« China, U.S. Debts and the Economy | David Mason's Blog | John Thain: Poster Boy For Greed and Incompetence »
This is not the time to cut taxes
My op-ed piece, "This is not the time to cut taxes," appears in the 1/13/09 issue of The Christian Science Monitor. The subtitle of the piece is, "To increase federal revenue, taxes must go up, not down." There I write that
"talk of tax cuts may be music to the ears of American taxpayers and a nod to satisfy Republicans but they make no sense in a time of soaring budget deficits and huge new government expenditures, including the probability of $1 trillion for Obama's proposed economic stimulus plan."
I conclude the article with these thoughts:
"Obama should allow the Bush tax cuts to expire at the end of next year, for everyone except the very needy. He should also raise the marginal tax rates for the very wealthy. These rates are very low by both historical and international standards. Increased taxes will be unwelcome and painful, but the US is in a situation as unprecedented and dangerous as that of the Great Depression. Obama himself has called on Americans for sacrifice. And after two decades of bingeing, we can afford a little sacrifice."
Advertisement
So, I guess someone didn't take Macroeconomics?
I'm not going to get too vicious here, but to a first approximation, tax cuts and government spending are the same thing in the time of recession. Tax increases and spending cuts, also. You can argue about multipliers and incentives, but by and large private income and government spending both contribute to economic activity.
So raising taxes (or foregoing tax cuts) in a recession is not an approved method.
I'm not making an argument about tax rates, only about timing. Saying this isn't the time for tax cuts is just wrong. If there was ever a time, this is it.
January 12, 2009 6:16 PM | Reply | Permalink
I agree w/ El Presidente.
A large tax cut will be a lot more stimulative (and more quickly) than a large infrastructure project.
And on the individual side, a temporary suspension of social security taxes would also quickly revive the consumer.
I agree we need to start sacrificing. But that doesn't mean we just go out and raise taxes so we can continue to spend like drunken sailors.
We need to make sure that the things the government is spending on is more productive than the dollar the private sector would spend it on.
And some point we still need to pay it back
January 12, 2009 6:43 PM | Reply | Permalink
I think Obama can get away with his "middle class tax cuts" but should increase taxes on larger net incomes.
I would point out that Mason in this blog entry is looking 2 years ahead (the end of next year is Dec. 2010). We will have a lot more data long before then.
If public borrowing can be done cheaply, it's sometimes better than collecting taxes. But going into a recession, incomes and profits are generally decreasing so that even keeping tax rates constant means depressed tax revenues. That means even more borrowing should be expected. This tends to drive up the cost of borrowing, making taxes a better choice at some point.
If you're going to spend the money, be prepared to pay the price.
One thing taxes do is to curtail wasteful consumer spending, as people have less cash on hand. Do you trust people to spend wisely, or do you trust the government to spend wisely? Clearly this depends in part on who's in charge in the government at the time, as well as how one defines "waste".
I don't see how tax cuts do a good job of creating jobs going into a recession. And from what I've seen of "multipliers", even economists seem to think that they don't have as much stimulative effect as other methods.
January 13, 2009 1:52 AM | Reply | Permalink
OK - I missed the part about looking two years ahead. To say we should do it, but only in two years, is a cop out in my opinion. Let's talk about what we should do today. I think we should have a business tax cut today as well as the consumer tax cut (ie I agree with Obama).
We don't need taxes to curtail "wasteful consumer spending" - we have enough people who are unemployed that are already curtailing non-essential spending.
You don't see how tax cuts do a good job of creating jobs? Take a look at what we did post-9/11. We cut taxes on capital investments for businesses. Businesses responded to this and dramatically increased their investments.
January 13, 2009 7:59 AM | Reply | Permalink
A few points:
1. The reason Paul Krugman et al. frequently say tax cuts are "less stimulative" than government spending is that people save some of that money, rather than spending it. So suggesting that "wasteful consumer spending" is the problem misses the point. Wasteful consumer spending is stimulative, and consumer saving is good too; it reduced the debt load and provides investment capital.
2. The 2001-2002 tax cuts actually didn't stimulate a significant increase in business investment (well, except in residential real estate). That's not to say they didn't have a positive effect on growth, but since they were financed by deficit spending, rather than cuts in programs, government borrowing took up much of the potential for investment. Think of it this way. Instead of opening new factories, people bought T-bonds. That's the net effect.
January 13, 2009 11:36 AM | Reply | Permalink
EP, your point 1 contradicts itself. You say tax cuts aren't effective because some of that is saved, but then you say that saving is stimulative.
It's not a good time to encourage what I call "churning" of the economy, aka "wasteful spending".
I agree that buying Treasuries doesn't help much now (giving tax cuts so people can buy new guvmint debt). But with fractional reserve banking, people putting money into CDs etc. could help private borrowing by significantly increasing the availability of money. Trouble is, not that many people with good credit want to borrow for productive (non wasteful) purposes right now.
So I tend to agree that "savings" via Treasuries or bank CDs etc. isn't a great use of government money (remember, tax cuts are replaced by guv. borrowing). But if the Feds can borrow at 0% and we individuals can get 4% on our secure deposits, great! (fictional notion alert)
January 13, 2009 11:56 PM | Reply | Permalink
1. I absolutely agree that the government ought to borrow as much as it can at 0% before rates go up, there's just no reason not to unless you think the FRB is going to allow deflation (and I don't).
2. My point wasn't that borrowing or spending was good; quite the opposite. I was pointing out that in terms of creating a sustainable recovery, tax cuts being saved by consumers wasn't a bad thing.
3. I'm not sure what the difference between spending and "wasteful spending" is; unless you mean spending by the government on foriegn military and security adventures (wink).
January 14, 2009 10:13 AM | Reply | Permalink
1. Even with deflation: If we don't spend it, we can invest it or buy out extant Treasuries thus reducing future debt service costs. We are paying 0% in nominal rate so it's like printing money without the monetary inflation side effects!
2. Good and bad depend on the effective rates of return (tax cuts vs. outright public spending).
3. Churning and sending wealth/money overseas as trade deficits (as distinct from investing wisely overseas!), both count as wasteful spending, domestically speaking. It isn't about military adventurism or financing Israel's mass murder in Gaza, it's just economics. And programs which lead to trickle up domestically are also suspect.
January 14, 2009 10:29 PM | Reply | Permalink
I would encourage people to read the whole op-ed piece at the CSM link. My post was simply an excerpt from that piece. In the original, I mention that there is almost no economic or historical evidence that shows that tax cuts lead to net increases in government revenue. And we are desperately in need of such revenue, at a time when the government is bankrupt and the spending needs overwhelming.
As to macroeconomics, most textbooks suggest that tax cuts generate much less economic activity than government spending. And at least two Nobel prize winning economists, Paul Krugman and Joseph Stiglitz, have argued as I do against (most) tax cuts.
January 13, 2009 6:09 PM | Reply | Permalink
David, The point here is not about "increases in government revenue". You're on the wrong page of the playbook when you talk about that. It's about how tax cuts etc. affect the economy in current, and near future, circumstances.
Government isn't exactly bankrupt, it's just deep in debt -- it arguably can go deeper before defaulting. The macro-scale (if not macro-economic) question is: Do tax cuts cost more or less than government borrowing at this time? This comes down to efficiency - is private use of money which would have gone to taxes more or less efficient than guvmint borrowing which is needed to replace the lost tax revenue, today?
Also keep in mind that Obama by giving "middle class" tax cuts is keeping a big campaign promise. If he doesn't raise taxes on the high high end, those people generally won't complain (but I think he should raise those tax rates anyway).
January 14, 2009 12:10 AM | Reply | Permalink