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Thursday, September 23, 2010 12:45 PM

Ass Backwards: Senate to Shelve Bush Tax Cuts for Individuals; House to Pass Small Business Tax Cuts

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If ever you want to see tax policies that are ass backwards, look no further than two Congressional tax bills, one should pass but may not even get a vote, the other is seriously misguided but will pass anyway.

Senate Democrats Ready To Shelve Tax Cut Vote

TPM reports Senate Dems Ready To Shelve Tax Cut Vote

A senior Senate Democratic aide told TPM today there won't be a vote on extending the Bush tax cuts in the upper chamber before the November election, a blow to party leaders and President Obama who believed this would have been a winning issue.

"Absent a stunning turn of events, we're not going to do tax cuts before the election," the aide told TPM.

"We have a winning message now, why muddy it up with a failed vote, because, of course, Republicans are going to block everything," the aide said.

Aides for two senators in tough bids have suggested they would take the plunge and vote before the election, but they'd prefer to vote if it means the tax cuts extension could actually be passed. And that's not counting the conservative Democrats who disagree with the majority of the caucus about where the threshold should be -- and lean toward a higher than $250,000 in income definition of the middle class.
Politics as Usual

The irony is both parties are blaming each other and both parties are to blame. Certainly the Democrats should have enough votes to pass something given they have a majority. I highly doubt the Republicans would filibuster a tax cut proposal this close to election.

However, Democrats might not have the votes because of defections. Senate leaders fear those defections, and do not want to risk Democrats being blamed.

Another, perhaps more likely alternative is that Democrats believe a "winning message" (blaming Republicans) is better than "winning action".

Either way, taxpayers will suffer.

Contrary to the what the Democratic fools believe, I think people will blame incumbents not Republicans for failure to pass something. Thus, Republicans have every incentive to do the wrong thing, short of a filibuster.

The bottom line is the same. Nothing gets done, and both parties are to blame.

Year End Cliff Gamble on 2% of GDP

I did not think it would come to this. I was nearly certain there would be a vote and something would pass. It still may. But if TPM is correct, it's now likely this vote is dead.

Zero Hedge provides some insights into what this all means in The Goverment's "Year End Cliff" Gamble On 2% Of GDP And 10% Of Disposable Income
With mid-term elections a month and a half away, and the expiration of the Bush tax cuts approaching at a rapid pace, the stakes for Obama's dwindling administration on the tax cut extension issue loom. And as Goldman's Alec Phillips demonstrates, the costs of either decision are huge: on one hand, should Obama go ahead and relent to extending all the tax cuts, he will almost guaranteed not be around for a second term due to the avalanche of disappointment in his electorate as he relents on this key promise.

On the other hand, should he and the republicans be unable to find a compromise and all tax cuts expire, the impact to the economy could be so vast that America's breezy depression will become a full blown hurricane, possibly worse than anything the nation has ever seen.

Phillips' succinct summary of the downside case is as follows: "Letting all of these provisions expire would subtract nearly 10 percentage points from annualized disposable income growth in Q1 2011, which could translate into a nearly 2 percentage point decline in final demand and nearly that large a drag on GDP in the first half of 2011."

And it is not just the Bush cuts that are at steak: the year end "cliff" also sees the expiration of the “Making Work Pay” (MWP) payroll tax credit enacted in ARRA, and the relief from the alternative minimum tax (AMT). One thing is certain: if a stalemate prevails, GDP for H1 of 2011 will be wildly negative.
Scoring Points More Important than Doing the Right Thing

I cannot find a link for that quote by Goldman's Alec Phillips, but I certainly concur that consumer spending will take a big hit if something does not pass. A decline in consumer spending in turn will negatively affect GDP.

This just goes to show you that scoring points takes precedence over actually doing something useful. The impacts of this particular point scoring episode may be severe.

Small Business Non-Boost

Inquiring minds are reading Congress Set to Approve Bill Aimed at Boosting Small Businesses
The U.S. Congress is poised to give final approval to legislation aimed at boosting lending to small businesses in what is likely the Democrats’ final jobs bill before the Nov. 2 elections.

The House is slated to vote today on a measure offering a mix of tax cuts, loans and revived stimulus provisions aimed at easing the flow of credit and signaling voters, who head to the polls in six weeks, that Democrats are trying to boost the economy. Passage would send the bill, which was approved by the Senate last week, to President Barack Obama for his signature.

Economist Alan Blinder, a former Federal Reserve vice chairman, said many small businesses have had “extreme” difficulty getting loans though he said poor sales remain their biggest problem.

“The thing that drives small businesses over and above everything else is the ability to sell their product,” he said.

The bill had been held up for months by Senate Republicans who objected to provisions setting up a $30 billion program in which the Treasury Department would buy preferred shares in community banks, with participants paying the government dividends on a sliding scale depending on how much they increase lending. Dividends could be as low as 1 percent. Republicans said the plan amounted to little more than a scaled-down facsimile of the Troubled Asset Relief Program.

For all the controversy over the provisions, it’s far from certain banks will participate in the program, said Mark Zandi, chief economist for Moody’s Analytics. Banks will probably be reluctant to take the government’s money, he said, after seeing TARP recipients hit with retroactive executive-compensation limits amid a public outcry over tax dollars going to institutions paying million-dollar salaries.

“I’m skeptical that banks will actually take the government up on their offer,” said Zandi. “I think the memory of TARP will be in the minds of those lending institutions and they’ll be reluctant to use the capital.”

Other provisions would provide $56 billion in tax cuts over the next 12 months, with the bulk coming through “bonus depreciation” that allows companies to more quickly write off the cost of purchases. The tax cut would amount to $12 billion over 10 years, the yardstick used by Congress to determine how much bills cost, in part because businesses taking bigger deductions now couldn’t claim them in the future, which would increase projected tax revenue in subsequent years.
Buying Preferred Shares Amazing Convoluted

Buying preferred shares of banks to get them to lend is amazingly convoluted. Banks need to decide business risks of lending and make those decision on risk, not on government prodding.

The only possible saving grace for such monstrous stupidity is that Zandi is likely correct when he says banks may not take the offer in memory of TARP. Nonetheless, this is yet another step down the path of more seriously misguided government intervention.

Republicans were correct to object to this foolishness.

Tax Credits for Capital Spending Make Little Sense

Given the #1 problem facing small corporation is lack of customers, it makes little sense to entice businesses to increase capacity. Payroll tax credits suffer the same flaw.

Please see my response to both those ideas in Response to Nouriel Roubini on "America Needs a Payroll Tax Cut"

Indeed, I received this email from the president of a small corporation just yesterday.
Dear Mish:

I agree with your analysis of the statements by Roubini re: payroll taxes. As a business owner with four employees, I’d welcome them; however, such breaks would not entice me to hire another employee.

Have a good day.
I am quite certain that sentiment represents the vast majority of small business owners.

The one thing small business owners need is customers. It's hard to get more customers when government is going to start taking a bigger bite out of everyone's pay check.

This is further proof that Congress has those bills ass backwards. But hey, who cares if the economy goes to hell. After all, scoring political points is far more important!

Mike "Mish" Shedlock
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