The president elect is just revealing his plans for his first important legislation: the stimulus. And I am afraid it is poorly designed, at least at first glance.
Lets start with the tax cuts: 40% of the package to draw "considerable" GOP support. For starters, despite all the ramblings of conservative intellectuals on the vices of government spending and the virtues of tax cuts, it is indisputable that the multiplier effect on the economy by spending is greater. A conservative (no pun intended!!) value of the multiplier would be 1.2. This is assuming that most spending is pork, useless etc.
For tax cuts, the best case is a multiplier of 1. Why? For one, when people get tax cuts, they dont spend in times of crisis. They use it to draw down debt (pay it off), and spend on essential commodities. Not blaming the consumer, for whom it makes perfect sense, but a poor stimulus. If you wanted further proof, just look at the stimulus passed in 2008. The economy recovered for one quarter and then anemically shut down. Now, this was at a time when people where still optimistic. Anyone bets that times are better now???
Business tax breaks, as suggested add little as incentive. By allowing losses offset with past taxes, you are merely transferring wealth. What stimulus is that?
This is not to suggest that all tax breaks are bad, or that the stimulus should avoid them. Indeed this much better than Bush's tax cuts for those who dint need them and were not even asking for one. I will address this issue and the politics behind it in detail in the next post.
Lets start with the tax cuts: 40% of the package to draw "considerable" GOP support. For starters, despite all the ramblings of conservative intellectuals on the vices of government spending and the virtues of tax cuts, it is indisputable that the multiplier effect on the economy by spending is greater. A conservative (no pun intended!!) value of the multiplier would be 1.2. This is assuming that most spending is pork, useless etc.
For tax cuts, the best case is a multiplier of 1. Why? For one, when people get tax cuts, they dont spend in times of crisis. They use it to draw down debt (pay it off), and spend on essential commodities. Not blaming the consumer, for whom it makes perfect sense, but a poor stimulus. If you wanted further proof, just look at the stimulus passed in 2008. The economy recovered for one quarter and then anemically shut down. Now, this was at a time when people where still optimistic. Anyone bets that times are better now???
Business tax breaks, as suggested add little as incentive. By allowing losses offset with past taxes, you are merely transferring wealth. What stimulus is that?
This is not to suggest that all tax breaks are bad, or that the stimulus should avoid them. Indeed this much better than Bush's tax cuts for those who dint need them and were not even asking for one. I will address this issue and the politics behind it in detail in the next post.
