Tax policy should always be on the table. I'm tired of listening to people who admittedly have the job of fighting tax increases. I'll do my job, and dig past the repeated boilerplate about taxes killing investment and hiring.
American business have practically zero interest rates and historically low tax rates. And yet businesses are (perhaps rationally) not hiring. No wonder - the customer that represents 25% of the economy said it is tightening their belt, and probably going to fire a bunch of employees and close many positions held by current retirees. (That's the government - local, state, and federal.)
Let's step aside from the somewhat artificial government/private sector separation. Lewis Black put it best here (starting around 0:41): whether it's government, or the private sector, there are people who do the job, and there are rules that are either followed or broken.
So let's ditch whether a job is public sector or private sector for a second. Fiscal tightening is probably going to be bad for employment in the near to mid-term, whatever its impact longer term on the economic health of the country.
I'm wondering if it's possible to construct a tax that incentivizes hiring and capital investment now, rather than later. I'm going to avoid changing taxes on earned income, and explore policies to move money that is sitting in cash/short-term bonds.
Let's say, hypothetically, I'm a major company in America, continuing to make significant profits and sitting on a pretty hefty cash reserve. Policy is enacted such that my effective cost to hire and buy equipment will increase next year and stay higher. This gives me an incentive to do as much purchasing and hiring this year as seems reasonably prudent. Maybe there's equipment that I need. Maybe I need to hire to replace retiring employees.
How would this be done? There are carrots, and there are sticks.
Carrots are gifts above and beyond what is currently given. It might be a direct tax break for hiring or captial spending. It might be targeted subsidies for industries that can scale up quickly (construction, as opposed to, say, advanced research).
Sticks would involve taking away existing breaks, or imposing completely new taxes. It could involve ending the current tax credit for hiring new employees. It could be an increase in Medicare contributions to apply to new hires after a certain date, or an increase in sales tax. It could be a change in depreciation rules for capital purchases. It could be a change in environmental or labor regulations that will exempt those hired before a certain date.
Naturally, it wouldn't make sense to make the trigger date too soon. For example, if the sticks came with hiring in one week, there wouldn't be time to really increase hiring and purchasing before the cost of hiring/purchasing increased, which could, indeed, hinder recovery. But it wouldn't make sense to make it so far into the future that the change was discounted - actuarily as well as psychologically - to the point that it didn not change behavior. One to three years seems reasonable; perhaps over a longer period and involving increases over a period of time.
Carrots require more government spending and breaks, and probably more deficits. It's a bit odd that the party most concerned with government spending wants more work on one side of the ledger, and in a way that could potentially increase deficits.
I'm not exploring the moral fairness angle, or the effectiveness long-term of such policies. I'm also not exploring the political tractability of such a proposal (though it might be better than it seems at first glance, if one chooses to fight for it). I'm just wondering how it could be done.
Too often the focus is on changes on taxes on earned or unearned income. But if the goal is to change the behavior of companies that have cash on hand, then the tools used have to operate on that cash, and not only on the promise or reality of future profits.
Would love some informed, well-reasoned thoughts on this.
3 comments:
Hey Ryan,
Nice blog here! I have a feeling that you and I are probably in agreement on economic questions, so much of this will probably be choir-preaching, but hey, there's room on the armchair for everyone, right?
First, I have to begin by noting what should be obvious, but that for most Americans is very difficult to see. The current economic crisis contains a debate over two issues, not one: the size of the debt and the size of the government. In principle, one really doesn't have much to do with the other. But the strategic linking of the two issues has enabled the political right to build a relatively successful campaign against taxes. They have successfully framed the debate as, "big government --> big debt" when in reality there is no evidence for this. As just an American example, try correlating the size of state government with the size of their debt. Do the same internationally. The relationship is not there; at least, I have not seen the evidence, but then again, this debate isn't about evidence or economic theory. It's about ideology.
The political right doesn't actually care about the debt. It's pretty easy to demonstrate why. The same people ostensibly calling for austerity are also requiring that half of the fiscal power of the government (the power to tax) be effectively eliminated. As you note, if one's aim was deficit/debt reduction, government has two tools for doing this: taxes and spending. The right would toss their mothers in a volcano before raising a cent of revenue through taxes. The tax burden is lower than its been throughout almost the entire 20th century. We are not suffering under the oppression of heavy taxes; we are suffering under the oppression of unemployment and weak aggregate demand. But the orthodox solution to this challenge (and one that a majority of economists agree is necessary) is deficit spending and stimulus. The right doesn't have an economic reason why we shouldn't do that, so they frame a political reason (we need smaller government!") as an economic reason ("once government stops interfering with business, investment can flourish and the economy can grow!"). END PART 1
BEGIN PART 2
That being said, I can't see how the political climate will allow any of the creative solutions you offer. But I imagine that's not surprising to you or anybody else. :) In your blog you said you were not so much considering the political tractability of the options, just wondering how it could be done. I think one thing that's disappointing about this debate is that it has generated the idea that we don't know how it could be done. In fact, we know exactly how it should be done. Keynesian theory tells us we should be putting money in the hands of individuals with the greatest marginal propensity to spend. In our time, this means targeting the millions of Americans who are spending what they have just trying to deleverage. And it means NOT putting more money in the hands with the lowest marginal propensity to spend (corporations with large and mounting profits). The solution is relieving mortgage debt and tax cuts on the lower and middle class. It's pretty simple actually. (As an aside, and like yourself, I kind of like the idea of offering tax breaks to companies that are willing to hire new employees, despite the fact that I'm still a bit uncomfortable at throwing money at a sector that is sitting on large profits. This sounds to me like an awkward, and possibly counter-productive, marriage of supply-side and demand-side economics.)
This is usually when people say, "government spending at a time like this will only ballon the debt, crowd out necessary investment, raise interest rates, and send international lenders fleeing!" This is false. The debt is not as important as people think, and even if it was, the debt to GDP ratio, ignoring debt that the government owes itself, is still only about two-thirds of GDP. Crowding out is not a problem because companies are unwilling to invest anyway (why? survey says: low consumer demand). Interest rates remain low despite continued government borrowing, and international lenders continue to lend even in the face of America losing its triple-A status. So why aren't we doing what we know we need to do? Because it's not an economic problem, it's a political problem.
Thank you for your post and thoughts. It's a really interesting time to be alive!
Anthony,
Thanks for your thoughtful reply. It's odd how anti-Keynesian everyone's gotten. Maybe not odd- just depressing. However, there does need to be some sort of way to fix the other side of the Keynesian equation - increasing taxes during good times. I can just imagine the "you're gonna kill the goose that lays the golden eggs!" cries now. I should review how Clinton was able to raise taxes.
Good point on the linkage. I don't think that that's been underscored enough; there are a lot of artificial constructions and connections being made in the political sphere that have, at best, a tenuous basis in reality and experience.
I think one of the reasons why it's been such a hard sell politically is that the analogy of personal finance applied to government spending is, to put it charitably, imperfect. The linkage between households deleveraging and cutting back, and what the government should/must do, has seemed to resonate pretty well among the electorate. And, had I not my own limited but pretty decent education in economics in high school, college, and grad school, I might buy it.
Preaching to the choir? Perhaps He're hoping we can hear the Hallelujah chorus soon. I'm tired of Dies Irae on repeat. :)
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