Thursday, January 10, 2008
The power of future tax cuts
The editors of the New York Times are fretting over the economy, which may or may not be fret-worthy (or may only be fret-worthy for certain people). They want the White House, Congress, and the Fed to do pretty much anything other than cut taxes:
The Federal Reserve, with its prodigious lending capacity and power to cut interest rates, could yet save the day. But with prices, and fears of inflation, also rising, the Fed has less room to maneuver.
That is why it is imperative that President Bush and Congressional leaders begin a serious discussion about how to help revive the economy, if need be, with a short-term stimulus package.
President Bush has suggested that permanent tax cuts (his longtime goal and a favorite of nearly all the Republican presidential candidates) are his fix of choice. But those tax cuts would take effect in 2011, doing nothing for today’s economic woes. (bold emphasis added)
The extension of the Bush tax cuts might or might not be the best way to stimulate the economy through the next year, but it is silly to write that it would "do nothing for today's economic woes." Of course future taxes influence all sorts of behavior today, including the time horizon of investments, the timing of transactions, the willingness of businesses to incur risks, and even consumption. If, for example, prospective heirs knew today that the elimination of the estate tax would be permanent, they might very well consume more than they would otherwise. Do not underestimate the impact of worthless-heir consumption.
This is all of a piece with the refusal -- or the inability -- of the left to consider that people are rational economic actors with more foresight than the next six months. The fate of the Bush tax cuts will have a huge impact on the economy today. Make them permanent, and I can virtually agree that the cost of capital, particularly equity capital, will fall dramatically.
1 Comments:
By 
Georg Felis, at
Fri Jan 11, 02:36:00 PM:
NPR (yes I listen, it gets my blood going in the morning) was opining this morning about the poor performing economy and how it needed economic stimulus. But they promptly commented that making the Bush tax cuts permanent would NOT work because that would only help in the future. Then they began complaining that the economy needed long term economic support too. *sigh*
One interesting thing they reported on that I had not heard before: Tax cuts that could be passed by Congress which would only take effect if certain events took place, i.e. two successive months of negative job growth. It sounded interesting, but I am deeply suspicious of the Tax code being used to manipulate the economy. (Yes I know it happens now, no I don’t like it). I wonder if they would think it would be a good idea to allow the Fed to manipulate the Corporate Tax Rate as well as the Federal Funds Rate? Do you think that would send Liberals into an apoplectic fit?
