1.26.2009

ONCE AGAIN, WHY NOT JUST THE TAX CUTS?

BY CINCINNATUS

I’m sure you’re all tired of hearing me say this, but this article in the Wall Street Journal reignited my ire over the concept of “stimulus packages.” It is, or at least should be, common sense that whenever the government is involved in spending large sums of money, special interests and political patronage always play a role. As Melloan discusses in this article, while the intention is to put more money in the pockets of average Americans, vast sums of money are siphoned off in the process as politicians throw bones to groups of influence. President Obama has promised that the stimulus package will contain only “green pork,” that is to say only pork for private interests that meet certain environmental standards. While this sounds lovely (to some), there is a problem: Obama has no legislative authority but the veto, which he will not use when the stimulus package hits his desk, bedecked with the usual pork we see out of Congress.

I’ll give credit where it’s due; a portion of the stimulus, about 40% of the total amount, will be (if promises are kept) aimed at moderate tax cuts. But I have to again illustrate that tax cuts + massive spending are not a recipe for national economic recovery. It has to be one or the other. And if the federal government is willing to sacrifice a billion some odd dollars for the sake of the economy, why not just make it all tax cuts? Something we learned from the Bush tax cuts (and Keynesian economists never seem to want to discuss) is that they led to increased revenues for the government, as private citizens were able to parlay the money they kept into greater wealth. So once again, if the government is willing to spend/sacrifice money for the sake of the economy, the opportunity should be taken to ensure that the fix will result in a sustained increase in the size of citizens’ wallets, rather than a one-time lump sum or a “leaky” transfer of wealth, as Melloan calls it.

Additionally, while tax cuts are essential and I applaud anyone who advocates for them responsibly, I have to take issue with the fact that the Obama administration still has its eye on either letting the Bush tax cuts for the wealthiest 5% (those who create jobs) expire or repealing them before 2011. Lawrence Summers has
recently reiterated this goal after David Axelrod expressed it a few months ago. This is dangerous and, if it comes during the recession or its recovery, will have disastrous effects on all of us (as I have warned repeatedly; see here, here and here). The government can spend all the money it wants (and it is) on infrastructure and “job creation,” but if it saddles those in the private sector who actually create lasting jobs with inordinate taxes, it will all be for naught.

2 comments:

Chris Berry said...

Federal revenues from personal income taxes are roughly $1.125 trillion annually, assuming a strong economy. That number will be significantly lower during a recession. Spending $1 trillion on a recovery package is roughly equivalent to 11 months of income tax revenue. There is no doubt that a tax holiday would provide a far more powerful and more immediate stimulus to the economy.

Ben Wheat said...

Case in point about the pork...

Pelosi defends birth control funding in stimulus