Thursday, February 05, 2009

The Least-Risk Solution: Permanent Tax Cuts

We could argue over "who gets 'em" and "how much," but first, let's look at the logic.

...I enjoy being interviewed on live radio in other parts of the country. And when I do that, I get the chance to hear what local callers think about the economy, and more importantly, what they want.

They want to save a lot more money. This answer comes up automatically, without qualification, and without exception when you talk to ordinary folks

Cianfrocca thinks that this is a 'secular' trend, which makes sense. Most people realize that Social Security will be less-than-adequate for retirement (or perhaps even worse than that.)

Periodic increases in the desire of individuals for liquidity are nothing new. In the days before deposit insurance, they appeared as increases in holdings of currency or specie. Now, they show up as higher bank balances. Either way, the money is neither consumed nor invested so it effectively disappears from the economy.

The other way that money disappears from the economy is when the Federal government collects taxes.

One can argue that the Feds also spend that money--but save that for a moment.

So how do individuals contrive to save more money? Simple. They cut down their levels of consumption and investment (savings and investment are NOT the same thing).

Oops. That makes the economy smaller. It also increases unemployment, which raises government deficit spending automatically (through lower tax revenue and higher unemployment compensation). The increase in personal savings is directly correlated with an increase in government deficits. They go hand in hand.

This is the "supply-side" argument. Consumers will reduce demand because they are reducing the supply of dollars to the marketplace. Keynesians say that Government spending offsets this reduction--but even Big Gummint types concede that Gummint spending is less efficacious than consumer spending--and when the T-Bonds are issued, they 'crowd out' private debt-issuance, thus reducing private-sector investments and spending.

The counter-proposal?

What’s the right answer? Easy as pie. CUT TAXES, RADICALLY.

Obama wants to spend $900 billion over two years, a bit more than 3 percent of GDP.
Scrap that whole idea. Instead, let’s cut about 60% of the payroll tax, the entire employee contribution plus a bit of the employer contribution, for two years. That’s about the same sized increase in the Federal deficit

...The additional money that people will save out of their paychecks will displace their forgone consumption and investment. They’ll be able to increase savings as they desire, without cutting their spending

Yes, Cianfrocca assumes that spending will resume apace. On that element he could be wrong, of course. But the Obey-Pelosi proposal is horrifically defective; it's a "throw-money-at-the-wall-and-see-what-sticks" approach--and the average citizen has seen right through it, as the polls tell us.

What could go wrong with this? Same as the last time we tried it, in the 1960s. President Kennedy found it easy to cut income taxes. When inflation appeared in 1965, it took LBJ three more years to jam a tax increase through. If it turns out we can’t bring back the payroll tax, the Federal Reserve has other ways to shrink the money supply

And a payroll-tax cut happens to be extremely progressive.

Tweaks? Yup. I'd run the payroll-tax liability all the way to the top--that is, EVERY taxpayer will contribute no matter the size of their income--before cutting it by 60%. Even more progressive.


Scott said...

What worries me is that tax cuts aren't going to be an effective economic stimulus and won't get us out of our current crisis. Tax cuts do not directly translate into demand because people can, and often do, choose not to spend that money. Manipulating the interest rates usually works okay, but it hasn't this time. Once you put the rate at zero and people still aren't spending no matter how cheap money is, where do you go from there? GOVERNMENT SPENDING. That is the only sure way to translate each dollar into a dollar's worth of demand in the economy.

You don't want to increase long-term spending? Fine.

You want to have a long-term discussion about lowering taxes? Fine.

But I'm thinking the most effective thing we can do right now to pull us out of our economic nosedive is to have the government go shopping big-time.

TerryN said...

"But I'm thinking the most effective thing we can do right now to pull us out of our economic nosedive is to have the government go shopping big-time."

On credit?//

Dad29 said...

I have already conceded (on someone else's blog) that the proposed $600 million purchase of new Gummint cars is a good idea.

For that matter, the purchase of 350 F-22's would ALSO be a good idea.

SOME Gummint spending is a good thing. No one argues against Gummint spending, generically.

But Porkulus as currently structured is irresponsible, often irrational, and--what really counts--less EFFICACIOUS than consumer spending (or saving, for that matter.)

'Pissing into the wind' is the closest analogy I can think of.