...Not so Common...

Today's title is part of a quote from Voltaire, where he opines that "Common sense isn't so common".   Unfortunately I agree, but it is essential to keep looking.  Let me also acknowledge that if ever there were a place where common sense remains elusive it's the Internal Revenue Code. Still, that doesn't excuse continuing to apply common political maneuvring in the guise of sensible solutions to help the economy. 

In particular I am struck by the notion of financing what are supposed to be tax cuts designed to stimulate the economy with tax hikes.  I’m not an economist, but it feels counter intuitive that switching who pays the taxes actually creates economic stimulus.  It turns out I’m not the only person who thinks this way.  Megan Mcardle, writing in the Atlantic, puts it nicely.  “Providing stimulus through payroll tax cuts that are financed with tax hikes on other people is like trying to boost your household income by making your wife pay you to mow the lawn.” 

Her follow up to this point cites the work of Christina Romer on the topic.  Romer, a former Chairperson of the President’s Council of Economic Advisors posits that “tax increases are highly contractionary". Her conclusion from research is that tax hikes have a disproportionate dampening impact on investments, and that makes them more specifically damaging to the economy than other types of tax changes. 

There is a sense of urgency here to take steps that will make a difference, not just trying to score political points.  As Bryan Caplan notes in his Econolib blog, “Free markets do lead to higher economic growth, but this is a very gradual process. “  Which brings us to the question what do we do in the meantime?  I don’t have a point to advocate here beyond common sense.  While it may be true that a payroll tax cut is too expensive, it’s also true that there’s evidence a step like that has positive economic impact.  Just as the IRS gets to test deductions based on the idea that they have to have economic substance, the legislation to fix the economy should be held to the same standard of being able to create substantive economic improvement.