Tax Cuts Without Deficits

TAX CUTS WITHOUT DEFICITS….Brad DeLong links today to an article by Martin Feldstein in which he tries to outline ways to stimulate the economy without increasing the long-term deficit. If I’ve read it correctly, this is the relevant sentence:

[A] temporary rise in the tax depreciation rate and the resulting tax cut are automatically offset by lower depreciation and therefore high tax liabilities in later years.

OK, I’ll buy that. Allow United Airlines to depreciate 80% of the cost of their new airplanes right away and it amounts to a stimulative tax cut. But if they depreciate 80% now, they’ll have only 20% to depreciate in the future and that automatically leads to higher taxes in years to come. Very good.

But are there other similar proposals that have this kind of automatic balance built in? Feldstein mentions some revenue-neutral tax jiggering that could be stimulative, but that sounds like fairly ordinary tax policy stuff to me.

The reason I ask is that I often read articles where the author says “We need to do X” and then gives an example of how to accomplish this ? an example that’s frequently very clever indeed. Unfortunately, it often turns out that the example given is the only one the author knows about, and it’s obviously not enough to solve the entire problem. In this case, to create a broad-based stimulus package that doesn’t lead to persistent deficits we’ll need more ideas than just the depreciation proposal. What are they?

On a slightly different topic, Feldstein also mentions something else that I guess I knew but had never quite put my arms around:

The current relatively low rates of inflation and correspondingly low nominal interest rates restrict the ability of central banks to stimulate the economy.

I guess this is yet another reason that mildly high inflation is a good thing. If inflation is running at, say, 4%, then an interest rate of 1% translates into a real rate of -3%. Highly stimulative. But if inflation is running at 2%, then the real interest rate is only -1%. Nice, but maybe not enough to really kickstart the economy.

It’s funny, but after all those years of worrying about inflation, it really does seem as if there are an awful lot of good reasons to try and target an inflation rate of 4% or perhaps even a bit higher. The question is, once you let the 4% genie out of the bottle, can you keep it under control? There’s the rub….

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