Nooooo! No More Tax Cuts!

From the NYT:

“President-elect Barack Obama plans to include about $300 billion in tax cuts for workers and businesses in his economic recovery program, advisers said Sunday, as his team seeks to win over Congressional skeptics worried that he was too focused on government spending.

The legislation Mr. Obama is developing with Congressional Democrats will devote about 40 percent of the cost to tax cuts, including his centerpiece campaign promise to provide credits up to $500 for most workers, costing roughly $150 billion. The package will also include more than $100 billion in tax incentives for businesses to create jobs and invest in equipment or factories.”

It’s fine by me if Obama wants to include the middle-class tax cut he promised during the campaign. And the business tax cuts he has mentioned seem more intelligent than the standard cuts in corporate tax rates — they’re targeted at firms who invest, or who hire new workers.

That said, there are a lot of reasons not to focus on tax cuts. First, the money we are proposing to spend on stimulus is not free. We are proposing to spend a lot of it, and a lot of economists seem to think that $750 billion is on the low side. For both reasons, it’s important to get the greatest possible stimulus per dollar. And tax cuts won’t do it. Yves Smith:

“In very simple form, stimulus programs of various sorts are meant to compensate for a falloff in demand. You can have government spending (as in government does the consumption) or give the money somehow to consumers (in direct ways, such as tax cuts or vouchers of various sorts, like food stamps).

The problem with tax cuts is they may not be spent. And the degree to which they are saved means the stimulus was ineffective. In other words, reliance on tax cuts runs the risk that greater spending will be required to achieve the same result than via government spending.

That is not a theoretical concern. We saw it, big time, with last summer’s tax rebate. Gary Shllling did a detailed look at when the checks got in the hands of taxpayers versus changes in retail spending. He concluded that about 80% of the tax rebate was saved.

In graphic form:


Second, we have an enormous backlog of public spending. Our bridges are crumbling, our mass transit systems are generally pitiful, we badly need to upgrade our electric grid, etc., etc., etc. We need to do these things.

Third, people used to say that it was better to cut taxes than to spend more money, since tax cuts were easier to reverse. This might once have been true, and it’s probably still true for some politically connected programs, but it is absolutely not true for things like basic infrastructure spending. And we are going to need to be able to reverse course quickly. Once we have successfully avoided a full-scale depression, we are going to have to confront the next looming problem, which (imho) will be a run on the dollar. To do that, we are going to have to bring down the deficit. That will be hard in any case, but it will be a lot harder the sharper the increase in taxes it requires.

According to the WSJ, one reason for relying so heavily on tax cuts is that “it may make it easier to win over Republicans who have stressed that any initiative should rely more heavily on tax cuts rather than spending.” To which I can only say: screw them. Their economic philosophy got us into this mess; we should not let them force us to use ineffective means to get out of it.

If the Democrats can’t keep enough of their Senators in line to get this passed, and corral a couple of Republicans, then we’re in worse shape than I imagine. I’d really rather try to do it right before preemptively conceding to the Mitch McConnells of the world.

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