Tax Cut Confusion

One to the many nice things about blogging is it tends to provoke me to look at what’s being discussed in print and on line, using that to shape the topic for the week.   Usually there’s something that emerges as worth more attention than I’ve given it – and that brings motivation to learn and then to share.  That said – I am burnt out on this tax the rich / jobs bill stuff.   I must admit part of my problem is that this is a complex issue.  So, in an effort to overcome my nascent attention deficit disorder and to better understand what is actually a consequential topic to my pocketbook, I am considering the following question.    Do tax cuts really help the economy? 

The Tax Foundation says not unless there’s a sense of permanence associated with the cut.  We all know that nothing is certain but death and taxes.  However the new twist on that is “what taxes and when” tends to be an open question.  The Tax Foundation article suggests the temporary nature of  the proposed payroll tax cuts is a problem.  The argument is, in an uncertain economy when it’s a one-time deal, tax cuts don’t stimulate the economy.  People are on a budget, and don’t expect things to get better, so rather than spend the “windfall” they put the money in an emergency fund.   

The question of whether tax policy is effective if it’s not permanent is a popular topic.  The blog A Taxing Matter takes issue with the pressure to make the R&D credit permanent arguing that companies that need to do research anyway shouldn’t get a special deduction for doing it.  The New York Times did a scathing piece on this topic earlier this month, targeting the video game industry.   In both these articles they argue the specific tax cut is bad, but ineffective when temporary.   The same Tax Foundation piece I referenced earlier uses that logic for saying a temporary tax cut to encourage jobs is useless.  When people with such different views come to essentially the same conclusion, it’s usually a sign they’re on to something.

The only missing piece I see in this discussion is that these temporary tax cuts aren’t being imposed from outer space.  We (since I vote I have to include myself in this group) keep electing people who see temporary tax cuts as a way to get re-elected.   As a mom I think we voters have to admit that the child- like behavior in Washington didn’t occur without our participation, and won’t stop unless we take appropriate action.

Speaking of being appropriate – I should mention that Christina Romer, whose work I cited last week as an argument against the tax hike portions of the jobs bill, has a piece in the New York Times Business Section today defending the bill.  (Though notably she doesn’t say good things about the tax hikes.)  Here’s the link if you’d like to know more.