Wednesday, January 23, 2008

Len Burman Pokes a Finger in the Eye of the Stimulus

I enjoyed Len Burman's op-ed in today's New York Times for reaching this conclusion, in "Make the Tax Cuts Work:"

There’s bipartisan agreement that something along these lines should be done, but the president has also argued for an extension of his tax cuts, now scheduled to expire at the end of 2010. This idea has met with less support. It would accomplish nothing in the short run, and most of the benefits would go to the very rich — the group least likely to spend a tax windfall.

But if they were repealed in a year, the Bush tax cuts could spur a burst of economic activity in 2008. If people knew that their tax rates were going up next year, they’d work to make sure that more of their income is taxed at this year’s lower rates. Investors would likewise have a giant incentive to cash out their capital gains now to avoid paying higher taxes later. In 1986, stock sales doubled as taxpayers rushed to avoid the capital gains tax rate increase scheduled for 1987. If people pour their stock gains into yachts and fast cars, that’s pure fiscal stimulus.

The money involved could be considerable. Capital gains in 2007 were something like $700 billion, representing well over $1 trillion in asset sales. It looks as if gains will be much lower in 2008, but a looming tax increase could easily spur an additional $500 billion in sales. If only 20 percent of that translated into extra spending, we’d have as much or more short-term stimulus as we could get from the package Congress and the president are considering.

Best of all, this is one stimulus proposal that would reduce the deficit — the single largest threat to the economy’s long-term health. And that long-term benefit wouldn’t depend on our getting the timing and amount of stimulus right, something policymakers are notoriously inept at.
UPDATE: Len responds to some of his fan mail at the TaxVox blog.


A Red Mind in a Blue State said...

If the politicians are insisting on trying to stimulate the economy, i would rather see them authorize $150 billion in immediate spending on infrastructure projects sitting on the shelves of states and cities-- or speeding up projects that are on hold or being stretched out. A much better way to try to stimulate the economy:

1) People with jobs but big ticket items, refinance, etc
2)Investing in infrastructure helps in the short AND the long term
3)The money stays here--not funneled thru WalMart to China
4) We need work done now on water projects, roads, bridges, etc.

Raising taxes is really never a good idea-- want to see money be declared and taxes paid? Require the turning in of all green-colored money--exchange it for blue--with a criminal amnesty for declaring hidden cash, but you have to pay taxes on it. Or how about serioulsy pursuing employers who hire illegals in the cash economy? Not going to get much in taxes from a guy cutting lawns, but the guy who owns the truck(s)is certainly not reporting all his income.

Brooks said...


1) Wouldn't revenues from any premature realization of cap gains -- premature in the sense of being artificially accelerated by a tax hike in 2009 -- be received in April, 2010, probably long after the time we'd want stimulus to avoid/mitigate/shorten a recession?

2) I have (what I think is) a unique idea for a fiscal stimulus. Let me preface it by saying I lean toward no fiscal stimulus at all, preferring to let the Fed, rather than politicians, try to manage economic cycles. But if we are to have fiscal stimulus, one key objective is that it be effective & efficient in terms of immediate stimulus per dollar lost to the Treasury. Getting more money in the hands of lower income/wealth individuals (who will spend a higher portion of it immediately) via tax rebates (particularly employee payroll taxes) and increased transfer payments (e.g., food stamps) fit that criterion, but have a fairness problem in that they represent increased wealth transfer, albeit for the (at least ostensible) purpose of stimulus. So here's my crazy idea to ensure efficiency & effectivess while avoiding that fairness issue: Government issued gift certficates (instead of those cash rebates) that must be spent within 3 months, issued to most/all of the population. Granted, since money is fungible it won't all be incremental, but we could help ensure that by precluding necessities (as distasteful as that sounds), such as food, gas, heating oil, etc., since that's stuff that would be purchased anyway. Using such gift certificates would ensure that a high portion of each stimulus dollar is spent immediately. I do see the drawback of the expense of processing (government fulfillment of) these gift certificates, but I'm guessing that that expense (or more precisely the incremental expense over that of administration of cash rebates) would be small relative to the size of the stimulus and relative (in qualitative terms) to the benefit of greater fairness. Andrew, I'd love to hear any comment you may have.



Paul Zrimsek said...

If this guy's idea of stimulus is "everybody dumping their stocks" (I wouldn't have believed it if I hadn't seen it with my own eyes), seems to me we've already had about as much stimulus as we can stand.

Brooks said...

Another drawback to my "gift certificate" idea that occurs to me is that the processing delay (mainly on the fulfillment end) could inhibit and/or delay the multiplier effect, although that's just an assumption on my part, I have no idea of magnitude, and no idea of the extent to which that problem could be mitigated by streamlining/accelerating the fulfillment process. And of course, some retailers (and perhaps others) honoring the gift certificates would have to adopt a new process and spend some time on it, but here, too, magnitude might not be significant and would be lower the next time this tactic were used (due to learning/experience curve, etc.).

Andrew Samwick said...


The idea is to advance realizations that would come in later years into the current year. Investors would be selling their winners early to avoid the rising tax rate in the next year. That frees up cash, some of which will be spent. Len would acknowledge that revenues in future years--from that particular tax on those particular gains--would fall. But why would he care? He's gotten the tax cuts to sunset a year ahead of schedule.

Brooks said...

Andrew and all,

I realize now my Question #1 above was dumb. Guess I just wasn't thinking. Yes, it's stimulus by incremental short-term selling of shares leading to incremental short-term spending (revenues are another matter).

I'd still love any comment on my "gift certificate" idea.

Paul Zrimsek said...

I understand about the tax revenues. But doesn't the assumption that it would be good for people to sell more stock now-- and that they need encouragement in this regard-- look a little.... odd to you?

Andrew Samwick said...

Investors with unrealized capital gains are sensitive to the tax cost of realizing those gains. If the tax cuts expire, the tax rate goes back up. Len conjectures that investors will realize more before the tax rates go up. If he advances that date, then we get realizations and the potential for spending them sooner rather than later. This allows him to claim his plan is also "stimulus."

It also allows him to make sure the tax cuts sunset (and even a year ahead of schedule), which is his larger objective. The oddness of the argument is a feature, not a bug.

Brooks said...

Not to be paranoid or to think too highly of myself, but I have to wonder if this Bloomberg columnist stole my stimulus idea of gift certificates (or "coupons" as she more appropriately terms them). Until today I had not seen anyone suggest it. And now it shows up after I post yesterday on a few popular economics blogs. Hmmmm.