Thursday, January 24, 2008

And the Winner Is....

I've refrained from commenting on the various "economic stiumulus" plans being proffered by politicians on the theory that its just politics and not likely to happen, but this editorial by Len Burman of the Urban-Brookings Tax Policy Center is just too stupid to pass up. He reveals his bias against low taxes in the first paragraph:

SINCE 2001, Washington’s answer to every policy question has been the same. What should we do with a big surplus? Tax cuts. How do we beat back global terrorism? Tax cuts. Increase energy independence? Rebuild New Orleans? Expand health insurance coverage? Tax cuts, tax cuts, tax cuts.


I think it is safe to say that Mr. Burman doesn't like tax cuts. He reveals his "stimulus plan" in the next paragraph:

Now comes another question that becomes more pressing each day that the markets lose ground — one to which taxes have long been at least part of the answer. How do we stimulate the economy to prevent or shorten a recession? One way would be to repeal the Bush tax cuts two years early, in 2009.


Um, okay that sounds stupid.

It’s true that more tax cuts this year could help head off a recession in the short run. Washington could send taxpayers rebate checks or give businesses temporary breaks for new investments in equipment. President Bush is likely to propose both as part of his $150 billion package of emergency measures.

Similar efforts in 2001 and 2002 had mixed results at best, but so long as the tax breaks are temporary, they wouldn’t do much long-term economic harm either. That said, the president’s proposal would leave out 37 percent of households because they do not earn enough to pay income taxes. A credit against payroll taxes or, better still, increasing transfers to the low-income families most likely to spend the money — say, by temporarily increasing food stamps — would do more to energize the economy.


I guess we really are all Keynesians now. This idea that the government taking money from one citizen and giving it to another with a higher propensity to spend will stimulate the economy is a myth that just won't die.

There’s bipartisan agreement that something along these lines should be done, but the president has also argued for an extension of his tax cuts, now scheduled to expire at the end of 2010. This idea has met with less support. It would accomplish nothing in the short run, and most of the benefits would go to the very rich — the group least likely to spend a tax windfall.


He's right about that; there is a bipartisan agreement that something along these lines should be done, but bipartisan does not mean smart.

But if they were repealed in a year, the Bush tax cuts could spur a burst of economic activity in 2008. If people knew that their tax rates were going up next year, they’d work to make sure that more of their income is taxed at this year’s lower rates. Investors would likewise have a giant incentive to cash out their capital gains now to avoid paying higher taxes later. In 1986, stock sales doubled as taxpayers rushed to avoid the capital gains tax rate increase scheduled for 1987. If people pour their stock gains into yachts and fast cars, that’s pure fiscal stimulus.


I suppose he could be right that repealing the tax cuts early would result in taxpayers pushing income into this year, but what exactly would that accomplish? What are we supposed to do about next year? And yes signaling a capital gains tax hike probably would convince people to sell appreciated assets this year. What the hell, the market is down anyway, why not just go ahead and drive a stake through its heart? And using those gains to buy "yachts and fast cars"? Yeah, that's the ticket to long term economic growth. Take money from people likely to invest it and give it to people that are likely to spend it; everyone knows that the path to prosperity is through spending, not saving and investment, right?

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