The Wall Street Journal has sent a news alert that says that Obama is mulling a stimulus plan that will rely more heavily on tax cuts than initially envisaged as a way to win needed Republican support. The Journal says tax cuts could be as much as $310 billion, or 40%, of a total package of $775 billion.
I’m not at all keen about the sound of this (and note I am of two minds about stimulus, but am putting that aside for the purposes of this discussion).
In very simple form, stimulus programs of various sorts are meant to compensate for a falloff in demand. You can have government spending (as in government does the consumption) or give the money somehow to consumers (in direct ways, such as tax cuts or vouchers of various sorts, like food stamps).
The problem with tax cuts is they may not be spent. And the degree to which they are saved means the stimulus was ineffective. In other words, reliance on tax cuts runs the risk that greater spending will be required to achieve the same result than via government spending.
That is not a theoretical concern. We saw it, big time, with last summer’s tax rebate. Gary Shllling did a detailed look at when the checks got in the hands of taxpayers versus changes in retail spending. He concluded that about 80% of the tax rebate was saved.
The way to compensate for that is to devise a tax cut program that directs most of the dough to those with a high propensity to spend, namely, lower income groups, and Obama’s plan would apparently contain those elements:
The largest piece of the overall tax relief would involve cuts for people who pay income taxes or who claim the earned-income credit. It would serve as a down payment on the “Making Work Pay” proposal Mr. Obama outlined during his election campaign, providing a credit to offset Social Security and Medicare payroll taxes of $500 per individual or $1,000 per family.
However, in this environment, weighing tax cuts towards the lower economic strata might still lead to a fair bit being saved. After all, consumers at all income levels are carrying a lot of debt, and given how any kind of missed payment leads to catastrophically high interest rates, it would be a wise move for anyone in an arrearage to give getting their credit card debt down top priority.
And since Republicans are presumably not too keen about bennies to the lower classes, there are goodies for business too:
As for the business tax package, a key provision would allow companies to write off huge losses incurred last year, as well as any losses from 2009, to retroactively reduce tax bills dating back five years. In effect, this would entitle companies to receive cash from the government that they otherwise couldn’t have claimed.
A second provision would entice firms to plow that money back into new investment. The investment write-offs would be retroactive to expenditures made as of Jan. 1, 2009, to ensure that companies don’t sit on their money until after Congress passes the measure.
A separate element would offer a one-year tax credit for companies that make new hires or reverse layoffs, which could be worth $40 billion to $50 billion. And the Obama plan also would allow small businesses to write off a broad range expenditures worth up to $250 million in 2009 and 2010. Currently, the limit is $175 million.
Losses in a C-corp had a five year carry back and a 15 year carry forward. so one would think there would be plenty of scope for recovery of 2009 losses (update: an alert reader says tax loss carry backs are now only two years, but that gets changed with some frequency). Well, not everyone thinks that way:
Business lobbyists are pushing hard for Congress to allow companies that haven’t paid corporate income taxes to get a break, too. Start-up companies, alternative-energy firms and large corporations that have been swallowing losses for years — such as automotive and steel companies and some airlines — have already begun lobbying for such “refundability.”
They argue that a provision to claim losses on back taxes will have little effect on the economy if firms that need it most — struggling companies that weren’t obligated to pay any taxes — can’t benefit from a tax break.
For years, the tax code has allowed poor individuals to get tax checks even if they don’t pay income taxes to begin with. But such largesse hasn’t been granted to businesses.
Richard Nixon proposed a negative income tax as an alternative to welfare. Guess we are now going to see large scale business welfare. Most new businesses fail in the first three years, and longer-term survivor rates are even lower, but they will be propped up regardless of their intrinsic viability.
Gee, maybe I should figure out a way to show big losses this year……
Item 2 could have an import leakage component (would there be a local content requirement? Probably not….).
The third item seems the most significant, but if you as a company don’t expect a lot of income this year, the value of a writeoff (as opposed to a credit) is debatable. It could wind up to a significant degree rewarding companies for spending they would have made anyhow. The tax credit for hiring has more potential, but it depends on the size of the credit relative to the employee’s’ total cost (salary plus benefits).
As always, the devil lies in the details, which we will see in due course. But on a first pass, this looks like a pretty big ticket way to co-opt opposition.