Stimulus bill

Kerr’s attacks on Pompeo’s energy policies fall short

by Bob Weeks on October 10, 2012

We often see criticism of politicians for sensing “which way the wind blows,” that is, shifting their policies to pander to the prevailing interests of important special interest groups. The associated negative connotation is that politicians do this without regard to whether these policies are wise and beneficial for everyone.

So when a Member of Congress takes a position that is literally going against the wind in the home district and state, we ought to take notice. Someone has some strong convictions.

This is the case with U.S. Representative Mike Pompeo, a Republican representing the Kansas fourth district (Wichita metropolitan area and surrounding counties.)

The issue is the production tax credit (PTC) paid to wind power companies. For each kilowatt-hour of electricity produced, the United States government pays 2.2 cents. Wind power advocates contend the PTC is necessary for wind to compete with other forms of electricity generation. Without the PTC, it is said that no new wind farms would be built.

The PTC is an important issue in Kansas not only because of the many wind farms located there, but also because of wind power equipment manufacturers that have located in Kansas. An example is Siemens. That company, lured by millions in local incentives, built a plant in Hutchinson. Employment was around 400. But now the PTC is set to expire on December 31, and it’s uncertain whether Congress will extend the program. As a result, Siemens has laid off employees. Soon only 152 will be at work in Hutchinson, and similar reductions in employment have happened at other Siemens wind power equipment plants.

Rep. Pompeo is opposed to all tax credits for energy production, and has authored legislation to eliminate them. As the wind PTC is the largest energy tax credit program, Pompeo and others have written extensively of the market distortions and resultant economic harm caused by the PTC. A recent example is Puff, the Magic Drag on the Economy: Time to let the pernicious production tax credit for wind power blow away, which appeared in the Wall Street Journal.

The special interests that benefit from the PTC are striking back. An example comes from Dave Kerr, who as former president of the Hutchinson/Reno County Chamber of Commerce played a role in luring Siemens to Hutchinson. Kerr’s recent op-ed in the Hutchinson News is notable not only for its several attempts to deflect attention away from the true nature of the PTC, but for its personal attacks on Pompeo.

There’s no doubt that the Hutchinson economy was dealt a setback with the announcement of layoffs at the Siemens plant that manufactures wind power equipment. Considered in a vacuum, these jobs were good for Hutchinson. But we shouldn’t make our nation’s policy in a vacuum, that is, bowing to the needs of special interest groups — sensing “which way the wind blows.” When considering everything and everyone, the PTC paid to producers of power generated from wind is a bad policy. We ought to respect Pompeo for taking a principled stand on this issue, instead of pandering to the folks back home.

Kerr is right about one claim made in his op-ed: The PTC for wind power is not quite like the Solyndra debacle. Solyndra received a loan from the Federal Financing Bank, part of the Treasury Department. Had Solyndra been successful as a company, it would likely have paid back the government loan. This is not to say that these loans are a good thing, but there was the possibility that the money would have been repaid.

But with the PTC, taxpayers spend with nothing to show in return except for expensive electricity. And spend taxpayers do.

Kerr, in an attempt to distinguish the PTC from wasteful government spending programs, writes the PTC is “actually an income tax credit.” The use of the adverb “actually” is supposed to alert readers that they’re about to be told the truth. But truth is not forthcoming from Kerr — there’s no difference. Tax credits are government spending. They have the same economic effect as “regular” government spending. To the company that receives them, they can be used — just like cash — to pay their tax bill. Or, the company can sell them to others for cash, although usually at a discounted value.

From government’s perspective, tax credits reduce revenue by the amount of credits issued. Instead of receiving tax payments in cash, government receives payments in the form of tax credits — which are slips of paper it created at no cost and which have no value to government. Created, by the way, outside the usual appropriations process. That’s the beauty of tax credits for big-government spenders: Once the program is created, money is spent without the burden of passing legislation.

If we needed any more evidence that PTC payments are just like cash grants: As part of Obama’s ARRA stimulus bill, for tax years 2009 and 2010, there was in effect a temporary option to take the federal PTC as a cash grant. The paper PTC, ITC, or Cash Grant? An Analysis of the Choice Facing Renewable Power Projects in the United States explains.

Astonishingly, the wind PTC is so valuable that wind power companies actually pay customers to take their electricity. It’s called “negative pricing,” as explained in Negative Electricity Prices and the Production Tax Credit:

As a matter of both economics and public policy, no government production tax subsidy should ever be so large that it creates an incentive for a business to actually pay customers to take its product. Yet, the federal Production Tax Credit (“PTC”) for wind generation is doing just that with increasing frequency in electricity markets across the United States. In some “wind-rich” regions of the country, wind producers are paying grid operators to take their generation during periods of surplus supply. But wind producers more than make up the cost of the “negative price” payment, because they receive a $22/MWH federal production tax credit for every MWH generated.

In western Texas since 2008, wind power generators paid the electrical grid to take their electricity ten percent of the hours of each day.

Once we recognize that tax credits are the same as government spending, we can see the error in Kerr’s argument that if the PTC is ended, it is the same as “a tax increase on utilities, which, because they are regulated, will pass on to consumers.” Well, government passes along the cost of the PTC to taxpayers, illustrating that there really is no free lunch.

Kerr attacks Pompeo for failing to “crusade” against two subsidies that some oil companies receive: Intangible Drilling Costs and the Percentage Depletion Allowance. These programs are deductions, not credits. They do provide an economic benefit to the oil companies that can use them (“big oil” can’t use percentage depletion at all), but not to the extent that tax credits do.

Regarding these deductions, last year Pompeo introduced H. Res 267, titled “Expressing the sense of the House of Representatives that the United States should end all subsidies aimed at specific energy technologies or fuels.”

In the resolution, Pompeo recognized the difference between deductions and credits, the latter, as we’ve seen, being direct subsidies: “Whereas deductions and cost-recovery mechanisms available to all energy sectors are different than credits, loans and grants, and are therefore not taxpayer subsidies; [and] Whereas a deduction of costs and cost recovery with respect to timing is not a subsidy.”

Part of what the resolution calls for is to “begin tax simplification and reform by eliminating energy tax credits and deductions and reducing income tax rates.”

Kerr wants to deflect attention away from the cost and harm of the PTC. Haranguing Pompeo for failing to attack percentage depletion and IDC with the same fervor as tax credits is only an attempt to muddy the waters so we can’t see what’s happening right in front of us. It’s not, as Kerr alleges, “playing Clintonesque games of semantics with us.” As we’ve seen, Pompeo has called for the end of these two tax deductions.

If we want to criticize anyone for inconsistency, try this: Kerr criticizes Pompeo for ignoring the oil and gas deductions, “which creates a glut in natural gas that drives down the price to the lowest levels in a decade.” These low energy prices should be a blessing to our economy. Kerr, however, demands taxpayers pay to subsidize expensive wind power so that it can compete with inexpensive gas. In the end, the benefit of inexpensive gas is canceled. Who benefits from that, except for the wind power industry? The oil and gas targeted deductions also create market distortions, and therefore should be eliminated. But at least they work to reduce prices, not increase them.

By the way, Pompeo has been busy with legislation targeted at ending other harmful subsidies: H.R. 3090: EDA Elimination Act of 2011, H.R. 3994: Grant Return for Deficit Reduction Act, H.R. 3308: Energy Freedom and Economic Prosperity Act, and the above-mentioned resolution.

I did notice, however, that Pompeo hasn’t called for the end to the mohair subsidy. Will Kerr attack him for this oversight?

Finally, Kerr invokes the usual argument of government spenders: Cut the budget somewhere else. That’s what everyone says.

Creating entire industries that exist only by being propped up by government subsidy means that we all pay more to support special interest groups. A prosperous future is best built by relying on free enterprise and free markets in energy, not on programs motivated by the wants of politicians and special interests. Kerr’s attacks on Pompeo illustrate how difficult it is to replace cronyism with economic freedom.

Tagged as: Cronyism, Economic freedom, Economics, Free markets, Government spending, Kansas fourth district, Mike Pompeo, Stimulus bill, Subsidy, United States government, Wind power

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The Obama tax cuts

by Bob Weeks on October 8, 2012

In the presidential debate last week, President Barack Obama spoke of his tax cuts: “So at the same time that my tax plan has already lowered taxes for 98 percent of families, I also lowered taxes for small businesses 18 times. And what I want to do is continue the tax rate — the tax cuts that we put into place for small businesses and families.”

Are these Obama tax cuts “real” cuts that will lead to economic growth, or just government spending programs in disguise? For tax cuts to be productive in growing the economy, they have to be associated with something positive, namely with work, saving, or investment. What many people positively respond to is a reduction in marginal tax rates, that is, the tax that must be paid on the next dollar earned.

Many of the Obama tax cuts were part of the stimulus bill passed in February 2009. Polls show that very people know of these tax cuts. Many were temporary.

The largest item that benefited most people was the Making Work Pay Tax Credit, a two-year program that rebates $400 per year to individual taxpayers, or $800 per year for married couples. The program was effective for tax years 2009 and 2010 only. This is not a reduction in marginal tax rates, although the program will reduce the average tax rate that people pay. It is simply a reduction in the overall amount of tax someone must pay.

This tax credit is not associated with any positive effort or activity by the recipients other than doing what they already do. The same criticism applies to the Bush tax rebate in 2008, too.

Besides the Making Work Pay Tax Credit, the Obama tax cuts consisted of other tax credits that apply not to everyone, but only to people who qualify.

For example, a child care tax credit pays up to $1,200 per year in child care expenses. Obviously, the only people who can claim this credit are working people with children who chose to place them in daycare. Beyond that, it is not a “tax cut” by any stretch of the imagination. Properly, it is a spending program implemented through the tax system. Sometimes called tax expenditures, these measures often escape the usual scrutiny and appropriations process that spending receives. Since they’re billed as a “tax cut,” they sound like a good thing to most people, as few like paying taxes.

If we need any more evidence that these programs are really spending disguised as tax cuts, consider the description of the child care tax credit as provided by the Internal Revenue Service: “It is a refundable credit, which means taxpayers may receive refunds even when they do not owe any tax.” That’s right. Even if you have no income tax liability, you can still get a tax credit — that is, a payment from the government.

As to the claim of 18 business tax cuts, a CNN analysis finds “If extensions or expansions aren’t double counted, the list comes out to 14 tax breaks — and only five are still around.”

In its analysis of the business tax cuts, a New York Times article concluded “As you can see, some of these aren’t tax cuts in the way many people would define them. Rather, they’re tax incentives — you’ve got to spend money (on health insurance, a new employee or new equipment) to save money.”

An example of one of the temporary business tax measures that were part of the ARRA stimulus bill was bonus depreciation. This measure allowed businesses to capture depreciation of assets more quickly than usual. This reduces taxable income, and therefore would act as an incentive for businesses to make capital investments.

Ironically, when business jets received a similar accelerated depreciation benefit, President Obama denounces this as a harmful tax break.

These measures, while reducing the amount of tax a business might pay, don’t change the marginal tax rate. Reducing marginal tax rates is what contributes to growth.

There has been the temporary payroll tax cut, which is a reduction in tax rates that pay for Social Security and Medicare. This tax, however, applies only to income up to $110,100, so after that level, the reduction no longer applies. Further, this is an example of reducing taxes, but not making corresponding reductions in spending. This means that government has to borrow more, which is a negative factor for economic growth.

Programs that reduce the average tax rate like Obama’s Making Work Pay Tax Credit and the Bush tax rebates of 2008 aren’t effective because they don’t affect the marginal rate — the rate paid on the next dollar earned. While anything that reduces the burden of taxes is welcome, we ought to implement the type of tax cuts that spur economic growth.

Who responds most positively to reductions in marginal tax rates? As Jeffrey A. Miron explains, it is the most economically productive members of society:

The Bush cuts provided lower taxes on ordinary income, especially for taxpayers at the high end of the income distribution. These are some of the most energetic and productive people in society; raising tax rates would discourage their effort and entrepreneurship. High-income taxpayers also have multiple ways of avoiding high tax rates, so any revenue gain from raising rates would be modest. The Bush cuts also lowered taxes on dividend and capital gains income; maintaining these lower rates is even more important for economic performance. Capital is mobile: when it is taxed heavily here, it flees somewhere else, meaning lower investment and employment in the United States. And because capital income taxes discourage investment or drive it overseas, they generate little if any tax revenue. (Jeffrey A. Miron, “Why the Bush Tax Cuts Worked”)

It is these “energetic and productive” people that are responsible for a great deal of business activity and job creation. When these people take steps to avoid taxes it means less productive economic activity and more unproductive tax shelters.

In Slaying Leviathan: The Moral Case for Tax Reform, author Leslie Carbone explains the harm of high marginal taxes, especially progressive taxes, where rates become higher as more income is earned:

The discouragement of earning money by working, saving, or investing inherent in any income tax is exacerbated by progressivity. While any high tax rates are economically destructive, high marginal rates are even worse, because high marginal rates particularly discourage productivity and inhibit economic growth. … By lowering potential pay off, high investment taxes especially discourage risky investment. Discouragement of risky investment squelches technological advancement, because new technologies are the most risky. This means our progressive tax system actually reduces progress and inhibits improve quality of life.

If the goal of the Obama Administration is to create private sector economic growth instead of growth in government, it needs to keep the Bush tax cuts in place and avoid increases in marginal tax rates for everyone, especially the most productive members of society. A better strategy would be to reduce these tax rates farther to create even more economic growth.

Tagged as: Barack Obama, Economics, Stimulus bill, Taxation

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The true size of the Obama stimulus

by Bob Weeks on December 7, 2011

When we think of the “Obama stimulus,” most people are referring to the American Recovery and Reinvestment Act of 2009. This legislation called for a variety of fiscal stimulus measures estimated to cost $787 billion at the time the law was passed.

The reasoning behind the stimulus comes from a school of thinking known as Keynesian economics, which holds that government should actively and aggressively manage the economy, most importantly by stepping up spending when demand is low. Through this deficit spending, it is said that government action can increase employment. This government spending purportedly accomplishes this through a multiplier effect, as dollars are spent again and again.

What’s often lost in the discussion is that all deficit spending ought to be included in the amount of stimulus the economy has received. When President Obama took office, the national debt — the accumulation of all deficits — was $10.626 trillion, according to CBS News.

Just recently this figure passed $15 trillion, meaning that there has been over $4 trillion dollars of deficit spending under President Obama. That’s $4,000 billion in deficit stimulus spending, or about five times the “official stimulus” amount.

Now, we’re starting to understand why Keynesian economics doesn’t work. Writing in the Wall Street Journal, Stanford economist Michael J. Boskin summarizes recent research that finds that the spending multiplier that Keynesian economists rely on is small, and actually turns negative by the start of the second year. Furthermore, the government spending crowds out private sector spending. The effect of Obama’s 2009 stimulus bill is estimated at 0.2 percent of GDP, an amount described as “puny.”

Tax cuts, however, are estimated to have a multiplier of 3.0, with “substantial tax cuts” having a multiplier of up to 5.0.

In context, Obama’s economic advisers, at the time he took office, estimated that the spending multiplier for government purchases was 1.57, while the multiplier for tax cuts was 0.99.

Of the new studies finding a small spending multiplier, Boskin writes: “These empirical studies leave many leading economists dubious about the ability of government spending to boost the economy in the short run. Worse, the large long-term costs of debt-financed spending are ignored in most studies of short-run fiscal stimulus and even more so in the political debate.”

In conclusion, he writes: “The complexity of a dynamic market economy is not easily captured even by sophisticated modeling (an idea stressed by Friedrich Hayek and Robert Solow). But based on the best economic evidence, we should reject increased spending and increased taxes.” He calls for reductions in personal and corporate marginal tax rates and an “enforceable gradual phase-down of the spending explosion of recent years.”

We should note that Obama and many of those in government are easily seduced by the allure of Keynesian deficit spending. It’s government, after all, that gets to spend the money. Republicans, even those who consider themselves conservative, have been seduced in this way, too.

Tax cuts, on the other hand, leave money and spending decisions in the private sector.

Why the Spending Stimulus Failed

New economic research shows why lower tax rates do far more to spur growth.

By Michael J. Boskin

President Obama and congressional leaders meeting yesterday confronted calls for four key fiscal decisions: short-run fiscal stimulus, medium-term fiscal consolidation, and long-run tax and entitlement reform. Mr. Obama wants more spending, especially on infrastructure, and higher tax rates on income, capital gains and dividends (by allowing the lower Bush rates to expire). The intellectual and political left argues that the failed $814 billion stimulus in 2009 wasn’t big enough, and that spending control any time soon will derail the economy.

But economic theory, history and statistical studies reveal that more taxes and spending are more likely to harm than help the economy. Those who demand spending control and oppose tax hikes hold the intellectual high ground.

Continue reading at the Wall Street Journal (subscription not required)

Tagged as: Barack Obama, Economics, Government spending, Stimulus bill

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Kansas and Wichita quick takes: Friday September 9, 2011

by Bob Weeks on September 9, 2011

A citizen call to action. This month’s meeting of Americans for Prosperity, Kansas focuses on the Douglas Place project in downtown Wichita. Event organizers write: “On September 13, 2011 the Wichita City Council will be holding a public hearing to consider approval of millions of dollars of public incentives being offered to the downtown Douglas Place project developers. Monday’s meeting will have these topics: Learn about the incentive programs being offered. … Learn and consider getting involved in this issue as a citizen. … Consider testifying before the City Council. … Attend the council meeting to show your support for other speakers. … Please attend and participate in a group discussion to share ideas on how you can make a positive difference in local city government. … Presenters include Bob Weeks, Susan Estes, and John Todd.” This free event is Monday September 12th from 7:00 pm to 8:30 pm at the Lionel D. Alford Library located at 3447 S. Meridian in Wichita. The library is just north of the I-235 exit on Meridian. The event’s sponsor is Americans for Prosperity, Kansas. For more information on this event contact John Todd at john@johntodd.net or 316-312-7335, or Susan Estes, AFP Field Director at sestes@afphq.org or 316-681-4415.

Troubles with Kansas City tax increment financing. I think the problems in Kansas City are larger than what we have in Wichita. But then, Wichita hasn’t relied on TIF as much as Kansas City has. But plans for the revitalization of downtown Wichita call for its expanded use. We need to be cautious, as Jon N. Hall explains in Creative Destruction in Kansas City?

Effects of stimulus on hiring. A new paper from the Mercatus Center sheds light on the effects of American Recovery and Reinvestment Act of 2009, also known as ARRA, also known as the stimulus bill, and one of the first legislative initiatives by President Obama. “In an effort to boost hiring and job creation and to invest in a variety of domestic infrastructure programs, Congress passed and the president signed the American Recovery and Reinvestment Act (ARRA), commonly known as the economic stimulus package, in 2009. ARRA represented one of the largest peacetime fiscal stimulus packages in American history. But little is known about the ways in which organizations and workers responded to the incentives created by the bill.” Among the report’s findings: “Hiring isn’t the same as net job creation. In our survey, just 42.1 percent of the workers hired at ARRA-receiving organizations after January 31, 2009, were unemployed at the time they were hired (Appendix C). More were hired directly from other organizations (47.3 percent of post-ARRA workers), while a handful came from school (6.5%) or from outside the labor force (4.1%)(Figure 2). Thus, there was an almost even split between “job creating” and “job switching.” This suggests just how hard it is for Keynesian job creation to work in a modern, expertise-based economy: even in a weak economy, organizations hired the employed about as often as the unemployed.” See Did Stimulus Dollars Hire the Unemployed? for the full report.

Kansas education summit. On Thursday September 15th, Kansas Policy Institute is holding a summit on education in Kansas. In its announcement, KPI writes: “Kansas can expand educational opportunities for students in need — even in our current economic climate. Join a “Who’s Who” of the nation’s education reformers in a discussion on how Kansas can give every student an effective education. … Invited participants include Gov. Sam Brownback, the Kansas Department of Education, Kansas National Education Association, Kansas Association of School Boards, state legislators, and other public education stakeholders.” … KPI notes that we increased total aid to Kansas public schools by $1.2 billion between 2005 and 2011, that 25 percent of Kansas students are unable to read at grade level. The event will be held at the Holiday Inn & Suites, Overland Park West. The cost is $35, which includes breakfast and lunch for the all-day event. … RSVPs are requested. For more information, click on Kansas Policy Institute Education Summit.

Why should conservatives like libertarian ideas? From LearnLiberty.org, a project of Institute for Humane Studies: “Are you a conservative? If so, Dr. Stephen Davies provides a few compelling reasons to consider libertarianism. For instance, conservatives tend to prefer institutions that have been tried and trusted, and want to maintain and uphold a traditionally established way of life. They also typically believe in an established or correct moral code. However, it does not logically follow that government should enforce all of these things. In fact, government enforcement of morals and traditions is often detrimental to both.”

Tagged as: Americans For Prosperity, Education, Free markets, Kansas Association of School Boards, Kansas National Education Association, Kansas Policy Institute, Liberty, Stimulus bill, Tax increment financing, TIF districts, Wichita and Kansas schools, Wichita city council

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Obama job plan not likely to help

by Bob Weeks on September 5, 2011

In order to help the economy President Barack Obama promises to soon reveal a plan to create jobs. Today’s preview before a union audience in Detroit didn’t provide many details, but based on the president’s past actions and guesses as to what the plan is likely to contain, it’s unlikely the plan will work.

Various news reports and commentary have mentioned these as possible elements of an Obama jobs plan:

A tax credit for hiring new workers. Some sources have suggested the plan might use tax credits to pay companies as much as $5,000 per new worker hired. Another estimate said Obama will have another tax credit plan that creates 900,000 additional jobs at a cost of $30 billion. That’s $33,333 per job. There’s evidence that these programs don’t work very well, as many of the jobs the government pays for are ones that companies were going to create anyway. This is also not a cut in marginal tax rates. Instead, it is more properly classified as a government spending program.

Job training. This is a common response by government. Government, however, has a history of training the wrong people for the wrong jobs. The private sector is much better positioned to train its employees. But job training sounds like education, something that’s it’s difficult to be opposed to, no matter how poor a job the government does.

Spending on infrastructure, especially school repairs.

Extending the one-year cut in the payroll (Social Security and Medicare) tax. Less tax money flowing to government is always a good idea. Balanced against this is the need to pay for Social Security and Medicare.

Extending unemployment insurance benefits. There’s some sense in doing this. Obama didn’t start the recession, but his policies are prolonging it and preventing recovery. So it’s not necessarily workers’ fault they were laid off and can’t find a job. But there’s a lot of evidence that extending unemployment insurance benefits extends the time many people will be out of work.

Signing trade agreements. This is a good idea, as allowing free trade increases the wealth of everyone. But, you don’t need a treaty in order to have free trade.

Help for homeowners. The housing crisis, caused by government, is a major problem. The value of houses must be allowed to fall to their natural level. Any programs that prevent this, or delays this market-clearing from happening, only prolongs the problem. It’s likely that any program coming from the Obama administration will do this.

In his speech today, Obama’s speech today mentioned spending on “roads and bridges.” he also called for an extension of the payroll tax cut, which he said placed an extra $1,000 in the pocket of the average family, and he alluded to the trade agreements.

He challenged Republicans to support tax cuts for working class companies, instead of for oil companies and the rich, and said “The time for Washington games is over. The time for action is now.”

The problem with the president’s proposals is that they do not provide an environment for the growth of business. Some of his plans, like repairing schools, simply grow government at the expense of the private sector and leave future taxpayers a bill.

The tax cuts for hiring workers is simply a spending program. The president — if he does propose these tax credits — will likely present them as a tax cut. That’s true in one sense, as it leaves more money in the private sector rather than government, which is good. But these tax credits aren’t what we need to really grow the economy, even through the program will leave more money in the private sector.

For tax cuts to be productive in growing the economy, they have to be associated with something positive, namely with work, saving, or investment. What people positively respond to is a reduction in marginal tax rates, that is, the tax that must be paid on the next dollar earned.

Programs that reduce the average tax rate like Obama’s Making Work Pay Tax Credit and the Bush tax rebates of 2008 aren’t effective because they don’t affect the marginal rate — the rate paid on the next dollar earned. This is not to say that I am not in favor of these programs. Anything that reduces the burden of taxes is welcome. But they are not the type of tax cuts that spur economic growth.

Why are low marginal tax rates important to economic growth? First, high marginal tax rates discourage people from producing. As people get to keep less and less of what they produce after they pay higher tax rates, most decide to produce less. Some stop producing anything.

Second, high marginal tax rates encourage people to invest in economically unproductive investments — like tax shelters — simply to avoid paying tax, without regard to the underlying wisdom of the investment. Or, people decide that since government takes so much of the money they earn, they might as well spend it on tax-deductible expenses that they might not buy otherwise. A company might hold an engineering conference at an expensive luxury resort instead of a modestly-priced facility — or instead of holding it electronically.

Who responds most positively to reductions in marginal tax rates? First, with about half of American households paying no federal income tax at all — although they do pay payroll taxes — the idea of marginal tax rates doesn’t apply to them. That leaves high-income workers, or as Jeffrey A. Miron explains, the most economically productive members of society that are positively affected by marginal income tax rates:

The Bush cuts provided lower taxes on ordinary income, especially for taxpayers at the high end of the income distribution. These are some of the most energetic and productive people in society; raising tax rates would discourage their effort and entrepreneurship. High-income taxpayers also have multiple ways of avoiding high tax rates, so any revenue gain from raising rates would be modest. The Bush cuts also lowered taxes on dividend and capital gains income; maintaining these lower rates is even more important for economic performance. Capital is mobile: when it is taxed heavily here, it flees somewhere else, meaning lower investment and employment in the United States. And because capital income taxes discourage investment or drive it overseas, they generate little if any tax revenue. (Jeffrey A. Miron, “Why the Bush Tax Cuts Worked”)

It is these “energetic and productive” people that are responsible for a great deal of economic activity and job creation. When these people take steps to avoid taxes it means less productive economic activity and more unproductive tax shelters.

In Slaying Leviathan: The Moral Case for Tax Reform, author Leslie Carbone explains the harm of high marginal taxes, especially progressive taxes, where rates become higher as more income is earned:

The discouragement of earning money by working, saving, or investing inherent in any income tax is exacerbated by progressivity. While any high tax rates are economically destructive, high marginal rates are even worse, because high marginal rates particularly discourage productivity and inhibit economic growth. … By lowering potential pay off, high investment taxes especially discourage risky investment. Discouragement of risky investment squelches technological advancement, because new technologies are the most risky. This means our progressive tax system actually reduces progress and inhibits improve quality of life.”

This is one of the things the president needs to do to grow jobs: reduce marginal tax rates. Then, reduce spending. This, along with sound monetary policies, has the best track record of producing private sector economic growth, and with that, jobs. But both of these, since they reduce rather than grow government, are not within Barack Obama’s realm of thinking, and so are not likely to be proposed.

Tagged as: Barack Obama, Economics, Stimulus bill, Taxation

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Obama’s tax hikes must be resisted

by Bob Weeks on July 12, 2011

As our nation’s leaders consider the possibility of raising income tax rates, we need to be aware of the negative impact of higher marginal tax rates on the economy and make sure we resist the lure of higher taxes. This is especially important even if the new higher tax rates are confined to to the rich.

The concept of marginal tax rates is important to understand, as it holds the key to understanding how we can drive economic growth, and how we can kill it, too. President Barack Obama believes he has already cut taxes in the name of economic growth. These tax “cuts” — I use quotes deliberately — are part of the stimulus bill passed in February 2009.

So what are the Obama tax cuts? There was one program that qualified — sort of — as a “cut,” and several tax credit programs. The largest item that benefited most people is the Making Work Pay Tax Credit, a two-year program that rebates $400 per year to individual taxpayers, or $800 per year for married couples.

It’s important to note that this is not a reduction in marginal tax rates, which is the tax rate that people pay on the next dollar they earn. That’s what people focus on. The program will, however, reduce the average tax rate that people pay.

This bears repeating: People can’t control the tax on income they’ve already earned. But they can decide whether to submit themselves to the marginal tax rate: The tax rate the government charges on the next dollar they may — or may not — earn.

So why isn’t Obama’s Making Work Pay Tax Credit a stimulus boon to the economy? It’s not associated with any positive effort or activity by the recipients other than doing what they already do. (This applies to the Bush tax rebate in 2008, too.)

For tax cuts to be productive in growing the economy, they have to be associated with something positive, namely with work, saving, or investment. What many people positively respond to is a reduction in marginal tax rates, that is, the tax that must be paid on the next dollar earned.

Programs that reduce the average tax rate like Obama’s Making Work Pay Tax Credit and the Bush tax rebates of 2008 aren’t effective because they don’t affect the marginal rate — the rate paid on the next dollar earned. This is not to say that I am not in favor of these programs. Anything that reduces the burden of taxes is welcome. But they are not the type of tax cuts that spur economic growth.

Why are low marginal tax rates important to economic growth? First, high marginal tax rates discourage people from producing. As people get to keep less and less of what they produce after they pay higher tax rates, many decide to produce less. Some stop producing anything.

Second, high marginal tax rates encourage people to invest in economically unproductive investments like tax shelters simply to avoid tax, without regard to the underlying wisdom of the investment. Or, people decide that since government takes so much of the money they earn, they might as well spend it on tax-deductible expenses that they might not buy otherwise. A company might hold an engineering conference at an expensive luxury resort instead of a modestly-priced facility — or instead of holding it electronically.

The Bush cuts provided lower taxes on ordinary income, especially for taxpayers at the high end of the income distribution. These are some of the most energetic and productive people in society; raising tax rates would discourage their effort and entrepreneurship. High-income taxpayers also have multiple ways of avoiding high tax rates, so any revenue gain from raising rates would be modest. The Bush cuts also lowered taxes on dividend and capital gains income; maintaining these lower rates is even more important for economic performance. Capital is mobile: when it is taxed heavily here, it flees somewhere else, meaning lower investment and employment in the United States. And because capital income taxes discourage investment or drive it overseas, they generate little if any tax revenue. (Jeffrey A. Miron, “Why the Bush Tax Cuts Worked”)

In Slaying Leviathan: The Moral Case for Tax Reform, author Leslie Carbone explains the harm of high marginal taxes, especially progressive taxes, where rates become higher as more income is earned:

The discouragement of earning money by working, saving, or investing inherent in any income tax is exacerbated by progressivity. While any high tax rates are economically destructive, high marginal rates are even worse, because high marginal rates particularly discourage productivity and inhibit economic growth. … By lowering potential pay off, high investment taxes especially discourage risky investment. Discouragement of risky investment squelches technological advancement, because new technologies are the most risky. This means our progressive tax system actually reduces progress and inhibits improve quality of life.”

Tagged as: Barack Obama, Economics, Stimulus bill, Taxation

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Corporate jet incentive, or tax dodge, or kids’ safety?

by Bob Weeks on June 30, 2011

Yesterday President Barack Obama denounced the tax breaks given to owners of corporate jets. Described by MSNBC Television program host Rachel Maddow as a “corporate tax loophole” that allows “giant corporations to dodge their taxes,” Obama cast the issue as corporate fats cat vs. kids: “You go talk to your constituents — the Republican constituents — and ask them, are they willing to compromise their kids’ safety so that some corporate jet owner continues to get a tax break?

(Yes, I sometimes watch the leftist television news programs — so that you don’t have to.)

Maddow, if you’ve ever watched her show, is given to snarky exaggeration as her style. The use of the term “dodge” is an example. Most people would think that “to dodge” means to avoid completely, and that’s what Maddow would like her viewers to believe: that these giant corporations are paying no taxes at all when they buy these planes.

The reality, however, is different and much less sensational. Since the tax in question is an income tax, we must first calculate income. That means accounting for the expenses incurred in running the business. For assets with a long lifespan, depreciation is used, whereby a portion of an asset’s cost is deducted each year from income. With the U.S. corporate income marginal tax rate at 35 percent, being able to deduct one dollar in depreciation saves 35 cents in taxes.

The issue in question, as identified by Lachlan Markay is an economic incentive implemented in the form of accelerated depreciation for purchasers of corporate jets. This provision allows companies to deduct depreciation costs from their income sooner, so they save on taxes now rather than later.

Accelerated depreciation doesn’t increase the total amount of depreciation that can be deducted from income. Of course, taking a deduction this year rather than in a later year is valuable.

So it’s not a “dodge,” as Maddow told her viewers. But it is a benefit to the companies that take advantage of it.

The real question is whether these manipulations of the tax code are harmful or beneficial. Certainly Congress did not believe they were harmful when it passed the legislation that created this special accelerated depreciation, available for only a short time for purchasers of specific assets. It was designed to provide a stimulus to a specific industry. And if that term “stimulus” seems familiar, the legislation that created this accelerated depreciation incentive was part of H.R. 1: American Recovery and Reinvestment Act of 2009, also known as ARRA, also known as the stimulus bill, and one of the first legislative initiatives by President Obama.

Now the president, evidently, feels this wasn’t such a good idea. Or he has decided that purportedly rich corporations are a convenient and politically expedient opponent. Attacking them fires up his base, as evidenced by Maddow’s over-playing of this matter.

This is also an example of using the tax code in order to achieve an economic or social policy goal. In this case, one industry benefits, but others don’t. The remaining taxpayers have to make up the difference in lost tax revenue. Or, the country simply goes deeper in debt, and the cost is passed on to future generations.

A further effect is that by making corporate jets cheaper (because of the accelerated depreciation), companies are induced to spend in this area when — absent the incentive — they might make alternative investments. So the question is: Are discounted corporate jets a wise investment for companies who otherwise might not buy them, at least not this year? Are Congress and the president smart enough to know that investment should be directed to this area? Todd Tiahrt, who represented Wichita at the time, thought so. That city, of course, is home to several companies that manufacture the types of airplanes targeted by Congress.

But what benefits one city or one industry is not necessarily good for the rest of the country. A better course is to simply cut tax rates and let each company decide how to direct its capital investment.

Tagged as: Barack Obama, Stimulus bill, Taxation

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Kansas and Wichita quick takes: Tuesday May 31, 2011

by Bob Weeks on May 31, 2011

Pachyderm to feature DA Foulston. This Friday (June 3) the Wichita Pachyderm Club features Nola Tedesco Foulston, District Attorney for the Eighteenth Judicial District of Kansas, whose boundaries are coincident with Sedgwick County. Foulston’s topic will be “An office overview and current events at the Eighteenth Judicial District of Kansas District Attorney’s office.” Foulston, a Democrat, was elected to her office in 1988 and has served continuously since then. … Appearances by speakers other than Republicans at Pachyderm often generate controversy, and this week is no exception. Pachyderm is a Republican club, and the mission statement of the national organization reads: “Promote active citizen involvement and education in government and politics through the formation and support of grassroots, Republican clubs across America.” Some feel that an appearance at Pachyderm will bolster Foulston’s re-election prospects, should she decide to run again next year. Others believe that no Democrat should be be a speaker — ever. In my opinion, the sentiment of the Pachyderm board and of many of the club’s regular attendees is that while Pachyderm is indeed Republican and conservative, the club’s mission of political education and civic engagement allows — in fact, encourages — appearances by prominent officeholders of any political party. In any county, the District Attorney is a powerful force in local government, with broad discretion as to the prosecution of criminal cases. This is a speaker that the members of Pachyderm should be encouraged to hear, even though members may not agree with her politics. …. Foulston will likely face several tough questions from the usually spirited Pachyderm audience. … Upcoming speakers: On June 10, John Allison, Superintendent of USD 259, the Wichita public school district, on “An update from USD 259.” On June 17, The Honorable Lawton R. Nuss, Kansas Supreme Court Chief Justice on “The State of the Kansas Courts.” On June 24, Jim Mason, Naturalist at the Great Plains Nature Center will have a presentation and book signing. Mason is author of Wichita’s Riverside Parks, published in April 2011. On July 1, Jay M. Price, Director of the Public History Program at Wichita State University, speaking on “Classes of Values in Kansas History.” On July 8, Dave Trabert, President, Kansas Policy Institute, on “Stabilizing the Kansas Budget.”

Sedgwick County Commission. In its Wednesday meeting, the Sedgwick County Commission will consider making two forgivable loans for the purposes of economic development. These loans have become popular with economic development officials, and often the City of Wichita and Sedgwick County make loans of equal amount to the same company. … The program works by loaning the company an amount of money, with the entire amount paid out at once. Then, if performance goals are met over a period of time, the loan (and interest) is forgiven. Otherwise, portions of it, with interest, may become due. Often the term of the loan is four or five years, with a portion of the loan forgiven each year if goals are met. The performance goals are usually the number of full-time or equivalent employees. … The Golf Warehouse in northeast Wichita is asking for a $48,000 forgivable loan. It recently received a loan of that amount from the City of Wichita. Mid-Continent Instrument, Inc. is asking for $10,000. … Usually economic development incentives are accompanied by a cost-benefit study performed by Wichita State University Center for Economic Development and Business Research. The county hasn’t supplied such analysis for these two items.

Kansas budget signed. On Saturday — a holiday weekend day — Kansas Governor Sam Brownback signed the budget bill. He used his line-item veto authority to strike an across-the-board reduction in spending, preferring to make targeted cuts instead. Although the governor had proposed ending funding for public broadcasting, the legislature included funding, and the governor did not veto it. … Most controversial of the governor’s handful of changes to the bill will be his veto of funding for the Kansas Arts Commission. This action was not a surprise, as recently the administration laid off all the commission’s employees. Associated Press reports that the chairman of the commission isn’t ruling out a lawsuit.

KPERS suit threatened. Changes made by the Kansas Legislature to Kansas Public Employees Retirement System, or KPERS have caused state employee organizations to consider a lawsuit, according to Associated Press reporting. The changes made this year are mild compared to the changes that must be made if KPERS is ever to become self-sustaining. The threat of a lawsuit over these minor changes doesn’t foretell a future of cooperation from state employees in making the much larger reforms that must be made.

Stimulus jobs — or not. Malcolm Harris calls attention to an analysis of the job-creation performance of the 2009 stimulus bill. The working paper is titled The American Recovery and Reinvestment Act: Public Sector Jobs Saved, Private Sector Jobs Forestalled. Its goal, according to authors Timothy Conley and Bill Dupor, is to “understand the causal effect on employment of the government spending component of the ARRA.” The key finding is this: “Our benchmark point estimates suggest that the ARRA created/saved approximately 450 thousand state and local government jobs and destroyed/forestalled roughly one million private sector jobs.” That’s a net loss of jobs. … The authors note there is “appreciable estimation uncertainty” in the estimates. Still, they are able to conclude: “However, our estimates are precise enough to state that we find no evidence of large positive private-sector job effects.” … The report includes a section summarizing other researchers’ findings, which usually find that the stimulus program created or save many jobs. The studies that find large job creation usually rely on “fiscal policy multipliers,” a Keynesian economics concept.

Government doesn’t create jobs. Investor’s Business Daily relies partly on the Conley and Dupor paper in its editorial Government Doesn’t Create Jobs. IBD asks “In a joint op-ed with the British prime minister, President Obama admits that jobs are created by an innovative private sector. So why is he strangling ours with regulations, rules and taxes? We would hope it was a candid admission of the truth rather than just boilerplate rhetoric in an op-ed in the Times of London by President Obama and British Prime Minister David Cameron. But there it was: ‘Governments do not create jobs; bold people and innovative businesses do.’” Continuing: “For once, the president is spot on. Businesses create jobs to fill a need, and their incentive is profit. Businesses invest; governments can only spend. Businesses create wealth, as do their employees. Government consumes wealth and sucks the economic oxygen out of the room. Its employees create paperwork and regulations that restrict economic growth.”

Tagged as: Economic development, Economics, Free markets, Government spending, Kansas Governor, Kansas legislature, Sam Brownback, Sedgwick county government, Stimulus bill, Wichita Pachyderm Club

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Obama’s spending stimulus failed

by Bob Weeks on December 2, 2010

The school of thinking known as Keynesian economics holds that government should actively and aggressively manage the economy, most importantly by stepping up spending when demand is low. Through this deficit spending, it is said that government action can increase employment. This government spending purportedly accomplishes this through a multiplier effect, as dollars are spent again and again.

The value of the spending multiplier — is it big or small? — is an important question. Also, the multiplier effect may be different for government spending versus private spending.

Now, we’re starting to understand why Keynesian economics doesn’t work. Writing in the Wall Street Journal, Stanford economist Michael J. Boskin summarizes recent research that finds that the spending multiplier is small, and actually turns negative by the start of the second year. Furthermore, the government spending crowds out private sector spending. The effect of Obama’s 2009 stimulus bill is estimated at 0.2 percent of GDP, an amount described as “puny.”

Tax cuts, however, are estimated to have a multiplier of 3.0, with “substantial tax cuts” having a multiplier of up to 5.0.

In context, Obama’s economic advisers, at the time he took office, estimated that the spending multiplier for government purchases was 1.57, while the multiplier for tax cuts was 0.99.

Tax cuts, on the other hand, leave money and spending decisions in the private sector.

Why the Spending Stimulus Failed

New economic research shows why lower tax rates do far more to spur growth.

By Michael J. Boskin

Continue reading at the Wall Street Journal (subscription not required)

Tagged as: Barack Obama, Economics, Government spending, Stimulus bill, Taxation

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Myth of Obama tax cuts

November 19, 2010

A comparison of the Bush and Obama tax cuts leads to understanding which is productive in producing economic growth.

Stimulus bill

Why the Spending Stimulus Failed

Why the Spending Stimulus Failed

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