Posted on 08/23/2011 7:00:00 AM PDT by SeekAndFind
Let me get this straight: Republicans are arguing for a not-insignificant tax increase, and President Obama is sounding like Jack Kemp, saying higher taxes would lead to lower GDP growth. I knew I shouldn’t have followed that damned rabbit down the hole.
As part of a harebrained attempt to stimulate the economy, a temporary reduction in the payroll tax was appended to the deal to prevent the Bush-era income-tax rates from expiring. There is good reason to think that these kinds of short-term stimulus measures don’t do much good. One of Milton Friedman’s key achievements was working out a formal version of this idea, which is known as the “Permanent Income Hypothesis.” In short, it holds that most people are not utter fools, and that they therefore recognize temporary fluctuations in their income as temporary, and therefore as no basis for making long-term economic commitments. If your take-home pay is normally $5,000 a month, and you get a $1,000 Christmas bonus, you don’t go into January acting like a guy whose take-home pay is $6,000 a month. You act like a guy who just got $1,000 in new net worth, not $1,000 a month in new income. Likewise, if the government gives you a temporary tax break that adds $200 a month to your take-home pay, you don’t move from a $1,500-a-month apartment to a $1,700-a-month apartment, or build a $20,000 extension onto your house, or buy a $35,000 car instead of a $25,000 car. You know that the extra income won’t last forever.
That’s why the ever-burgeoning stimulus project has underperformed. It started with those embarrassing $300 checks from the 2008 Bush stimulus, which grew up to be the $400 Making Work Pay tax credit, and then provided the mutant offspring of the payroll-tax cut, which is good for a few hundred bucks for most families, and up to a couple of grand for the high-rollers. It all adds up to about $10 billion a month — not the smallest of potatoes.
There are bunches of lavishly credentialed economists whom I respect who are in general in favor of the temporary payroll-tax reduction. Count me skeptical, for a couple of reasons. One is that I suspect that the impact of day-to-day consumer spending on the long-term performance of the economy is exaggerated. (Nations do not consume their way into prosperity, they produce their way into prosperity; scarcity is real, reality is not optional; etc.) I am driven to tooth-grinding when I read that the payroll-tax cuts are more effective than regular income-tax cuts, because the latter benefit wealthier people, who are more likely to save their money and less likely to spend it. But “save” is another way of saying “invest,” and in advanced, high-wage, high-discretionary-income societies such as ours, capital investment is where growth and jobs come from. I suspect that politicians like to goose consumer spending because it produces short-term froth that looks and feels a lot like growth but in the long run isn’t. Growth comes from investment, and investment comes from real savings — whereas encouraging high levels of savings-reducing consumer spending in a debt-ridden society in order to send a bunch of cash sloshing through the sluices in an approximation of productive economic activity may not be the best long-term strategy.
And while temporary tax cuts probably aren’t very effective in general, there’s good reason to think that this one would be less effective than most. As Bryan Caplan explains, under perfectly free labor-market conditions it wouldn’t matter whether we cut the employee side or the employer side. But we have regulated labor markets (minimum-wage laws, union rules, etc.), and so it does matter. We cut the employee side rather than the employer side, which raises compensation. Cutting the employer side would have reduced the cost of labor: Prices go down, demand goes up — what is true for widgets is true for workers. If Republicans want to hold out for something, they might consider holding out for transferring the cut from the employee side to the employer side — which, of course, would be walking into a class-warfare minefield, but it’s still the right thing to do.
Whatever they end up doing, Republicans should fight for one more change: making the rates permanent, at whatever level they end up at. More important than a relatively modest tweak of the tax rates here and there, the fact that we’re set to have a major national political brawl every year or so over tax rates is the source of a great deal of economic uncertainty. Investors need stable rules (recent EPA adventuring is unhelpful) and a stable political-economic environment in which to operate. I have argued before that it matters less whether we settle on a top income-tax rate of 38 percent or 35 percent than that we settle on a rate — and that goes double for corporate-income and capital-gains taxes.
Republicans, coming off of an Iowa presidential debate in which every single candidate on stage vowed to oppose a deficit-reduction deal in which $100 billion in tax hikes would earn $1 trillion in spending cuts — which is to say, they vowed to reject a balanced budget — on the grounds that no tax increase of any kind at any time anywhere is acceptable, are going to look mighty foolish if they come out for jacking up taxes on lower-earning households with the nation on the brink of the second leg of a double-dip recession. President Obama will be more than happy to spend the next year campaigning on tax cuts. The short-term payroll-tax stimulus is a dumb idea, to be sure, but it is not the hill for Republicans to die on. They should tweak it if they can, and try to make the rates permanent, but there are more important battles to be won.
— Kevin D. Williamson is a deputy managing editor of National Review.
The Republicans, as usual, seem to be singing to the sheet music handed out by the DNC.
The short-term payroll-tax stimulus is a dumb idea, to be sure, but it is not the hill for Republicans to die on.
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I have to agree. Kill it in 2013 not 2011.
The first thing I ever learned about taxes was that increased taxes are meant to control the people....the less money the people have, the more control the government has. More taxes also gives the government more money to spend, not to reduce any debt. Many years ago, I had a very good professor that taught this.
I agree, lower taxes are lower taxes. The Dems are trying to set us up get us to lower payroll taxes on the average worker so they can soak the rich.
We need to counter with a flat tax.
I believe a fair plan would be for everyone - including those 50% of us that pay no federal tax now - kick in $20 per month. There are approximately 150 million eligible so the amount of extra tax would be $36 billion per year. That money would be used strictly for debt reduction. The Federal government would kick in an equal amount rising the total to $72 billion. This money must only be used to reduce the national debt. We pass a balanced budget amendment at a level that will sustain entitlements at the present level with gradual reform of those programs along with a time limit for out and out welfare and unemployment benefits, i.e., raise the retirement age of those entering the work force to 75. Those billionaires who want to kick in more can do so. At $20 a month, no one gets hurt and we could get rid of the debt in less than 30 years. Please tell me I’m not crazy!
“That money would be used strictly for debt reduction.”
Dream on, man. If we gave them more money, they would just spend more. Tigers can’t change their stripes.
The 14 trillion debt is humongous. 72 billion is chump change compared to the debt. Even if we were to assume no interest accumulating on the debt and no further annual deficits which of course there would be, it would take 194 years to pay the debt off. And that assumes Warren Buffet turns over all his assets to the US Treasury which of course he would not do. We really need a annual paydown closer to the 500 billion range. Ryan’s plan is in that range but it is really only cutting into the trillion dollar annual deficit not really paying down debt.
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