Bad Stimulus Ideas: Untargeted Tax Cuts and Permanent Tax Cuts

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It can never be repeated enough that President Bush and his allies in Congress enacted major tax cuts in 2001, 2002, 2003, 2004 and 2006. A blinding monomania is leading some conservatives to argue that our economic problems stem from the fact that we have not sufficiently cut taxes.

Taking a Break from Taxes?

In late November, Congressman Louie Gohmert (R-TX) proposed the startling idea of having a year-long holiday from the federal income tax for 2008. He has more recently modified his proposal to be a holiday from federal income and payroll taxes for the first two months of 2009. Congressman Mike Pence (R-IN), who will be the House Republican Conference Chairman starting next year, has recently indicated that he supports this proposal.

Arguably, the people who are suffering most in this economic crisis (and the people who would be most likely to increase their consumption in response to a change in income) are the unemployed, who do not pay much in taxes. It's true that unemployment benefits are taxable but Obama has already proposed to make them tax-free, and Congress is likely to oblige.

Meanwhile, a huge proportion of the benefits of the tax holiday would go to the very rich. According to a recent report from the Congressional Joint Committee on Taxation (page 19 for those interested) households with total incomes above $200,000 will only make up 3 percent of households in America in 2009. They will receive 31 percent of the income, so it's not unfair that they will pay 39.5 percent of federal taxes (including federal income and payroll taxes and an insignificant amount of excise taxes). This means that if Congress enacts a holiday from federal income and payroll taxes, over a third of the benefits would likely go to the richest 3 percent of Americans, who receive just under a third of the nation's total income.

Throwing Money at Companies with No Strings Attached: Hatch's NOL Carryback Proposal

Another type of tax cut has been proposed that is equally ill-advised. Senator Orrin Hatch (R-UT) has proposed allowing companies to use their losses to get refunds of taxes they've paid over the past 15 years. He also proposes to make this change permanent.

Here's a little background. As a general rule, a company operating at a loss in a given year will not have to pay taxes for that year, because its deductions will wipe out its taxable income. Under current law, if a company has excess deductions for net operating losses (NOLs) beyond its taxable income for the year, it can apply those excess deductions not only against earnings in later years, but also against income taxed in the previous two years. That allows it to get previously paid taxes refunded.

Senator Hatch's proposal would allow a company to apply those excess deduction against income paid in the previous 15 years.

There is no reason to think this change would lead to the creation or retention of jobs. Allowing a company to use it's current year losses to get a refund of taxes paid in the past does not lower the cost of doing business or make it easier to profit. It would simply hand cash to business-owners who are not profiting currently. Smart business people will expand their business only if they can profit by doing so, regardless of how much cash they have on hand. A business owner is likely to lay off workers if she cannot earn enough to cover expenses and enjoy a profit. Simply giving the business some cash with no strings attached will not change that.

Some Senators wanted to include a similar provision to the housing bill in the spring, but that proposal would have only allowed NOLs to be used to offset income taxes paid in the past four years. Lawmakers eventually rejected that idea, and hopefully they will reject Hatch's even more radical proposal to allow NOLs to be used to offset taxes paid in the past 15 years.

Thank you for visiting Tax Justice Blog. CTJ and ITEP staff will soon retire this domain. But ITEP staff are still blogging! You can find the same level of insight and analysis and select Tax Justice Blog archives at our new blog,

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