Last week, the Tax Foundation released a paper titled, “Reexamining the Tax Exemption of Municipal Bond Interest,” which argued that lawmakers should consider reforming the current tax treatment of municipal bond...
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- TARP and a Tax Holiday Are Apples and Oranges
TARP and a Tax Holiday Are Apples and Oranges
My colleague Joe notes below a proposal by Texas Rep. Louie Gohmert to suspend personal income and payroll tax collections for two months in 2009, as an alternative "use" for approximately $350 billion in bailout funds that are as yet unallocated. Let's set aside the merits of temporary tax suspensions in general. I'll note that they violate one of the Tax Foundation's five principles of sound tax policy—stability—and leave it at that.
A key problem with this proposal and its counterparts on the left (see, for example, The Progressive's $700 billion wish list for new government spending) is that they conflate buying $x worth of assets with spending $x on programs, or foregoing $x in tax revenues. Because TARP (the bailout program) is not really $700 billion of spending, an alternative plan of the same size that funds more government programs or gives new tax cuts would blow a much bigger hole in the federal budget than TARP does.
So far, the Treasury has used about $350 billion of the $700 billion in funds available through TARP, principally to purchase preferred stock in large banks. The preferred stock is an asset with real value—the banks pay an annual rate of interest to the government, and the government can sell the preferred stock to other investors. So, when the government buys $350 billion worth of preferred stock in banks, it's not spending the money; it's investing it.
Of course, these might be bad investments. The preferred stock may be worth less than the government is paying for it, if the dividend is below market. And if one of the banks the government invested in fails, it would likely lose part of all of its investment in that bank. However, the cost to taxpayers here is the difference between what the government pays for its investments and what they're worth—a fraction of the total bailout amount, except in the unlikely event that all the investments are worth $0 (i.e., all banks fail).
On the other hand, new tax cuts or new spending programs represent an actual current cost to the federal treasury in their full amounts. If the government spends $350 billion more on health care programs, or gives $350 billion in new tax cuts, it must either cut spending elsewhere or raise that money from taxpayers today (with current tax increases) or tomorrow (with debt issuance followed by higher taxes in future years). Suspending personal income and payroll taxes for two months would cost the federal government about $330 billion, in Gohmert's estimation; using that money to buy more preferred stock would cost only the amount by which the government overpays, almost surely much less than $330 billion.
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