It's official: Deal reached on "fiscal cliff"

[magicvent]

Re: It's official: Deal reached on "fiscal cliff"

EJ,

Recently you wrote that the coming recession wouldn't be too severe. By forecasting a major market correction, have you revised your projection or does it fit with a mild recession?

[don]

Re: It's official: Deal reached on "fiscal cliff"

reading the fine print . . .

Tuesday, January 1, 2013

Eight Corporate Subsidies in the Fiscal Cliff Bill, From Goldman Sachs to Disney to NASCAR

Matt Stoller is a fellow at the Roosevelt Institute. You can follow him at http://www.twitter.com/matthewstoller.

Throughout the months of November and December, a steady stream of corporate CEOs flowed in and out of the White House to discuss the impending fiscal cliff. Many of them, such as Lloyd Blankfein of Goldman Sachs, would then publicly come out and talk about how modest increases of tax rates on the wealthy were reasonable in order to deal with the deficit problem. What wasn’t mentioned is what these leaders wanted, which is what’s known as “tax extenders”, or roughly $205B of tax breaks for corporations. With such a banal name, and boring and difficult to read line items in the bill, few political operatives have bothered to pay attention to this part of the bill. But it is critical to understanding what is going on.

The negotiations over the fiscal cliff involve more than the Democrats, Republicans, the middle class and the wealthy. The corporate sector is here in force as well. One of the core shifts in the Reagan era was the convergence of wealthy individuals who wanted to pay less in taxes – many from the growing South – with corporations that wanted tax breaks. Previously, these groups fought over the pie, because the idea of endless deficits did not make sense. Once Reagan figured out how to finance yawning deficits, the GOP was able to wield the corporate sector and the new sun state wealthy into one force, epitomized today by Grover Norquist. What Obama is (sort of) trying to do is split this coalition, and the extenders are the carrot he’s dangling in front of the corporate sector to do it.

Most tax credits drop straight to the bottom line – it’s why companies like Enron considered its tax compliance section a “profit center”. A few hundred billion dollars of tax expenditures is a major carrot to offer. Surely, a modest hike in income taxes for people who make more than $400k in income and stupid enough not to take that money in capital gain would be worth trading off for the few hundred billion dollars in corporate pork. This is what the fiscal cliff is about – who gets the money. And by leaving out the corporate sector, nearly anyone who talks about this debate is leaving out a key negotiating partner.

So without further ado, here are eight corporate subsidies in the fiscal cliff bill that you haven’t heard of.

1) Help out NASCAR - Sec 312 extends the “seven year recovery period for motorsports entertainment complex property”, which is to say it allows anyone who builds a racetrack and associated facilities to get tax breaks on it. This one was projected to cost $43 million over two years.

2) A hundred million or so for Railroads - Sec. 306 provides tax credits to certain railroads for maintaining their tracks. It’s unclear why private businesses should be compensated for their costs of doing business. This is worth roughly $165 million a year.

3) Disney’s Gotta Eat - Sec. 317 is “Extension of special expensing rules for certain film and television productions”. It’s a relatively straightforward subsidy to Hollywood studios, and according to the Joint Tax Committee, was projected to cost $150m for 2010 and 2011.

4) Help a brother mining company out – Sec. 307 and Sec. 316 offer tax incentives for miners to buy safety equipment and train their employees on mine safety. Taxpayers shouldn’t have to bribe mining companies to not kill their workers.

5) Subsidies for Goldman Sachs Headquarters – Sec. 328 extends “tax exempt financing for York Liberty Zone,” which was a program to provide post-9/11 recovery funds. Rather than going to small businesses affected, however, this was, according to Bloomberg, “little more than a subsidy for fancy Manhattan apartments and office towers for Goldman Sachs and Bank of America Corp.” Michael Bloomberg himself actually thought the program was excessive, so that’s saying something. According to David Cay Johnston’s The Fine Print, Goldman got $1.6 billion in tax free financing for its new massive headquarters through Liberty Bonds.

6) $9B Off-shore financing loophole for banks – Sec. 322 is an “Extension of the Active Financing Exception to Subpart F.” Very few tax loopholes have a trade association, but this one does. This strangely worded provision basically allows American corporations such as banks and manufactures to engage in certain lending practices and not pay taxes on income earned from it. According to this Washington Post piece, supporters of the bill include GE, Caterpillar, and JP Morgan. Steve Elmendorf, super-lobbyist, has been paid $80,000 in 2012 alone to lobby on the “Active Financing Working Group.”

7) Tax credits for foreign subsidiaries – Sec. 323 is an extension of the “Look-through treatment of payments between related CFCs under foreign personal holding company income rules.” This gibberish sounding provision cost $1.5 billion from 2010 and 2011, and the US Chamber loves it. It’s a provision that allows US multinationals to not pay taxes on income earned by companies they own abroad.

8) Bonus Depreciation, R&D Tax Credit – These are well-known corporate boondoggles. The research tax credit was projected to cost $8B for 2010 and 2011, and the depreciation provisions were projected to cost about $110B for those two years, with some of that made up in later years.
Conveniently, the Joint Committee on Taxation in 2010 did an analysis of what many of these extenders cost. You can find that report here.

Enjoy!


http://www.nakedcapitalism.com/2013/...K7ddh8jXtuH.99

[NCR85]

Re: It's official: Deal reached on "fiscal cliff"

Will the recession return the private sector to a steep deleveraging trend with credit acceleration turning negative again like Steve Keen is expecting? If so this could turn out the be pretty devastating.

[NCR85]

Re: It's official: Deal reached on "fiscal cliff"

I've been paying attention to the 2 year breakeven rate lately. According to Market Monetarist theory, what the effect of the fiscal cliff will be depends on to what extent the central bank is capable of offsetting the budget cuts' negative effect on nominal GDP growth. Although there is no market indicator for NGDP growth, inflation expectations tend to be a decent proxy for it. The 2 year breakeven rate is currently below 2% but not shockingly low:

http://www.bloomberg.com/quote/USGGBE02:IND

This indicator makes the fiscal cliff look like not too big a deal, although we'll have to see how it develops over time.

ps. I'm still trying to figure out what made the rate jump up on 19/20 dec 2012. Anyone have any ideas on that?

[Polish_Silver]

EJ's graph misleading

In this context the stock market is telling us that the gig is about up.

What is the justification for "normal growth rate?"
During the interval of the plot, the population has doubled and money supplied increased vastly. If the "index" is nominal prices, those things should be factored in.

[NCR85]

Re: EJ's graph misleading

Total credit market debt-to-GDP began to rise steeply right around the time that yellow line got diverged from on the quoted graph:

http://www.bearishnews.com/wp-conten...l-debt-gdp.jpg

[vinoveri]

Re: EJ's graph misleading

Total credit market debt-to-GDP began to rise steeply right around the time that yellow line got diverged from on the quoted graph:

http://www.bearishnews.com/wp-conten...l-debt-gdp.jpg

Yes, and note that the untethering of $ from gold occurred in '71 and we don't get a dramatic shift (b/c money is getting more expensive through the 70's as yields rise) until ..... Volcker raised rates to kill the inflation, and then we have 30 yrs+ of declining rates allowing debt to be continually rolled over and/or financed more cheaply. Question is where are we going from here at 0% cost to borrow.

[LazyBoy]

Re: EJ's graph misleading

By waiting until the New Year, they got to vote for a tax cut instead of a tax increase and appease Norquist...

[ProdigyofZen]

Re: EJ's graph misleading

Actually what EJs chart is showing is what classical economists would have called "fictitious capital." The stock market has risen as a byproduct of this fictitious capital.

Most bank lending today is to capitalize rent seeking interests on property that already exists and not for hiring labor and production.

[Slimprofits]

Re: EJ's graph misleading

So I'm curious, but not enough to click through, is ZH still claiming to have predicted this outcome all along?

[Bundi]

Re: It's official: Deal reached on "fiscal cliff"

Will the recession return the private sector to a steep deleveraging trend with credit acceleration turning negative again like Steve Keen is expecting? If so this could turn out the be pretty devastating.

Speculating here but if this is cycle 2, it hits at a lower price, suggest private sector is that weak.

[gwynedd1]

Re: EJ's graph misleading

Letting the payroll tax reduction climb back up 2% should make for a lousy 2013.

[EJ]

Re: It's official: Deal reached on "fiscal cliff"

EJ,

Recently you wrote that the coming recession wouldn't be too severe. By forecasting a major market correction, have you revised your projection or does it fit with a mild recession?

Here's the forecasting challenge. We have not had a recession during about output gap since 1937 - 1938.

The 1937 - 1938 recession lasted only a year and cut GDP by only 6.6% of GDP but the stock market reacted violently.

After peaking at 194.40 on March 10, 1937 the DJIA proceeded to fall 49% over the following year finally bottoming at 98.95 on March 31, 1938.

A similar over-reaction to a mid-gap recession in 2013 is possible. The reason is that confidence is still shaky and perception that the U.S. economy may be "down for the count" after years of tepid recovery from the American Financial Crisis.

It will allow deflationists such as Keen and Mish to once again come out of hiding where they went as fuel and food prices soared since Q2 2009. They will again declare the debt-financed economic growth game over and tell us that a final deflation spiral is upon us.

But the U.S. won't be down for the count. For my part I will note it as a phenomenon that we have come to call a mini-Ka as in the deflationary precursor to a currency depreciation induced reflation, the final cycle of which will some day produce a panic out of U.S. debt, the infamous Ka-Poom of the Janszen Scenario. But I do not see that happening in this round in 2013.

Now back to trying to figure out when. The stock market always -- always -- rallies into a recession. That signal is certainly there. As for others, no two recessions are alike so there is no universal indicator. The work continues.

[vinoveri]

Re: It's official: Deal reached on "fiscal cliff"

After peaking at 194.40 on March 10, 1937 the DJIA proceeded to fall 49% over the following year finally bottoming at 98.95 on March 31, 1938.

A similar over-reaction to a mid-gap recession in 2013 is possible. The reason is that confidence is still shaky and perception that the U.S. economy may be "down for the count" after years of tepid recovery from the American Financial Crisis.

It will allow deflationists such as Keen and Mish to once again come out of hiding where they went as fuel and food prices soared since Q2 2009. They will again declare the debt-financed economic growth game over and tell us that a final deflation spiral is upon us.

But the U.S. won't be down for the count. For my part I will note it as a phenomenon that we have come to call a mini-Ka as in the deflationary precursor to a currency depreciation induced reflation, the final cycle of which will some day produce a panic out of U.S. debt, the infamous Ka-Poom of the Janszen Scenario. But I do not see that happening in this round in 2013.

Now back to trying to figure out when. The stock market always -- always -- rallies into a recession. That signal is certainly there. As for others, no two recessions are alike so there is no universal indicator. The work continues.

I recall you mentioning the 1937 recession was caused by a policy mistake, fiscal/monetary tightening. It appears that that will not be occuring again, unless you believe the FICA hike is enough to decrease demand and spook investors. Notwithstanding the Fed meeting minutes released today signalling an near term end to QE, we know to watch what they do vs say, and if the market even begins to drop by more than 10%, won't we see massive reflation QE etc. Hard to imagine a large drop given the liquidity that will be available; that is unless there is a paradigm shift in outlook or policy response?

Wish I knew who the market is anymore?

[scoey]

Re: It's official: Deal reached on "fiscal cliff"

I recall you mentioning the 1937 recession was caused by a policy mistake, fiscal/monetary tightening. It appears that that will not be occuring again, unless you believe the FICA hike is enough to decrease demand and spook investors. Notwithstanding the Fed meeting minutes released today signalling an near term end to QE, we know to watch what they do vs say, and if the market even begins to drop by more than 10%, won't we see massive reflation QE etc. Hard to imagine a large drop given the liquidity that will be available; that is unless there is a paradigm shift in outlook or policy response?

Wish I knew who the market is anymore?

In the fullness of time, history may reveal any number of 2013 policy responses that might later be viewed as policy errors that precipitated a Recession/market correction or crash, including but not limited to the following:
- Republicans caving on fiscal cliff
- Democrats punting on fiscal cliff
- debt ceiling debacle
- failure to address entitlements
- Fed under pressure, reverses easing course too soon/too late
- any or all of the above leading to a loss of consumer confidence, debt re-rating, further deferrals of capital spending/hiring, etc.