FCC spectrum auctions have failed to deliver projected revenues.

The Senate Democratic payroll tax cut, S.1944, would expand the current 2% cut to 3.1% and would pay for it with a 10-year 1.9% surtax on incomes over $1 million. CBO scored this as balanced. It doesn't include the unemployment insurance extension or the "doc fix" or the alternative minimum tax relief in the House Republican bill. While I am concerned about the burgeoning income disparities in this country, I would rather set income tax rates as part of a broad reform we desperately need and not as an ad-hoc increase on millionaires to pay for a one-time tax cut.

I expect the final version of this bill to look similar to H.R.3630. If President Obama signs it before Christmas, employers will have to scramble to implement it in time for the first paychecks of the new year. Washington's last-minute-itis strikes again.

IMF Funding Under Attack, But It's Safe For Now.

Pete Davis — Sun, 04 Dec 2011 23:28:05 +0000

Friday's Hill article that Senator Tom Coburn (R-OK) was planning an amendment to direct the U.S. to vote against any IMF bailouts became a hot topic of conversation among international investors despite Coburn's admission that his amendment had little chance of enactment. On June 29, 2011, on a 44-55 vote, the Senate rejected Senator Jim DeMint's (R-SC) amendment No. 501 to rescind the U.S.'s $100 billion line of credit to the International Monetary Fund to keep it from being used to bail out European Union countries. In late July, the House Appropriations State Foreign Operations Subcommittee approved the same rescission, but it hasn't moved beyond there. It may resurface in the omnibus appropriation to fund the government beyond December 16.

On June 24, 2009, when President Obama signed the supplemental appropriation establishing the U.S.'s $100 billion IMF line of credit, he asserted Congress has no authority to tell him how to vote at the IMF in this signing statement. That was after White House officials begged and promised their way to getting that line of credit and quickly repudiated those promises in the signing statement as recounted in this Wall Street Journal article. No wonder Mr. Obama ducked calls for additional funding for the IMF at last month's G-20 summit in Cannes, France because that would require congressional approval, which it would be difficult to get. So there's little chance of rescinding that $100 billion IMF line of credit before 2013, but that could change quickly if the Republicans win the White House and majorities in both houses of Congress in the 2012 election.

More Time Won't Produce A Super Committee deal.

Pete Davis — Tue, 22 Nov 2011 18:50:35 +0000

I had a report yesterday that a high Treasury official recently told some foreign central bankers not to worry and that the Super Committee could still reach a deal after November 23. I would point out that the Committee had plenty of time from it's appointment in mid-August until its failure to agree on any recommendations yesterday, and it had the benefit of the detailed recommendations of the Bowles-Simpson Fiscal Commission, the Bipartisan Policy Center, the Committee for a Responsible Federal Budget, and others. The Super Committee's failure did not occur because it ran out of time; it occurred because House Speaker John Boehner (R-OH), House Minority Leader Nancy Pelosi (D-CA), Senate Majority Leader Harry Reid (D-NV), and Senate Minority Leader Mitch McConnell (R-KY) decided no deal was better than a deal which risked electoral defeat in 2012 and which offended their partisans with tax increases and entitlement cuts.

One night in early 1983, I watched Senator Pat Moynihan (D-NY) walk across the aisle on the Senate floor and work out the deal with Senate Finance Chair Bob Dole (R-KS) to save Social Security. Dole accepted a payroll tax increase and a new tax on the Social Security benefits of those with high incomes and Moynihan accepted a gradual increase in the retirement age from 65 to 67 and the more immediate six-month delay in the annual cost of living adjustment. President Reagan and Senate and House leaders embraced the deal, neutralizing any electoral advantage, and the country gained another 50 years of Social Security solvency.

In 1990, President George H.W. Bush signed off on a tax increase and spending cut deal crafted outside of the public glare at Andrews Air Force Base, which cost him his second term as president. His successor, Bill Clinton backed a similar tax increase and spending cut bill in 1993, which, together with his failed attempt at health reform, cost him the House and the Senate in the 1994 election. Those two deficit reduction deals produced the economic boom of the 1990s and four years of budget surpluses from FY98 through FY01, which President George W. Bush and Congress promptly squandered with tax cuts and an expansion of entitlement spending, primarily by extending Medicare to cover prescription drugs, that dwarfed any entitlement spending increases since President Roosevelt's New Deal created them.

Strong leadership means going beyond your partisan base to do things that later prove to be for the long-run good of the country. Unfortunately, we don't have that now in the Congress or in the White House, and no additional time is going to fix it. We will stagger along without doing much to boost our economy or to cut the deficit until the 2012 election. That's what weak leadership does, it postpones and equivocates, it explains away the problems, until the voters can't take it anymore. And don't expect a severe market downturn or ratings agency downgrade to break this gridlock. That would just become more fodder for the 2012 election campaign blame game. We're stuck until then.

The Food Industrial Complex Wins. Kids Lose.

Pete Davis — Thu, 17 Nov 2011 21:24:11 +0000

Late Monday, the food industrial complex won a big victory in the agriculture appropriations conference report, H.R.2112, with a provision that blocks the Agriculture Department from carrying out a rule to improve school lunches for the first time in 15 years. This New York Times article covers it well. The House is voting in favor of this right now at 4:30 p.m. Thursday, and the Senate will pass it late tonight or tomorrow. We have an obesity epidemic in this country that grows directly from eating too much processed food, too much salt, too much sugar, and way too many calories. Many times, I begged a 180 pound 4th grader I tutored a few years ago to forego the chips and the Chicken McNuggets and the pizza he was being served to no avail. Many times, I've heard from an inner city OB/GYN how hard it is to deliver a health baby from an obese and diabetic 22 year old mother. Here we have a sensible regulation sidetracked for short-term profit despite terrible long-term consequences.

Corporate Tax Reform For The 99%

Pete Davis — Tue, 15 Nov 2011 21:51:17 +0000

There's a reason that certain large U.S. corporations never seem to pay much tax. They've got an army of very sophisticated and expert tax attorneys, tax economists, accountants, and lobbyists who mark every foot of ground gained or lost in battles on Capitol Hill, at the IRS, and at the Tax Court. Our Founding Fathers had it right that an informed public was the best antidote to bad government. James Madison said, "...a people who mean to be their own Governors, must arm themselves with the power knowledge gives." In that vein, I heartily recommend Marty Sullivan's new book, Corporate Tax Reform: Taxing Profits in the 21st Century. Marty is a tax economist, who served at the Treasury Department and the Joint Committee on Taxation, where he became a good friend, and who, for the past 15 years, has written over 500 avidly read columns for Tax Notes. You won't find any easier to read or more revealing book on corporate tax reform than this one, and it's only 178 pages.

Senator Toomey's Tax Reform Plan

Pete Davis — Tue, 15 Nov 2011 20:59:14 +0000

This morning, House Speaker John Boehner (R-OH) was asked by a reporter:

QUESTION:

Do you, yourself, support the Toomey proposal? And what do you say to consider the critics who call it a tax increase?

BOEHNER:

Well, listen, I think the offer that the Republicans put on the table is a fair offer. Toomey, something like Toomey. It's important for us to, in my opinion, reform the tax code. We've got the highest business tax rate in the world. We've got a personal tax system that's so complicated it costs Americans about $500 billion a year to comply with the current tax code. And I think that reforming our tax code, both on the business side and personal side, will make America more competitive and produce more economic growth. And so I do believe that reforming the code is a step in the right direction.

The details of how we get there, frankly I think has yet to be worked out.

_____________________________

Senator Pat Toomey's (R-PA) plan is a scaled down version of what the Bowles-Simpson Commission proposed on pp.28-34 and in Table 17 on p.65 here, eliminate special tax breaks, lower the rates, and leave some for deficit reduction. Toomey discussed his plan on Fox News Sunday. I applaud his effort. Maybe it can become the basis for a Super Committee deal. Committee Democrats quickly rejected the proposal as not have enough tax break reduction to offset the 28% top rates. If so, the top rates would have to be higher, and more tax breaks would have to be taken away, but the principle is there. Just be careful to maintain the same progressivity of the current system or more.

However, tax reform is not some quick fix that will boost the economy in the next year or two. Drafting the initial changes to the law is the easy part -- repeal some tax breaks and lower the rates. The hard part is negotiating with those who would end up worse off to avoid unfairness and to ease transitions, where through no fault of their own, taxpayers made economic decisions based upon the old law that get whacked by the tax reform.

Enacting tax reform within the next year would test the limits of legislative possibility. The 1986 Tax Reform Act was drafted and redrafted in several iterations starting in 1978 with the Bradley-Gephardt plan, the 1984 Treasury tax reform plan, the 1985 Rostenkowski plan, the 1986 Packwood plan, and the final compromise 1986 Act. Then individuals and businesses would have to start living with the new tax reform. As new investment is reallocated to more productive uses, away from currently tax favored real estate, energy, and other uses, and as tax subsidized debt is shed, the economy would get stronger AFTER SEVERAL YEARS OF ADJUSTMENT.

This will make it all the harder for the Super Committee to reach a deal which won't disappoint financial markets or attract another rating agency downgrade, but we didn't get into this Great Recession in a few years, and we won't get out of it in a few years either. The American people recognize that all of the quick fixes of the past two years have barely kept our heads above water. It's time to do the hard work of long term tax reform. That's asking a lot of a town wedded to quick fixes.

Perry's Tax Slogan Plan

Pete Davis — Tue, 25 Oct 2011 23:15:33 +0000

Governor Rick Perry (R-TX) proposed his tax reform plan today and wrote this Wall Street Journal op-ed. Unfortunately, it's just a slapdash of slogans. If this plan were enacted as proposed, it would lose a lot of revenue, reward the rich, and complicate filing for most taxpayers.

Giving taxpayers the option would also mean that only those who pay less would opt in, guaranteeing significant revenue loss.

Pulling a post card out of your pocket is easy to do, but deciding whether to exercise your option to use that post card or to file under present law would add another layer of complication to April 15, just as we found with the Alternative Minimum Tax and the myriad of IRA filing options

A flat tax is a consumption tax in most versions, and Governor Perry would also eliminate tax on qualified dividends and long term capital gains, all of which mostly benefit the rich. Like many economists, I would prefer not to doubly tax dividends, but a large portion of dividends go to tax exempt accounts and are paid by corporations which didn't pay full tax on them.

See my last post for my views on going to a territorial tax system.

I'm pleased that Americans are debating the tax system. It's certainly needs sensible reform. To do a good job is going to require informed debate -- more than slogans.

Territorial Corporate Tax Reform Plan To Be Announced Soon

Pete Davis — Fri, 21 Oct 2011 23:05:37 +0000

House Ways and Means Chair Dave Camp (R-MI) will announce a territorial international corporate tax reform plan soon, probably this coming week. House Republicans are very intent on moving ahead with tax reform, and Camp's plan will be a good start. Months ago, President Obama formulated his own tax reform plan, but he won't unveil it because it might further impair his chances of getting reelected next year. Most businesses would prefer Mr. Camp's plan to Mr. Obama's, and here's why.

Competitiveness is the name of the game. Most U.S. multinational firms face a far higher top marginal tax rate of 35% than their foreign competitors do. Only Japan noses us out as shown in this chart and this table. We and Australia are almost alone in taxing worldwide income. Foreign competitors get preferential tax treatment on most of their overseas income. Our multinational firms avoid these high rates by hoarding around $2 trillion in cash overseas, taking advantage of our deferral regime, which only taxes overseas income when it is repatriated. They've been clamoring for a dividend repatriation holiday, like the one we had in 2004, to bring that home at 5.25% rate (an 85% reduction). See my post of a year ago on that. See this analysis by the Joint Committee on Taxation and this hearing and this hearing by the House Ways and means Committee.

To his credit, Mr. Camp would only back another dividend repatriation as a part of tax reform. He would lower the rate to about 28% and pay for it by repealing some corporate tax deductions and with another dividend repatriation. Note that the 28% would be permanent - or as permanent as tax rates ever get here - but the repatriation would be one-time revenue. Mr. Camp would also provide special treatment for income from new innovations.

Mr. Obama's plan has not been divulged yet, but it's a good bet that his territorial tax plan would sharply circumscribe what expenses U.S. multinationals could deduct. It would contain lots of new rules to prevent U.S. income from evading tax via overseas transactions. Mr. Camp's plan would be much more generous in this regard, and that's why U.S. multinationals can't wait for him to get started.

There are a host of other tough issues surrounding tax reform that can only be mitigated if our entire tax system is overhauled at one time with some generous transition rules. Because so many businesses pay tax as "pass through entities" on their individual tax returns, it would be very unfair and controversial to repeal some of their deductions without giving them rate reduction. Ideally, you would do all business and individual tax reform at the same time. Contracts which made economic sense under prior law may not after tax reform, so transition relief must be provided without creating permanent loopholes. How to treat income earned before reform and unused foreign tax credits is another thorny problem.

However, tax reform is done, there will be lots of winners and losers. Moving to a territorial corporate tax system with a 28% rate would advantage U.S. multinationals and financial institutions, but it would disadvantage domestic firms, particularly capital intensive firms. Our current system encourages U.S. firms to be taken over by foreign firms, e.g. Budweiser. This would be mitigated under Mr. Camp's plan, but it might be made worse by Mr. Obama's.

Mr. Camp's plan will probably cut future corporate taxes much more than Mr. Obama's, although how much additional economic growth and revenues result from Mr. Camp's will be hotly debated and almost impossible to prove after the fact.

It's hard to find anyone who likes the U.S. Tax Code as it now stands. We would be much better off with a comprehensive, top to bottom, overhaul of both the corporate and individual income taxes. However, it will take at least a year and maybe several years of legislative effort to do it well. In my opinion, it's doubtful that any tax reform could be enacted before late 2013, if then, because it will take strong presidential and congressional leadership to pull it off, as in 1986 under President Reagan.

The Unthinkable Has Happened! Open House GOP Criticism of Grover Norquist

Pete Davis — Wed, 05 Oct 2011 01:56:53 +0000

Plenty of Democrats have criticized the no tax increase pledge of Americans for Tax Reform President Grover Norquist, but Virginia Congressman Frank Wolf's (R-VA) attack is the first from a House Republican. Here's the transcript of his attack on the House floor today. Wolfe's attack on Norquist's shady connections is straight out of "Mr. Smith Goes to Washington."

Van Hollen Asked A Good Question.

Pete Davis — Tue, 04 Oct 2011 18:45:32 +0000

A few minutes ago, Congressional Budget Office Director Doug Elmendorf answered Rep. Chris Van Hollen's (D-MD) question: What is the cyclically adjusted budget deficit? CBO estimated the FY12 deficit would be $630 billion (4.0% of GDP) if the economy was operating at capacity instead of the $973 billion (6.2% of GDP) under CBO's baseline forecast. It's important to distinguish the policy or structural deficit from the cyclical deficit from weak economic growth. In that way policymakers can have a better idea of how much deficit reduction to undertake if the economy is on a path back to full employment. Of course, we may not yet be on a path back to full employment, and Congress rarely agrees to deficit reduction anywhere near 4.0% of GDP, let alone 6.2%, but deficit hawks can always hope.

China Currency Head Fake

Pete Davis — Sun, 02 Oct 2011 16:40:17 +0000

Just after 5:30 p.m. tomorrow, the Senate will invoke cloture on the China currency bill, S.1619. Passage by late Wednesday is assured. The bill imposes tougher reporting requirements on the Treasury Department and allows countervailing duty suits to be brought for currency manipulation. House passage is very unlikely despite majority support in both parties because Speaker John Boehner (R-OH) won't take it up, even though the House passed a similar bill last year. What's going on here?

This is an exercise in blame avoidance, but given Congress' record low popularity, it doesn't seem to be working. Unemployed workers across the country have seen their jobs move to China in part because of China's currency manipulation that keeps the Renminbi undervalued by approximately 30%, although estimates vary widely as explained in this Congressional Research Service report. Congressional leaders understand that retaliating against China, which holds $1.2 trillion of our debt (See this Treasury table.), could have severe repercussions. So the drill tomorrow is to pass the bill so senators can say they voted for it without revealing that it has no chance of enactment. I don't believe voters will be so easily fooled.

Close observers of Washington infighting may notice that Senator Reid scheduled the China currency bill ahead of President Obama's American Jobs Act, S.1549, to send a message of his displeasure about not being consulted in their formulation of the Jobs Act to Mr. Obama and his aides. This is one more example how contentious and difficult governing has become in Washington. As Washington paddles in all directions at once, our economy goes nowhere.

Immigration Is The Solution

Pete Davis — Thu, 22 Sep 2011 00:33:08 +0000

One of my favorite Wall Street economists called me up after the close today (after the market plunged in disappointment over the Fed's $400 billion "twist."), and exclaimed, "We could fix most of our problems by doubling or tripling legal immigration quotas." My response was "Amen." It would provide an instant boost of demand for housing and other durables, and it would bring in more skilled workers. Yes, it would bring in more workers at a time of record unemployment, but the skills mismatch in our economy has got to be overcome somehow, and this would do it. We're a nation of immigrants. It's only a question of how far back you have to go to find them. When he asked whether Congress would pass immigration reform in the foreseeable future, I had to admit, the answer is "No."

Revenue Estimating Methodology Affects What Goes Into The Tax Code

Pete Davis — Thu, 22 Sep 2011 00:23:28 +0000

Today, the House Ways and Means Committee explored how the Joint Tax Committee estimates the revenue effects of proposed changes in tax law. Too often in the past, such hearings have attempted to move the goal posts in favor of tax cuts. Although the discussion got quite technical right away, I was very pleased to see that members of the Committee understand the complexity and difficulty of incorporating assumptions about how taxpayers and the economy respond to tax policy changes. We're beyond the facile statements of a decade ago that tax cuts pay for themselves. On the other hand, certain tax policy changes that have disproportionate effects on business decisions, can raise economic growth and overall revenues in the long-run. We desperately need tax reform, lowering rates and eliminating tax preferences, and the models are getting sophisticated enough to show the benefits of well designed tax reform.

The trick is to separate out the special interest loopholes from the broader beneficial tax changes. It's only when you change marginal rates or depreciation schedules or close large special tax incentives that you get macro effects. For those of you who have not had the pleasure of trying to find a significant tax term in an investment equation, it's very difficult. Aggregate demand (sales) and interest rates always matter, but proving the tax term has some effect isn't easy. Sometimes it does. Sometimes it doesn't. It depends upon the policy.

Joint Tax Committee Chief of Staff Tom Barthold, the first economist to hold that position in 35 years, demonstrated the huge effort he and his staff have put in to their models to incorporate behavorial responses and macroeconomic effects.

Ways and Means Chair Dave Camp (R-MI) and the witnesses are to be commended for an excellent exploration of the issues and for demonstrating the lengths to which the Joint Committee is going to use the latest and best economic research to inform tax decisionmaking on Capitol Hill.

Check out the hearing video here, prepared testimony here, and the Joint Committee on Taxation's background pamphlet here.

"The Shame Of College Sports"

Pete Davis — Mon, 19 Sep 2011 23:38:17 +0000

I've been tutoring some of the poorest second through fifth graders in D.C. over the past six years. One of the first questions I ask in September at the beginning of each school year is "What do you want to be when you grow up." The girls have various answers, some quite ambitious, but the boys uniformly answer, "I want to play in the NBA, or the NFL, or in professional soccer." I ask the boys, "What chance do you have of playing in the NBA?" They have no clue, and I say, "There are roughly 1 million high school varsity basketball players. There are roughly 100,000 varsity college basketball players, and there are roughly 1,000 players in the NBA each season. Your odds are about 1 in 1,000 if you're a varsity high school basketball player. You'd better work on Plan B, graduate, and learn something that will get you a good job." So far, I have no evidence that any of the boys are listening.

Unfortunately, college sports are exploiting these ambitions in a fashion that comes close to slavery. Young minority players are recruited into schools at which they are totally unprepared to succeed academically and at which they aren't paid for their labors, let alone their high risk of career ending injury, and they are cast off as completely expendable after they fail to WIN! We even throw in tax-exempt status for the colleges and universities on their multi-billion dollar incomes from exploitation of these athletes. The next time you watch a college sports event, check out all of that TV advertising and all of that advertising festooned around the stadiums. It's all tax-exempt. Check out this CBO study. Most major colleges and universities aren't institutions of higher learning at all. They're sports conglomerates operating under the facade of higher education.

Finally, the cover has been blown in big time fashion with this week's Atlantic Monthly article, "The Shame of College Sports," by Taylor Branch. Tonight's PBS Newshour interview with Branch will be posted here. It's time to stop this charade of amateur athletics providing cover for such exploitation and pay young athletes a fair wage that covers their risk of injury.

Tax Reform Magic?

Pete Davis — Fri, 16 Sep 2011 16:29:19 +0000

Hardly a day goes by lately without a trumpet call for tax reform. Hurray! We desperately need tax reform. The Tax Code is a mess. I'm all for reform, but let's return to the real world and face up to what tax reform can and cannot do.

Tax reform won't create any jobs or boost the economy in the short run, in the first two years.

Tax reform won't raise any revenue for deficit reduction in the short run.

So why do tax reform? Because it has lot's of long run benefits, after five years. It will make U.S. multinationals more competitive and more likely to increase employment here in the U.S. It will shift employment away from the tax avoidance industry of lawyers and accountants to skilled workers who actually produce goods and services. It will cut down on the roughly $2 trillion U.S. multinationals have stashed overseas to avoid high U.S. taxes. It will stop rewarding U.S. multinationals for carrying debt and building financial services subsidiaries and will make them less vulnerable to financial crises. It will increase dividend payouts. It will lower the cost of capital and increase investment. These benefits only arise after firms change the way they operate, and that will take time, like many years.

On the individual side of the income tax, tax reform will reduce the excessive subsidies for housing and redress the disadvantage of renting. It will reduce health benefit subsidies which drive up health care costs. It will reduce the complexity which forces most taxpayers to use a tax preparer. With some extra effort, we could go to a return free system for most taxpayers.

The downside of tax reform remains hidden from most Americans. Those of us who benefit from tax loopholes are loath to admit it. Most American taxpayers have no idea that only 34% of 2008 tax filers itemized their deductions. Tax reform means closing loopholes and using the revenue raised to lower rates. If tax reform is done on a revenue neutral basis, which seems to be the operating assumption today, it will create almost as many losers as winners. Those losing tax loopholes will get lower rates too, but most will not get enough rate reduction to make them whole because there are plenty of taxpayers who don't benefit from the loopholes who will get rate reduction too. That's why tax reform won't create many jobs or boost the economy or raise revenue in the short run.

Washington is a town notoriously addicted to quick fixes, which tax reform is not. That's why tax reform doesn't come along every day. The last time we had major tax reform was in 1986, after two years of legislative effort. When it becomes obvious that tax reform won't produce short run benefits and when losers start lobbying their elected officials, tax reform could stall. In the past, tax reform has been enacted only after strong presidential leadership. So far, despite a lot of work within the Treasury Department that has yet to see the light of day, President Obama has steered clear of tax reform in favor of targeting a few loopholes.

One final sobering thought -- Why would you expect the very same elected officials who junked up our Tax Code to reform it? Maybe, with enough voter pressure, tax reform could happen, but for how long?

More Hope For Homeowners?

Pete Davis — Fri, 26 Aug 2011 02:00:43 +0000

This morning's front page New York Times article follows two days of Wall Street buzz that another Administration housing refinance program will be forthcoming soon. The road is littered with past failures as cited in this CRS testimony last spring. Nonetheless, President Obama's intense fundraising, opening of the Strategic Petroleum Reserve, and upcoming Labor Day speech on jobs all share single focus: get reelected by lowering the unemployment rate and reviving the housing market within the next year. I thought all of those afternoon meetings President Obama had with Treasury Secretary Geithner a few weeks ago were about the S&P downgrade and the Euro, but they may have been to explore new domestic policy initiatives. To the extent that homeowner fears are behind the weak housing market, another trumpet blast from President Obama might help.

There are plenty of constraints. Number one, the House won't pass anything to help President Obama get reelected unless forced to by public pressure. Mr. Obama's call for extending the 2% payroll tax cut and extended unemployment insurance beyond the end of this year have fallen on deaf ears of House Republican leaders. Number two, new programs can't cost much because there's little money left on the table from past efforts. TARP expired last October. Number three, mortgage investors have refused repeatedly to take a haircut in the past, despite federal offers to ease their pain. Number four, housing finance is so fragmented by state that it's very difficult to implement a national program without a lot of custom tailoring. Finally, litigation will gum up the works long past the next election on November 6, 2012.

The real wildcard in my opinion is the Fed. At 10 AM tomorrow, Fed Chair Ben Bernanke will address the Kansas City Fed conference in Jackson Hole, WY. He's the one actor who could throw major resources at the housing slump.

CBO Issued Its August Update Today Showing A Slightly Improved Deficit Outlook

Pete Davis — Wed, 24 Aug 2011 23:05:33 +0000

The Congressional Budget Office estimated subpar economic growth (2.3% real GDP CY11 4th Q over 4th Q and 2.7% CY12) and an FY11 deficit of 8.5% of GDP and FY12 of 6.2%. The deficit falls sharply to 3.2% of GDP in FY13 and to 1.6% of GDP in FY14 because of the budget savings of the Budget Control Act of 2011, S.365, and the assumed expiration of the payroll tax cut and extended unemployment insurance at the end of this year and of the Bush tax cuts at the end of next year. In my opinion, most, if not all, of the Bush tax cuts will be extended, adding 0.2% to 0.3% of GDP to the deficits. With the likelihood that the Joint Selection Committee on Deficit Reduction will deadlock and that most of its roughly 0.7% of GDP savings will be achieved by the January, 2013 sequester, the FY13 and FY14 deficits are more likely to be around 4% of GDP. See pp.26-7 for estimates of alternative policy outcomes. The Committee for a Responsible Federal Budget put out this analysis showing a more realistic baseline. We still have plenty of work to do over the next decade to get to budget balance, and the bulk of the heavy lifting, restraining Medicare and Medicaid growth and closing tax loopholes, lies ahead.

Bruce Bartlett Will Testify Tomorrow

Pete Davis — Mon, 25 Jul 2011 13:31:04 +0000

Bruce Bartlett will testify against the "Fair Tax" tomorrow before the House Ways and Means Committee at 10 AM. "This will be the first time I've ever testified as a Democratic witness," Bruce said. He'll need his flak jacket for having the courage to challenge conservative doctrine on taxes. It will be quite a show.

The hearing will be webcast live here. Click on the "Live Feed" at the bottom right. The hearing announcement is here.

Check out Bruce's post on the Fair Tax here.

Balanced Budget Amendments Are No Magic Bullet

Pete Davis — Fri, 22 Jul 2011 17:33:47 +0000

Some of us are old enough to have grown up watching The Lone Ranger. When Tonto handed The Lone Ranger the silver bullet, you knew he would shoot the gun out of the bad guy's hand with one shot, and all would end happily. Lately, Congress has been awash with balanced budget amendments (BBAs) to the Constitution. In my opinion, there are no silver bullets when it comes to balancing the federal budget.

That said, there are several levels of balanced budget amendments, and, late yesterday, Rep. Justin Amash (R-MI) introduced one of the better ones, H.J.Res.73. It would limit federal spending to the average of revenues collected over the past three years adjusted for inflation and population growth. A waiver for up to one year could be approved by 3/4 of each house of Congress. Unlike other BBAs, it would devote surpluses to reducing the federal debt and would provide a 10-year transition from today's unprecedented deficits to balance. It would also provide for enforcement through subsequent legislation.

There are four major problems with balanced budget amendments.

First, a BBA wouldn't be enforceable. Who would go to jail if a deficit appeared? What would be the remedy? Any attempt to enforce a BBA would have to be taken by the President, but if he or she didn't act, or if Congress wouldn't pass the President's remedy, what would the Supreme Court do? It's hard to imagine unelected Supreme Court justices raising taxes or cutting spending. How would they choose what to cut and who to tax? It's also not obvious that the Court would hear a case in the first place because no one would have standing to sue. Only injured parties can sue and proving injury from a deficit would be nearly impossible. Supporters argue that members of Congress would have standing and that laws can be enacted to enforce the BBA so it wouldn't have to go to the courts.

Second, BBAs would put economic policy in a straight jacket as explained in this recent letter from five Nobel Prize winning economists. When the economy plunges or a national emergency (think energy price spike, flu epidemic, or major terrorist attack) forces a deficit, you need to allow that deficit to avoid worsening the downturn. Economists say you should balance the federal budget over the entire business cycle for that reason: running surpluses in good times and deficits in bad times. Unfortunately, life is more complicated than that, and few political leaders would admit good times had arrived, so spending should come down and taxes should go up. That would be a prescription for electoral defeat. Furthermore, the sudden arrival of a deficit would be the wrong time to tighten fiscal policy. Doing so would worsen the economy and the deficit in the both the short-run and possibly in the long-run. Here's an economic analysis finding the short-run costs would outweigh the long-run benefits.

However, BBA supporters have plenty of history on their side. Washington's fiscal irresponsibility stretches back over the past decade when tax cuts, Medicare Part D, and the Iraq and Afghanistan wars weren't paid for. Prior to that, the federal budget was not balanced from FY69 until FY98 through several business cycles.

Third, as the Nobel economists point out, you should balance the operating budget of the United States, not including capital investments, R&D, education, and environmental protection. Balancing the federal budget as it is currently defined would rob the economy of the investments upon which future growth would depend. However, recent experience with the $787 billion stimulus bill raises serious questions about how vital federal investments are. Calling something an investment doesn't mean it will pay off.

Fourth, a BBA would encourage more budget gimmickry, creative federal accounting, and unfunded mandates on the states and on business. Loyola Law School Professor Theodore P. Seto has an excellent and very balanced paper on this which can be downloaded without charge here.

A detailed comparison of the House BBA, H.J.Res.1, and the Senate BBA, S.J.Res.23, by the Heritage Foundation's Brian Darling is here. More background is here. In 1995, a BBA passed the House and nearly passed the Senate as chronicled here. This December, 1996 discussion among Herb Stein, former OMB Director Jim Miller, former CBO Director Bob Reischauer, former Commerce Under Secretary Rob Schapiro, Senator Paul Simon (D-IL) is very well informed. Be sure to click on all six installments. Pro analysis from the Heritage Foundation is here. Con analysis from the Center for Budget and Policy Priorities is here.

If you're one of the few who missed Bruce Bartlett's July 15th article on BBAs, it's a must read here.

Finally, we balanced the federal budget for four years, FY98-FY01, without a BBA, so it can be done without a constitutional amendment. It just took 17 years of repeated spending cuts and tax increases starting in 1982 to get there.

In my opinion, when the voters decide its time to balance the budget, they'll elect members of Congress and a president who will find a way to do it. There's no substitute for backbone when it comes to balancing the budget.