Follow the Lumping Sums

On September 26, Alan Greenspan, Federal Reserve chairman, and Robert E. Rubin, former treasury secretary appeared before a closed door meeting of the Senate Finance committee. Both recommended against trying to use cuts in capital gains tax or corporate income taxes as a way to stimulate the economy. Both recommended that any tax cuts be temporary, targeted at giving consumers and perhaps businesses a quick boost that wouldn't encourage financial markets to raise the long term interest rates that might threaten the government's long-term fiscal health. After the meeting, Senator Max Baucus, Democrat of Montana, and chair of the committee, and Senator Charles Grassley of Iowa, the senior Republican committee member said they agreed with the "general framework" outlined by Greenspan and Rubin. Grassley told the New York Times that he had reluctantly concluded it was not the time for a capital gains cut. Administration spokesman Ari Fleischer would concede only that the scope of new tax cuts was "under review" House Republicans, however, including majority leader Dick Armey, insisted that capital gains tax cuts be considered, and that the administration had made a strong case for corporate tax cuts. The bill that, in the Times words, "Republicans muscled ... through the House," reflected Armey's view, and included more than $70 billion in corporate tax cuts this year. The Congressional Research Service, a nonpartisan agency that is part of the Library of Congress, reported that seven corporations would receive more than $3.3 billion from the repeal and refunding of the corporate alternative minimum tax, established in 1986.

"In the 1980s, companies paid less in taxes than their janitors," John E. Chapoton, a former Reagan treasury official told the Washington Post. "It looked terrible." The alternative minimum tax was part of the sweeping rewrite of federal tax code conducted under the Reagan administration. The administration wanted to eliminate all corporate tax breaks, but that became politically impossible. So the alternative minimum tax (AMT) was created to ensure that all individuals and corporations paid some tax, regardless of the tax breaks or loopholes available to them. The chemical, oil and gas, paper, steel, and auto industries, in particular, have fought the alternative minimum tax since its inception. These companies typically make large investments in plants and equipment, which when depreciated can produce losses to reduce taxable income. The AMT requires that companies calculate tax with some of the depreciation omitted, and then pay the higher amount.

Peter Orzag of the Brookings Institution argues that repealing the AMT is not an effective tool for stimulating the economy. In Orzag's view, corporations do not face a lack of cash, they face a lack of demand for their products. Further, repealing the AMT would only benefit corporations that had invested in the past, and do nothing to help corporations that had not been subject to the tax. Orzag suggests that repealing the tax could cost more than estimated, because a minimum tax discourages companies from looking for loopholes.

The House bill not only repeals the AMT, but allows companies to claim refunds back to 1986. An analysis by the Citizens for Tax Justice finds that sixteen companies that will receive $7.4 billion in AMT rebates are the source of $45.7 million in campaign contributions since 1991. Many of these companies already pay little federal income tax. The Bush 2000 campaign received $505,000 from these companies, which include IBM, General Electric, and General Motors.

*Amounts represent contributions from 1991 through June 2001, and include individual contributions in excess of $200, and soft money contributions.

As Paul Krugman observed recently in his New York Times column, "...[T]he most revealing indicator of what's really happening is the post- Sept. 11 fondness of politicians for 'lump-sum transfers.' That's economese for payments that aren't contingent on the recipient's actions, and which therefore give no incentive for changed behavior." He goes on to point out that a lump-sum transfer to someone in need can be a good thing, if it helps them out without reducing their motivation to work. But it is a bad thing if "the alleged purpose of the transfer is to get the recipient to do something useful, like invest or hire more workers." Krugman argues that characterizing the debate over the so-called stimulus bills as ideological is false, saying, "No economic doctrine I'm aware of, right or left, says that an $800 million lump-sum transfer to General Motors will lead to more investment when the company is already sitting on $8 billion in cash." Krugman suggests that this answers the question of whether legislators like Dick Armey and Tom Delay really believe in free markets, or just want to rob the poor and pay the rich.

The Bush administration supports not only rolling back the AMT, they support the National Manufacturer's Association proposal to double what CTJ calls " current law’s single biggest loophole, writing off equipment far faster than it actually wears out...." Donald T. Regan, Treasury Secretary during the Reagan administration warns that pairing these corporate windfalls could produce a media outcry similar to what occurred in the 80's, saying "A lot of people will think that's not good." Former Senator Bob Packwood, the Republican chair of the Senate Finance Committee at the time, who insisted on the AMT's inclusion in the 1986 tax reforms suggested, "Maybe if you make it bad enough the peasants will finally revolt again."

For Krugman, the profiteering-via-tax code resonates with other historical exploitations of wartime conditions....

...[C]urrent events bear an almost eerie resemblance to the period just after World War I. John Ashcroft is re-enacting the Palmer raids, which swept up thousands of immigrants suspected of radicalism; the vast majority turned out to be innocent of any wrongdoing, and some turned out to be U.S. citizens. Executives at Enron seem to have been channeling the spirit of Charles Ponzi. And the push to open public lands to private exploitation sounds like Teapot Dome, which also involved oil drilling on public land. Presumably this time there have been no outright bribes, but the giveaways to corporations are actually much larger.

References:

Stevenson, Richard W. "Congress Gets Plea to Widen Economic Relief" NY Times 26 Sep. 2001

Stevenson, Richard W. "Divided House Approves Economic Recovery Plan" NY Times 25 Oct. 2001

Buy Now, Save Later - Campaing Contributions and Corporate Taxation A Joint Project of the Institute on Taxation & Economic Policy, Citizens for Tax Justice, and Public Campaign. Nov. 2001.

Krugman, Paul "An Alternate Reality" NY Times 25 Nov. 2001.

Kessler, Glenn "Minimum Tax Spurs Maximum Pressure" Washington Post. 23 Nov. 2001