Wednesday, January 07, 2009

Obama's proposal to extend the carryback for NOLs

I have mixed feelings about this part of Obama's proposed stimulus package. On the one hand, if not for pervasive income mismeasurement by the tax system it would be madness not to treat losses as fully refundable. Otherwise, one discourages risk-bearing (since the government in effect says "heads we win, tails you lose") and offers inefficient incentives for corporate conglomerates (so one activity's losses can be deducted against another's gains). But with pervasive income mismeasurement and tax sheltering opportunities, it's more problematic. Imagine what Enron would have done had losses been refundable.

So extending NOL carrybacks is a move towards refundability, with mixed merits, but it happens after the fact for losses that have already occurred. This takes care of the tax planning problem for losses to date, but also eliminates the significance of making planning decisions more neutral ex ante (at least for those past decisions).

Perhaps another factor to consider here is that, as discussed in Alan Auerbach's recent paper (with Rosanne Altshuler) that we will be discussing at the NYU Tax Policy Colloquium on Thursday, Jan. 22, losses at the corporate level have become more common, predating the recession and apparently reflecting an economic shift towards greater divergence in business outcomes. That presumably strengthens the case for refundability by showing that it's more of a problem.

From the standpoint of Keynesian stimulus, the issues are somewhat different. Unclear to me that handing $$ to companies that happen to have experienced big losses recently is necessarily the best way to encourage further economic activity. If they have been losing money lately, are they the ones who would invest and hire more if someone handed them money? Is being cash constrained their big problem? Are they the ones to whom handing dollars would be most stimulative? (As opposed to consumers, or else the businesses - if any exist these grim days - that actually would run out and hire & invest if only they had the cash in hand.)

I'm reminded of TARP's fiasco in handing money to banks that did not respond by lending it out again because they didn't want to lend, didn't consider it a good move in the current economic environment, as opposed to being cash-constrained or simply paralyzed by the state of their balance sheets.

So this idea is not necessarily bad policy, but it might not be especially good stimulus.

1 comment:

Andrew said...

Your second paragraph is extremely well-said. Regardless of the policy reasons for NOL refundability, this is being done after the fact for stimulus reasons, not to fix incentives. There are clear winners and losers here, and any argument that this somehow brings additional integrity to the code is a red herring.

An additional huge problem with extending the carryback will be further exacerbating the revenue destruction and loss trafficking of the various Notices of questionable authority (especially if the NOL carryback extension is followed by additional sector-by-sector hacks at 382). But, then, I don't have a sufficient grasp of 382 and the Notices to know if this is a legitimate concern.

The multi-hundred billion dollar question is this: at what point do the current crisis, the government's willingness to enact hasty expensing incentives, generous carryback provisions, etc, start destroying the viability of the corporate tax as a source of revenue? If the end result is a monolithic tax base heavily populated with zombie companies that mainly exist to prevent the PBGC/FDIC from going bankrupt, I think we've pretty much "solved" the double taxation "problem".