In the last post, I had berated that tax cuts are ineffective. However, tax cuts are also a virtue in some cases as I shall shortly put forward. Reagan's supply side economics had its time but tax cut seekers should realize the limits when demand slumps.
When are tax cuts most effective? Any conservative would argue that it creates incentive to work and hence improves long run productivity. They also argue that tax dollars are best spent by society individually rather than government deciding how to use it. Both these have their merits. But neither is a reasonable stimulus. Also government has to step in to make good for the collapse in private demand, to prevent a deflationary spiral.
Even for a stimulus however, there is a need for tax cuts to boost consumption. First, there may not be enough "shovel-ready" projects for government to spend on. Second, if tax cuts are properly directed properly then people may actually spend it. In that way, targeting lower income people is a good start for stimulus tax cuts. That is one place that Obama has actually correctly identified.
On the politics now- why is PEBO doing this? Does he really think that Senators like Shelby, DeMint, Coburn and other southern GOP senators are really going support this stimulus? Well, they would want the whole package to be only tax cuts rather than the present 40%. Next they will argue that we need cuts in business, capital gains and wealthy people's taxes. Then they will call cuts for non income tax payers as socialism. So, the whole thing seems such a waste. Of course, none of these tax cuts would be sufficient stimulus in the short term. And the poor would suffer inordinately.
However, the tactic may be that by agreeing to look at GOP proposals and proposing tax cuts he can call the GOP's bluff and make this into a wall street vs main street fight. That is a sure fire winning argument for Barack. But this approach carries too many risks. Most importantly, politics could threaten the entire economy. In my opinion, and in the next post I intend to quantify this, the size of stimulus, and its composition is not enough. We MUST err on the side of more rather than less stimulus.
When are tax cuts most effective? Any conservative would argue that it creates incentive to work and hence improves long run productivity. They also argue that tax dollars are best spent by society individually rather than government deciding how to use it. Both these have their merits. But neither is a reasonable stimulus. Also government has to step in to make good for the collapse in private demand, to prevent a deflationary spiral.
Even for a stimulus however, there is a need for tax cuts to boost consumption. First, there may not be enough "shovel-ready" projects for government to spend on. Second, if tax cuts are properly directed properly then people may actually spend it. In that way, targeting lower income people is a good start for stimulus tax cuts. That is one place that Obama has actually correctly identified.
On the politics now- why is PEBO doing this? Does he really think that Senators like Shelby, DeMint, Coburn and other southern GOP senators are really going support this stimulus? Well, they would want the whole package to be only tax cuts rather than the present 40%. Next they will argue that we need cuts in business, capital gains and wealthy people's taxes. Then they will call cuts for non income tax payers as socialism. So, the whole thing seems such a waste. Of course, none of these tax cuts would be sufficient stimulus in the short term. And the poor would suffer inordinately.
However, the tactic may be that by agreeing to look at GOP proposals and proposing tax cuts he can call the GOP's bluff and make this into a wall street vs main street fight. That is a sure fire winning argument for Barack. But this approach carries too many risks. Most importantly, politics could threaten the entire economy. In my opinion, and in the next post I intend to quantify this, the size of stimulus, and its composition is not enough. We MUST err on the side of more rather than less stimulus.
No comments:
Post a Comment