Tax deductions for purchasing cars will create more jobs and economic growth more efficiently than if that money were spent on mass transit.

This is supposed to be a stimulus bill afterall, not just a pet-project spending bill.

by Steve on Feb 4, 2009 10:27 am  

That's the first time, in my entire life, that I've read a statement that highways are not pet-project spending.

by Joel Lawson on Feb 4, 2009 10:29 am  

They are pet-projects. But this bill is supposed to be designed to stimulate the economy. It largely is not. It's a massive spending bill.

$11 billion in tax-cuts is a start that will surely boost auto sales to some degree. And if Mikulski thinks it's such a good idea then it should be made permanent.

It's also limited to car loans under $50,000 and to households making less than $250,000 annually.

by Steve on Feb 4, 2009 10:38 am  

Re: Trees vs bollards

I was at the ANC6C meeting that discussed this issue. It was basically a recap of earlier discussions between the ANC6C P&Z committee and the Architect of the Capitol for the benefit of attendees. I briefly spoke with the P&Z chairman afterwards about alternatives. I learned that ANC6C first proposed that the gov't put their security bollards between the trees. They replied that installing the bollards would likely damage the roots of the trees. ANC6C then suggested installing heavy above ground planters or benches. The Feds response was (paraphrasing) that those forms of security barriers don't meet the standards for this project. ANC6C P&Z committee didn't accept the Feds unwillingness to mitigate impact and recommended the commissioners contest the removal of the mature trees.

by Paul S on Feb 4, 2009 10:46 am  

it should also be limited to new cars that have get more than 30 MPG.

by JTS on Feb 4, 2009 11:31 am  

Steve, narrow tax provisions like those reduce tax collections for a given set of marginal tax rates. If we keep loading up our tax code with lots of tax provisions, whether it be for incentives to buy cars, deductions for health insurance, mortgage interest, state and local taxes, then the marginal rates have to be higher to keep the same tax collection, or the government has to run a larger deficit for the same marginal rates. Both are undesirable.

Since damage to the economy (in the form of "deadweight losses") is generally proportional to the square of the marginal tax rate, it's more efficient to have a broad-based, low rate tax than a more narrow, higher rate tax.

Once the recession is over, it's important to stop doing things that were meant as temporary stimulus. In an expansionary cycle, the Fed is going to be raising the target funds rate in order to keep demand-based inflation in check. If Congress is still applying deficit-financed stimulus in the form of tax breaks or spending, then the Fed will have to push the funds rate higher than they otherwise would have to, which would work at cross purposes with the stimulus Congress is trying to accomplish. Interest rates would be higher, which would be bad for consumers and businesses, as well as the Government because it would have higher interest payments on our debt.

I hope there's an economist out there that can correct me if I'm wrong.

by Michael Perkins on Feb 4, 2009 12:04 pm  

Michael, are you against the interest deduction on mortgages which encourages home purchases?

Tax cuts put money directly into the hands of consumers. In a consumer driven economy such as ours, there is no better way to stimulate and promote economic growth than increasing buying power amongst consumers.

With the amount of money our majority party wants to spend, the Federal government could literally give all taxpayers a 5 month holiday from federal income taxes. That's a real stimulus. The vast majority of the spending in the bill is simply pork. And pork that's allocated over many years. Spending allocated for 2010 or 2011 won't grow the economy in 2009.

by Steve on Feb 4, 2009 12:13 pm  

Steve,

The problem with putting money in the hands of consumers is that they don't spend it nearly as effectively or as fast as the government can. They are individuals, and they get caught up in the Paradox of Thrift. We need them to spend, but the prudent decision for any individual is to save, not spend. So they save rather than stimulate.

Tax cuts as stimulus do not have immediate efficacy. The ones that would have immediate impacts are not the cuts you advocate, either. You'd need to cut the most regressive taxes. Cut the payroll tax rather than the income tax.

by Alex B. on Feb 4, 2009 12:17 pm  

paul: thanks for the follow-up!

by IMGoph on Feb 4, 2009 12:17 pm  

Re: illegal units. Yes, sometimes it's a case of no harm/no foul, but lack of a C of O could indicate serious code deficiencies and life safety issues, such as inadequate exiting, lack of and/or improper placement of smoke detectors, bedrooms inaccessible to the outdoors, etc. Shared mechanical systems and ductwork are also big no-nos. I think DCRA should make it easier to get into compliance, perhaps with just a walk-through inspection after the owner completes a simple checklist of common deficiencies. Now, to legally subdivide a single-family home and get a C of O, you need architectural drawings of the entire structure. There's lots of time and expense involved and most owners just don't bother. Even with a C of O, you're still not in compliance. You also need to get a basic business license from DCRA and then file an unincorporated franchise tax return (D-30) if the unit generates more than $12k a year in gross revenue. In my opinion DCRA and OTR should either waive this requirement or the Council should exempt two-unit Owner-occupied buildings from business licensing.

by Paul on Feb 4, 2009 1:07 pm  

I don't agree with Alex B. at all. We are not slaves to the gov't. It's OUR money. We should be able to do whatever we want with the money. And while I don't disagree that gov't can spend money faster, I disagree that they're more effective. They're wasteful and have their priorities are mixed up. Ideally, income tax would be absolutely minimal and most taxes would be abolished, simplified and decreased. However, with a popular president in a crisis and a single party in control of Congress, money will be spent and you'll have some good and a lot bad IMO.

And I'm not for mortgage interest deductions either. Why is the gov't encouraging people to buy homes? That's not something they should be involved in. The market should dictate what homes cost and who can afford one. They just end up taxing something else. Same thing with cars, if they automakers can make them good looking and affordable, people are going to buy fuel efficient vehicles, I'd rather not subsidize that.

Really, I'm anti-stimulus and am really cynical about these plans. I am for large infrastructure spending though b/c it is a benefit for the public and the gov't should help finance it IMO. States should do most of the work but for large scale projects like the Springfield Interchange or the Silver Line or high speed rail, I think it's reasonable for the feds to get involved.

by Vik on Feb 4, 2009 1:16 pm  

Alex, I believe that's the first time I've ever heard someone say the government can spend MY money more effectively and efficiently than I can. That entire argument is a non-starter. Government, by it's very nature, is inefficient.

Second, even if people were to save and not spend, it would flush capital back into banks which would restore liquidity to the credit markets. It's a win-win either way.

by Steve on Feb 4, 2009 1:18 pm  

Sometimes it's hard to sift through the media BS to get to the true core of the issue unless you have abundant time on your hands. I haven't taken the time to fully understand the stimulus yet and am still at the point where I only know bits and pieces.

I've heard that it will taken generations to pay off this stimulus package. Is that truth or hype? If it really is the truth then I don't believe people like Steve should take the attitude that the stimulus is "MY Money." Taking money from future generations to give the people today a tax cut so they can consume more crap and get through a recession a little quicker is selfish to me. That's why spending on infrastructure makes more sense to me - future generations can benefit from it as well.

I admit I'm not fully informed on the issue yet. If I've oversimplified please feel free to recommend any comprehensive and well-written coverage of the stimulus.

by Paul S on Feb 4, 2009 1:33 pm  

While updated infrastructure is required, it won't stimulate the economy in 2009. Infrastructure projects take years of design and engineering. The goal of a "stimulus" bill is to prevent or recover from a recession. Allocating billions of dollars for thousands of projects in hundreds of different industries into one bill isn't a stimulus. Not even 1/3 of the approximately $900 billion (not including interest) won't even be spent in 2009.

by Steve on Feb 4, 2009 1:44 pm  

By spending money effectively, I mean that the government can spend it more effectively for the purposes of the bill, which is stimulating the economy.

Steve, can you guarantee that you'd spend your share on worthwhile stimulus projects? Can you do the same for the rest of the country?

The answer is no, you cannot. Tax cuts do not produce the same impact as immediate spending, because people in a recession act in their own self interest, which is to save, not spend. I don't doubt that Steve can spend his money more efficiently for himself, but that spending is not what the economy needs as a stimulus.

And even if people do save it and it does shore up the banks, this is not going to happen fast enough to stimulate the economy. Tax cuts have a serious lag time in their efficacy.

Vik, you're all over the place with your critique, I think it's a little beyond the scope of what should be in the stimulus bill...

by Alex B. on Feb 4, 2009 2:39 pm  

Alex, your argument might be valid if the bill actually did spend effectively for the purpose of stimulating the economy. It isn't immediate spending. Only a small fraction of the bill will be spend on stimulus-related spending in 2009. By the time the majority of the spending comes on line the natural cycle of our free market economy will pull us out of a recession and the "stimulus" spending allocated for 2010 and 2011 will be nothing but pork.

by Steve on Feb 4, 2009 3:02 pm  

Steve, I am for limiting and eventually eliminating the deduction for home mortgage interest, because it would allow the government to lower income tax rates overall.

For the same total tax receipt, the homeowner interest deduction results in higher marginal tax rates for everybody and lower taxes for homeowners. But homeowners are generally older, wealthier, more financially stable and less likely to be of minority groups than non-homeowners.

I think there's a very good equity argument in asking why I should support a tax policy that increases taxes on a largely younger, poorer, less financially stable and more minority population in order to decrease taxes on the other group.

There are some arguments in favor of the deduction about the positive externalities of homeownership, but it's less frequent that the negative externalities are brought up. Two that I can think of:

1. Because owners are more emotionally attached to their homes, it is less likely that their properties can be purchased and assembled to higher-density uses in accordance with their true economic value. For example, single family homes near metro stations are very hard to change to higher density uses.

2. Because of the relatively high transaction costs of purchasing and selling real estate, homeowners are much less likely to move after a change in jobs within the same city. This likely contributes to longer commutes on average, assuming the initial home was purchased with the commute as at least one decision factor, and that the new jobs, on average, are selected based on other factors than reducing commute lengths. These longer commutes contribute to negative externalities in the form of higher congestion, air pollution, etc. For example, my uncle used to commute from Olney to Bethesda to work. Later, his job moved to Sterling. At least in part because he owns his home, he did not move to be closer to work, and now endures a longer commute than he did before and would if he had moved with the job.

I'm not saying these reasons apply to everyone, but at the margin they would affect some people.

by Michael Perkins on Feb 4, 2009 3:30 pm  

You have a very populist approach to taxation.

First, the "largely younger, poorer, less financially stable" population are often not the portion of the population that are creating jobs either by large consumption of goods and private services or by employing other people. Not to mention the "largely younger, poorer, less financially stable" pay very little in taxes to begin with.

There are incentives for the government promoting home ownership via tax breaks.

1) Statistically crime is lower amongst homeowners.

2) Property values tend to be higher in areas largely populated by owner-occupied homes.

Your two arguments against promoting home ownership are so abstract and anecdotal they aren't worth debating.

by Steve on Feb 4, 2009 4:55 pm  

Steve, those two items are correlation, but not necessarily causation.

by Michael Perkins on Feb 4, 2009 5:55 pm  

@Paul and re: separate housing units.

It's not a separate unit, I believe, and I'm sure there aren't code violations. It's just a basement bedroom (full disclosure: I've been inside that basement, though not seen the room where Rahm stayed). Would this arrangement--essentially charging rent for someone to use bedroom and bathroom--be illegal under DC law?

by dcresident on Feb 4, 2009 6:22 pm  

Steve, my approach is only "populist" in that it tries to keep things neutral, rather than attempting to redistribute wealth upward in socioeconomic status. See this analysis by the Tax Policy Center:

http://www.taxpolicycenter.org/UploadedPDF/1001084_Encouraging_Homeownership.pdf

In the analysis, they noted that 80+% of the economic benefit of the deduction goes to the top 20% of taxpayers.

It's not so much that I'm a populist, it's that I don't think one of our tax policy goals should be to subsidize home ownership by the rich. That's what our current deduction does.

Regarding your assertion that the poor "pay very little in taxes", they pay approximately the same fraction of income in taxes as anyone else, when you factor in regressive taxes like sales, gasoline, payroll, "sin" taxes, etc. While the "Suits Index*" of the Federal Income Tax is 0.344 (higher positive numbers mean that the burden increases with income), the index for the overall tax burden is 0.088 (2001 data). Since 2001, we have seen reductions in the most progressive of the Federal taxes, with cuts to Income, Estate and Corporate taxes. I would argue that the Suits index for all Federal, State and Local taxes together is near zero (which states that taxes paid are proportional to income). I can't find any current analysis since 2001, though.

It's only income taxes that the poor get a break on, and many people believe that "the poor don't pay taxes" because the income tax is the most visible of the taxes, with the other taxes being fairly invisible (payroll taxes happen automatically, as do gasoline, cigarette, and alcohol taxes. Sales taxes are somewhat more visible but require no paperwork.)

Your argument seems to boil down to standard trickle-down economics, that we should reduce the tax burden on the wealthy in the hopes that that will stimulate either consumption spending or investment. I don't buy it. While I don't believe we can fund the government solely on the shoulders of the rich, I also don't think we should go out of our way to subsidize their economic choices through a tax deduction for homeownership.

*Full disclosure, I'm the original author of the Wikipedia page on Suits Index. A suits index of -1 implies that all taxation is paid by the poorest individual, 0 implies that everybody pays the same fraction of income (a true flat tax), and 1 implies that the richest individual pays the entire tax burden.

**Additional disclosure, I own a house and take the deduction.

by Michael Perkins on Feb 4, 2009 7:51 pm  

From Steve:

While updated infrastructure is required, it won't stimulate the economy in 2009. Infrastructure projects take years of design and engineering. The goal of a "stimulus" bill is to prevent or recover from a recession.

There are shovel ready infrastructure projects. A Jan28 posting on Nadler's transit amendment stated that the Chicago Transit Authority could spend $500 million tomorrow for needed to address deferred maintenance, exercising options on buses, etc.. WMATA has a $529 million stimulus wish list as well.

by Paul S on Feb 4, 2009 8:01 pm  

I think the argument being made against infrastructure is that, while there would be a mandate for them to be "shovel ready" (within 90 or 120 or however-many days), unless they're short projects, that's not necessarily money spent in 2009. Infrastructure contracts are generally paid out over the life of the contract, and not all at once. Projects that spill over into 2010 or later years, even if started this year, will not all be paid out this year.

by Froggie on Feb 4, 2009 8:55 pm  

@dcresident:

The test that DCRA will use is whether the "unit" has separate cooking facilities. I don't know whether the situation on E. Capitol St is an illegal unit or not, but I was addressing the larger point posed here that DC should encourage basement apartment units in rowhouse neighborhoods and make it easier for homeowners to get into compliance.

by Paul on Feb 5, 2009 8:48 am  

I agree about the general point--DC should encourage basement apartments. And thanks for the specific answer! I can state with pretty close to certainty that the unit isn't illegal based on the separate cooking facilities test.

by dcresident on Feb 5, 2009 4:11 pm