The Pete Davis Archives
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!
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.
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.
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.
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.
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.
This morning, House Speaker John Boehner (R-OH) was asked by a reporter:
The details of how we get there, frankly I think has yet to be worked out.
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
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.
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."
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.
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?
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."
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.
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.
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.
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.
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.
Check out Bruce's post on the Fair Tax here.
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.