State Tax Hikes on the Rich Back on the Table

December 9, 2011 at 3:01 pm

State policymakers are seriously considering an important policy option:  Income tax increases on the wealthiest families in their states.

New York is about to impose higher taxes on individual taxpayers with annual incomes over $1 million and couples with incomes over $2 million. California’s governor and others in the Golden State have issued proposals for new tax rates on their wealthiest residents.  Legislators in New Jersey have vowed to push again to reinstate that state’s millionaires tax, an idea that polls show is increasingly popular, despite a promised veto from that state’s governor.  There are also proposals in Maryland and Washington that would reinstate or create taxes on high-income taxpayers.

There are compelling reasons for this increased interest:

  • States need the revenue from such taxes to reverse some or all of their recent deep cuts to education, health care and other areas important for sparking economic growth.
  • Such taxes are a reasonable response to the problem of widening income inequality and reduced mobility and opportunity.
  • The doomsday predictions that modest state tax increases on the wealthy few would cause them to leave have proven unfounded.

In short, raising taxes on a state’s wealthiest households can avert or reverse cuts in important services and also address the problem of income inequality, without negative effects.

Corporate Tax Holiday Has No Place on Payroll Tax-Cut Extension Bill

December 8, 2011 at 10:07 am

What should be a straightforward decision to extend the payroll tax cut for another year (and, ideally, make it more generous) is growing unnecessarily complicated.  House Majority Leader Eric Cantor is now pushing to attach to it a tax holiday for foreign profits of multinational corporations.

Failure to Extend the Payroll Tax Cut Would Shrink Paychecks of Working Americans Letting the payroll tax cut expire in just a few weeks would shrink the paychecks of millions of working families (see table), and economists warn that it could cost jobs and slow the recovery.   But the urgent need for an extension doesn’t make a new corporate tax holiday — an unrelated and deeply ill-advised idea — any more sensible.

As we’ve explained, the first tax holiday for “repatriated” foreign profits, back in 2004-2005, proved an embarrassing failure.  Firms mostly used the profits not to invest and create jobs in the United States but instead for things like stock buybacks and larger dividends.  Some of the firms that repatriated the largest amounts then laid off thousands of U.S. workers.

A second holiday would be worse.  By leading firms to expect more such holidays in the future, it would be an open invitation for them to shift more jobs, investment, and profits overseas.  This is part of the reason that the Joint Tax Committee, Congress’s official scorekeeper on tax legislation, estimates that it would cost taxpayers tens of billions of dollars over the next ten years.

The Congressional Budget Office recently ranked a repatriation holiday dead last, per dollar of federal cost, among the 13 policy options it analyzed for creating jobs in the current weak economy (see graph below).

Helping nurses, truck drivers, and all other working people across the country by extending the payroll tax cut should be an end unto itself.  Congress shouldn’t tack on a misguided windfall for foreign profits.

CBO Ranks “Repatriation Holiday” Dead Last in Job Creation

War, Taxes, and Priorities

December 7, 2011 at 5:30 pm

The Senate will shortly consider the McConnell-Hatch balanced budget amendment, which prohibits any deficit in any year, prohibits tax increases, and caps total spending at implausibly low levels (about 16½ percent of gross domestic product) — requiring a two-thirds vote of the House and Senate to overturn these provisions.  It also requires a three-fifths vote of both houses to raise the debt limit.

We’ve written about the serious adverse economic effects of creating a constitutional requirement to balance the budget every year, regardless of the state of the economy, and about the massive cuts that the spending cap would produce in Social Security, Medicare, and all other programs.

But it’s worth noting — especially on the anniversary of the Pearl Harbor attack, which plunged this nation into its biggest and costliest war — that while the amendment would allow Congress to run deficits, exceed the spending cap, or raise the debt limit by a simple majority vote if the nation is officially at war, raising taxes would still require a two-thirds vote of both the House and Senate.

In other words, if the nation is at war, majority rule would determine how much we spend to prosecute that war, and majority rule would allow us to run the deficits and accumulate the debt to finance that spending.  But the nation could not cover any portion of the war’s costs by raising taxes unless it could muster a two-thirds vote in both houses.

The implication is that keeping taxes low represents a higher national priority than raising revenue to finance a war.

Even if there were no other reasons to oppose the amendment, this is reason enough.

Cutting Federal Pay and Workforce Poses Problems

December 7, 2011 at 2:02 pm

Senate Republicans propose to freeze federal employee pay through 2015 and shrink the federal workforce by 10 percent over the next ten years to help pay for extending the payroll tax cut — although the savings actually would come from further large cuts in discretionary programs, potentially hitting everything from veterans’ health care to border security to food safety.  News reports indicate that House Republicans plan to use a pay freeze and cuts in federal employee retirement benefits to offset their proposed extension of the payroll tax cut.

The House and Senate Republicans note that their workforce proposals were in the plan from fiscal commission co-chairs Erskine Bowles and Alan Simpson, ignoring the fact that Bowles and Simpson recommended them as part of a comprehensive deficit-reduction plan that called for more than $2 trillion in increased revenues.

Also, as we pointed out when Bowles and Simpson released their plan, freezing federal workers’ pay, cutting their retirement benefits, and reducing the federal workforce would likely make the workforce less productive, less efficient, and less competent.  It might also save less than anticipated as agencies rely more heavily on federal contractors, although the strict caps on overall discretionary funding that Congress has enacted make it unlikely that agencies could hire enough new contractors to offset even a significant part of the cut in federal employees.

These changes would make it harder for agencies to attract and keep qualified federal workers, and for the remaining workers to manage federal operations effectively.  It is difficult, for example, to justify cutting staffing at the Social Security Administration by 10 percent just as the baby boom generation retires in large numbers and the number of Social Security beneficiaries swells.

As long-time budget expert Stan Collender (now with Qorvis Communications) explained regarding the Bowles-Simpson proposals:

The plan calls for a substantial reduction in federal employees.  A reduction in employees generally results in the government relying on more outside consultants to get the work done but, in addition to the recommended reductions-in-force, Bowles-Simpson also calls for significant cuts in the use of contractors.

The combination of those two seems to indicate that the now smaller number of federal employees will have to do everything that was done before, that is, that they will have to be much more productive.  But Bowles-Simpson also calls for a three-year freeze on federal employee salaries, and that almost inevitably means an increasing number of federal workers will quit. That will reduce rather than increase productivity as new and less experienced workers replace the more senior folks who will have left for greener pastures.

In other words, Bowles-Simpson projects substantial savings based on the expectation that a less experienced and much smaller federal workforce will be more productive and just as effective as the more experienced and larger workforce it replaces. That makes absolutely no sense.

Senate Balanced Budget Amendment Goes Far Beyond European Budget Rules

December 6, 2011 at 4:37 pm

The Senate will vote this month on a constitutional balanced budget amendment that would require a balanced federal budget every year, regardless of the state of the economy, unless two-thirds of the House and Senate overrode that requirement.  While some proponents point to balanced budget requirements in some European countries as evidence that the United States should adopt one, too, no European country has adopted or is seriously considering anything like the proposal before the Senate, as we explain in a new report.

  • No European country requires a balanced budget in every single year.  For example, some countries allow the government to run deficits during recessions in order to dampen their impact.

    The highly regarded private forecasting firm Macroeconomic Advisers has warned that requiring a balanced budget every year would make recessions “deeper and longer.”  If a balanced budget amendment were in place during this recession, “the effect on the economy would be catastrophic,” the firm concluded.

  • Some countries require the operating budget to be balanced but allow borrowing for capital expenditures such as infrastructure improvements, which can boost long-term economic growth.
  • Some countries’ balanced budget requirements are set in statute, not in their constitution, or simply reflect a commitment by political parties.  Thus, lawmakers can override them by a simple majority vote if circumstances warrant.

In fact, an International Monetary Fund survey of 81 countries — including all member countries of the Organisation for Economic Co-operation and Development (OECD) — found that, in 2008, not one had a constitutional balanced budget requirement that would require balance of the entire budget in every year, with no adjustment for economic cycles or capital investment.