Boring Into the Obama Stimulus Plan
The first and most important thing about the Obama stimulus plan is that it’s about the size we need. That’s absolutely critical. And while I shared many progressives’ initial flinch away from the idea of having so much of the stimulus be tax cuts, I checked in with some folks and came to the conclusion that Obama’s has the balance about right and they have perfectly valid reasons for relying on a hefty dose of tax cuts.
Still, that leaves the question of what kind of tax cuts. The stimulative effect of tax cuts varies wildly across different genres of cut. The details of the Obama plan thus far released contain plenty of good stuff in terms of refundable tax cuts that make sure to offer both some middle class relief and also get money into the hands of the poor people who are in the most objective need and who have the highest propensity to spend. But there’s also plenty of talk about this idea of letting businesses get a refund on past taxes paid based on present losses.
The way this works is that you may have wracked up enormous profits in past years by, for example, packaging a lot of bad debt and pretending it was good debt. That would mean awesome profits in 2004 and 2005 and 2006 on which you paid taxes. But you may have huge losses in 2008, since actually your business model was a house of cards. Huge losses means no taxes. But this backdating provision would let you spread your losses back in time, allowing you to claim refunds on all the taxes you paid back when your firm was profitable. As stimulus, this doesn’t work. Businesses spend money based on calculations of the likely returns on spending. Insofar as it’s profitable to expand operations, businesses will spend money on expanding operations. Insofar as it’s not profitable to expand, businesses won’t expand. Transferring lump sums of money to existing firms doesn’t alter the profit-loss calculus. A firm with no expansion opportunities it sees as profitable will just pocket the lump sum and consider itself fortunate. And a firm with expansion opportunities it sees as profitable will only be very marginally impacted by an infusion of cash.
Meanwhile, the distributional impact is regressive. Since this is basically free money for corporate executives, business loves the idea. But it’s weak weak weak on the merits and unworthy of an overall solid economic agenda.
36 Responses to “Boring Into the Obama Stimulus Plan”
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January 6th, 2009 at 2:42 pm
Normally, (if I remember my tax regulations – I quit doing taxes years ago) current year business losses can be carried forward into the future, to offset future business profits.
I’m guessing this backwards application isn’t so much a stimulus as a tourniquet.
Give these companies a pile of money by refunding old taxes and maybe they’ll stay in business a bit longer (or even survive and ride it out), thus slowing or staunching further economic misery from some quarters. If your company gets an infusion of cash, then maybe you don’t have to do that layoff. Better still, maybe it keeps you liquid enough to avoid bankruptcy, whether Chapter 7 or 11.
At some point, 2008/2009 losses would be offset against income, this is just moving the timing of when that happens.
January 6th, 2009 at 2:46 pm
Why not just do Stimulus Payments 2.0 + Infrastructure? Give everyone $2000 or something.
Sorry, I just have a compulsive aversion to tax cuts.
January 6th, 2009 at 2:49 pm
Except that it isn’t big enough since so much of it is tax cuts. Krugman already covered that this morning.
January 6th, 2009 at 2:55 pm
This is basically right. I have no principled objection to business tax breaks as a part of the stimulus, but this backward-looking approach just gives businesses free money without any incentive to spend it.
A far better approach would be some sort of temporary investment tax credit or accelerated depreciation on capital equipment, measures that would encourage businesses to push future planned capital expenditures into the present. Since investment prospects right now are obviously quite weak, a reasonable stimulus plan would try to lower the hurdle rate for investments made in the next year or two. Borrowing rates for firms with good credit are already about as low as they can get, so favorable tax treatment on new investments is a reasonable additional lever to pull.
January 6th, 2009 at 3:08 pm
I wouldn’t get your panties in a bunch about “tax cuts”. In most cases, by “tax cuts”, Obama is referring to “refundable tax credits”, which are just transfer payments to those who aren’t paying taxes to begin with. The extreme progressiveness of our tax code assures this: unless you only want to cut taxes on the minority of Americans who actually pay them (a political impossibility), you’re forced to make the tax code even more progressive by giving free money to everyone else who is effectively on the dole already.
January 6th, 2009 at 3:11 pm
Any idea what the tax refund provision for businesses will cost? Is it all of or a portion of the $100 billion in business tax breaks?
January 6th, 2009 at 3:25 pm
IS $700 billion big enough? Because after the $100 billion dollars in mostly useless business tax breaks, that’s about what’s left. Who knows, maybe it is, but the impression I got from economists that I trust is that it’s very much on the low end of what is needed. I agree that there’s a lot of good in this package, but I worry that it won’t accomplish its top objective.
January 6th, 2009 at 3:39 pm
Math is hard.
Can we go back to robots?
January 6th, 2009 at 3:41 pm
You’re missing who’ll get all these retro carries.
Banks had huge profits in the pase few years, as a pct of all corps way over their long term average.
Banks also need to mark down all the crappy paper they own, maybe even down to a price they can sell it, though a pessimistic or conservative mark would be just as good as selling it as far as the bank would be concerned.
This is an indirect way to get banks to take all the balance sheet hits they have to take and get it over with ASAP, which is better than letting it fester, since they will be subsidized to the tune of 35% on the hit. It’s also better than directly buying the stuff, since it won’t bail out foriegn banks either, which the original TARP plan would have done. It’s actually pretty smart.
January 6th, 2009 at 3:45 pm
Matt,
Not sure how much economic training you’ve had to be confident of your comments above, but if liquidity is a binding constraint then giving a cash injection to business will increase business spending.
Liquidity is currently a binding constraint on many businesses. I haven’t looked at the stimulus package details, but don’t be so quick to dismiss things. Not all Republican ideas are bad ideas, after all, it was the snake that suggested Adam eat the apple (something I consider was a good idea).
January 6th, 2009 at 3:51 pm
Adding to what j mct said above (and contra Matt), I know that large banks are NOT currently making spending decisions based on profitability alone. The general attitude as far as I can tell is “don’t spend on anything, no matter how profitable, if you can avoid it without disaster.” That’s not the most rational position, but it’s the one they’re talking. Retroactive tax breaks might actually change that, though I don’t pretend to really know one way or the other.
January 6th, 2009 at 3:51 pm
Lots of businesses are small businesses owned by the middle class, whether in the form of sole proprietorships, partnerships or corporations. A refund of prior year taxes due to the carryback of current year losses can be enough to allow this small business to stay in business and keep its employees working.
January 6th, 2009 at 4:12 pm
I would agree with Dominic, and somewhat less specifically with CLR. But even if businesses aren’t liquidity-constrained or debt-burdened, well-managed firms shouldn’t just “pocket the lump sum and consider itself fortunate.” They should either invest or return cash to shareholders. This may be regressive (if the shareholders are cats of the fat variety), but it isn’t necessarily unproductive. Granted, there are lots of not-well-managed firms, and that should be factored in to any estimation of the stimulative effect.
January 6th, 2009 at 4:14 pm
$700B is not large enough.
We need somewhere between $1.0 and $1.6T
As you say, the size of the stimulus is very important and there has been little to no discussion about how much is enough.
I am putting this into your suggestion box as something you should investigate. Note that if the wizards deserve a few posts a week, this topic deserve more.
January 6th, 2009 at 4:26 pm
I checked in with some folks and came to the conclusion that Obama’s has the balance about right and they have perfectly valid reasons for relying on a hefty dose of tax cuts.
Their reasons are absolute nonsense. These are political calculations, not economic ones. We would be better off dropping the $700 billion from airplanes.
January 6th, 2009 at 5:35 pm
Looks like Prof. Krugman decided to address this very issue today using the exact methodology I used two weeks ago.
He doesn’t go through the math, but if you do, you see his estimate to return to full employment is $1.5T.
January 6th, 2009 at 5:41 pm
The stimulus plan is a joke. If the real economy, as opposed to the financial economy, continues to get worse and tens of millions become permanently unemployed, without health insurance and sometimes without homes what is going to be needed is welfare. The stimulus package will do nothing for the real economy. Let me repeat, it’s a joke.
What should be done with the money is to distribute it to states and cities to keep them from eviscerating services. Welfare in other words.
In the meantime follow the daily record of the calamity here.
http://theautomaticearth.blogspot.com/
January 6th, 2009 at 5:46 pm
From quarter 4 in 04 to quarter 4 in 08 US corporations invested $1.7 trillion dollars in buying back their own stocks. Often by borrowing money to do it. Simple arithmetic says that half of that ‘investment’ is now lost. Not one job was created. Not one one piece of capital equipment was installed. Not one revenue making enterprise was begun.
That’s the investment we are supposed to believe in.
January 6th, 2009 at 6:55 pm
you’re forced to make the tax code even more progressive by giving free money to everyone else who is effectively on the dole already.
Ah, the Lucky Duckies again.
I really wish someone would explain to the public- there are indeed plenty of nonrich, even poor, people who do pay Federal taxes. Everyone with earned income pays FICA tax, and the self-employed pay double. The Earned Income Tax Credit applies to people with dependent children. There is a tiny credit for individuals, but it has very little net effect. If you don’t have young kids, or you’re a noncustodial parent, etc, You get zip. Which is to say, unless you make next to nothing, you pay taxes.
My concern is that a few extra dollars a week in your paycheck- how much demand is that going to create? More Dunkin’ Donuts?
My feeling about the business tax breaks is this is another stealth bailout of collapsing industries.
January 6th, 2009 at 8:58 pm
I dunno, I gotta trust Krugman on this one, he’s riding the zeitgeist these days better than anyone on the economy. if this just turns into a way for Citigroup to write off losses and nobody ever sees the money, that would not be the desired effect. I mean, I’ll cash the check if they send it. but my current problem is having trouble getting employment that pays well. I have employment that lets me live paycheck to paycheck, paying my bills, eating, and not too much beyond that. a tax cut for me gives me a few more bucks per week, which is not that useful, compared to there being a big public works project going on nearby that I could work at and earn more working at, you know? all this focus on tax cuts always, always, never does not become just another way for rich people to stash away a little more money. people who live off of their $$ and assets can really do something with tax cuts. people like me, they’re borderline useless, unless you’re just going to get rid of them under $30,000 or so, because I’m just under that heheh.
January 6th, 2009 at 9:06 pm
Re: tens of millions become permanently unemployed
In what alternate reality? Come on, we’ve maybe added somewhat less than two million people to the unemployment roles, and even most of those people are going to find new jobs eventually.
January 6th, 2009 at 9:08 pm
I believe that in comment #9, j mct describes very well what the bailout plan should have been.
but the stimulus plan should not be primarily another bank bailout scheme. it seems like that should be its own area of focus. this is supposed to be about creating a broader, better paying jobs base. letting banks successfully write off a lot of losses does not give us jobs!
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