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Not All Tax Cuts Are Created Equal
Are you listening, President-elect Obama?
President-elect Obama reportedly may include $300 billion of tax relief in his so-called stimulus scheme. Political prognosticators think this will give fiscal conservatives a reason to vote for the proposal, but lawmakers who favor limited government should look before they leap — especially if they actually want to improve economic growth.
The key thing to understand is that not all tax cuts are created equal. If policy makers want to boost growth, they need to reduce marginal tax rates on productive behavior such as work, saving, and investment. This “supply-side” insight is why the Kennedy and Reagan tax rate reductions were successful. It also is why flat tax jurisdictions such as Hong Kong and Slovakia enjoy such strong growth. And it is why zero tax regimes such as the Cayman Islands are beacons of prosperity.
Unfortunately, all reports indicate that the Obama plan will revolve around a gimmicky idea to give $500-$1,000 of tax relief to every household. Households certainly will be happy to receive this money, and I surely will cash any check that President Obama sends in my direction, but simply giving people money does not give them any reason to engage in additional productive behavior. And without more work, saving, investment, or production, there is no increase in national income.
Defenders of this type of scheme usually argue that distributing checks will result in people spending more money, which ostensibly will jump-start a sluggish economy. This is the Keynesian theory, but as this short video explains, it overlooks the fact that the government has to borrow every dollar that is being distributed to taxpayers or other recipients. So any money that is put in the economy’s right pocket first has to be taken out of the economy’s left pocket. Keynesian policies do not increase national income; they redistribute it. This, of course, is a pretty good summary of Obama’s entire so-called stimulus.
Wait a minute, some of you may be asking, doesn’t the same criticism apply to supply-side tax cuts? The answer is yes, but the argument for supply-side tax cuts has nothing to do with how much money people have in their pockets. Instead, advocates argue that the goal of good tax policy is to minimize the tax penalty on productive behavior. And if tax rates are low, then people will have an incentive to increase the quantity and quality of labor and capital they supply to the market. In other words, the goal of supply-side tax policy is to increase national income rather than to redistribute it — the opposite of the Obama agenda.
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Dan Mitchell is a senior fellow at the Cato Institute and co-author of Global Tax Revolution: The Rise of Tax Competition and the Battle to Defend It
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24 Comments
1. Pirate:I somewhat agree with this article. The tax cut portion of the stimulus is actually noted by the Obama team to be less effective than other parts. In my mind, the tax cuts are mostly there to buy votes and effect an overall tax policy that is more conducive to democrat special interests
As for the overall discussion, yes taxes are a drag on productive behavior but that seems to be very inconsequential during a recession. The biggest discouragement to investment during a recession is the recession not taxation. Turns out that the high probability of losing money is more of a drag on investment than getting taxed.
So while I think the tax discussion is important for thinking about long term growth, it’s woefully inadequate to think of as a “stimulus” package. I mean just how many times can you reduce marginal rates before you end up like the Federal Reserve… stuck with a rate that can’t conceivably go any lower.
Jan 17, 2009 - 2:40 am 2. Bob:The idea that our tax rates will be reduced to near zero, like the fed funds interest rate, is ridiculous. Lowering income tax and capital gains rates would serve as much more of an economic stimulus than federal spending or household tax rebates. But PEOTUS Obama is not driven by pragmatism but by liberal doctrine: He will not do anything to lower tax rates for “the rich” regardless of whether such lower rates would benefit either the economy or increase government revenues. This is the first commandment of the liberal faith: Thou Shalt Not Do Anything to Benefit the Rich (regardless of whoever else it might also help). For further explanation, see, P.J. O’Rourke’s book Eat The Rich, the title of which encapsulates every liberal’s dream.
Jan 17, 2009 - 5:16 am 3. John B:Sad to say, I’m losing interest in PEOTUS, I’ve heard his speeches, and noted his flip-flops. I’ve observed his friends and seen what kinds of people he chooses to associate with.
Suffice to say; if I were going to set out today to make a new friend, Obama would not be on my list. He is not someone I find commonality with, nor has he ever done anything to to inspire my admiration or confidence. I will not benefit from his tax plan, nor will I prosper under his administration. He will do nothing for me.
I just hope he doesn’t destroy the country in his four years in office.
Jan 17, 2009 - 6:19 am 4. Karen:We are working towards becoming debt-free (and are very close to succeeding) so if we get a check from Obama, it will be used to pay off whatever debt we have left. If we are debt-free when the check comes, we will put the money into savings to help us survive the bad financial times ahead.
Jan 17, 2009 - 7:55 am 5. Saltherring:I agree with Bob that the very basis of Obama’s taxation policy is wealth redistribution. Per IRS data, more than 40% of Americans pay NO income tax, yet Obama plans to grant these people “tax relief”, in the form of cash rebates. EVERYONE should pay at least a small amount of income tax, and no one should receive a rebate greater than the income tax they paid the previous year. “Sharing the wealth” curtails investment, productivity and individual liberty, and replaces them with socialism, indolence and dependency on others.
Jan 17, 2009 - 7:57 am 6. The Historian:STIMULUS PLAN IS ALL ABOUT SPECIAL INTEREST
The stimulus is not about tax cuts but a payoff for special interests. No change here.
http://greensrealworld.blogspot.com/2009/01/house-stimulus-plan-is-special-interest.html
Jan 17, 2009 - 11:01 am 7. Pat:Thank you to Mr. Mitchell for his editorial. To improve clarity and identification of the essentials:
1. Government borrowing is not the root problem – SPENDING is. Although borrowing is less harmful to prosperity in any given period than taxing, BOTH borrowing and taxing destroy wealth that has already been produced – making it unavailable for further economic progress. EITHER government is strictly limited to protecting individual rights (including the inalienable right to create and keep one’s wealth) at a very modest financial cost , OR it possesses our sanction to destroy rights and wealth in an ever widening spiral.
2. Keynesian policies steal and redistribute wealth that has already been produced AND destroy the productive citizens’ means to produce more wealth.
3. Supply-side tax policy’s stated goal is to increase national income AND the size of government.
4. NEITHER Keynesians nor Supply-siders address spending and uphold rights. Whether promising stability, stimulus, or prosperity, both deliver the opposite – instability and wealth destruction. As such, both approaches are mere rationalizations for MORE immoral government interference.
5. Flat tax moving toward ultimate abolishing of all income taxes and instituting of capitalism (complete separation of government and the economy) is what we so desperately need. Then Americans will finally be free to employ their great ingenuity and create prosperity and happiness that surpasses the roaring twenties, Hong Kong and the Caymans combined.
Jan 17, 2009 - 12:26 pm 8. John B:@ 7. Pat:
America ran out of good new ideas a long time ago. (Thank the school systems for that) Where we dumb everything down to the lowest common denominator.
To stay on top, we need to import educated eastern Europeans at an accelerated pace. Mexican labor can pick the lettuce, but they cannot launch the next generation space Hubble telescope.
Time to wake up folks.
Jan 17, 2009 - 1:20 pm 9. Saltherring:John B.
Ignorant, public school ‘educated’ people vote as they are told to by their masters in the ‘mainstream’ media. And we need look no further than January 20 for the proof.
Jan 17, 2009 - 2:20 pm 10. myth buster:Pat, I assume you support HR 25, then. Truthfully, there is no way to cut government spending without first evicting the enablers: massive lobbyist spending, tax code tinkering, and concealing the costs/imposing them on a small group of people. HR 25 would fix that by replacing the entire Federal Tax Code with a single retail revenue tax and a rebate on all taxes paid on poverty-level consumption.
Jan 17, 2009 - 3:16 pm 11. Marc Malone:I’m glad Obama seems to be backing off from the stupid employer incentives. The more government gets involved in business practices, the more businesses focus on gaming the system to get government money, rather than focussing on creating wealth.
@7 Pat – You’re half-right about supply-side. It’s stated purpose is to grow the government. They sell it by claiming that it creates more government revenues. Surely, it can, but it doesn’t have to. The government could simply choose to rebate the money, or lower taxes further, or pay off the debt.
Reagan spent the money on the arms race, thus crushing the USSR. Clinton at first chose to raise taxes, but that made things worse. The Pubs took over Congress and chose to balance the budget with the “peace dividend”. That was taking the supply-side benefit that had been being spent on the military and such and simply cutting those expenditures.
You’re right that spending is the problem, but you’re wrong that supply-side is about governmental growth. That part is simply a choice of what to do with the additional revenues generated.
Jan 17, 2009 - 3:34 pm 12. John B:as an aside,,, police nationwide are looking for a mug shot of anyone wearing a McCain/Palin tee-shirt. There seems to be plenty of mug shots with t’s and Obama, but no McCain/Palin.
http://www.thesmokinggun.com/archive/years/2008/1217081mugyear20.html
What conclusions can we draw from this?
Jan 17, 2009 - 3:56 pm 13. John B:Also,,,, if it’’s OK for the left to call Sarah Palin a “bimbo”,,, is it OK for the right to call Obama a “nigger”?
I’m kinda confused with this PC nonsense.
Jan 17, 2009 - 4:38 pm 14. Nate:#13: No. The right is supposed to have higher standards. Insults from the right should be either snarky or literary. Examples would be “Barak ‘Daley’ Obama” or “Perfidious spawn of Beelzebub”. Common racist epithets lack class and should be left to the left.
Jan 17, 2009 - 5:57 pm 15. Pirate:“The idea that our tax rates will be reduced to near zero, like the fed funds interest rate, is ridiculous.”
What makes it ridiculous? You’re magically going to start arguing for tax increases after the recession is over? No, you aren’t, and when the next recession comes along you’re just going to bring up the same points on needing to lower taxes.
Tax policy should not be looked at in terms of economic stimulus. In fact, doing so is a hell of a lot more Keynesian than you think.
Jan 17, 2009 - 7:22 pm 16. Kevin:I really deep down in my heart feel it would be best for this country if BHO follows Kennedy step-for-step.
Jan 17, 2009 - 9:05 pm 17. Войска ПВО:“Unfortunately, all reports indicate that the Obama plan will revolve around a gimmicky idea to give $500-$1,000 of tax relief to every household. “
..oh, so now it’s cool with Mrs Obambi that her husband is having the feds treat taxpayers to another set of earrings.
What was it that Martin Sheen said in Apocalypse Now? “Oh man! The bullsh*t piled up around here so fast you needed wings to stay above it!”
Jan 17, 2009 - 10:56 pm 18. The Historian:TAX CUTS CAN END THIS RECESSION
Business, not government, is the only force big enough to turn around the economy.
http://greensrealworld.blogspot.com/2009/01/business-not-government-will-drive-away.html
Jan 18, 2009 - 12:21 pm 19. rodguy911:Many people think that Obama is a socialist and his adm. is there only to incrementally advance socialism at the expense of the producers who make free market captalism successful.
Jan 18, 2009 - 2:36 pm 20. Justin:Giving out checks Santa Claus style and to many who don’t even pay income tax(I always thought that was a welfare check, silly me)does nothing more than crank up the govt. printing presses, again, and cretes a huge debt for our kids’ kids. Since our kids are already indebt up to their Obamas.
Paragraph two:
“The key thing to understand is that not all tax cuts are created equal. If policy makers want to boost growth, they need to reduce marginal tax rates on productive behavior such as work…”
I could not agree more.
A straight line above board $50 or so million dollar raise to every executive in Detroit asking for it in whatever form.
A straight line $500 million dollar performance increase for all former Goldman-Sachs employees currently employed by the Federal Government.
Similar performance based multi-million dollar pay increases following the US Military E-5’s and below ranks for successfully expelling any obvious deviant who is obviously deviant for earning under $50,000 annually.
Well, except for anyone qualifying under paragraph 3, line 3 any of the above exempted shall retroactively be exempted from immediate deportation. All of those not qualifying under the exemptions granted retroactively under the provisions subject to the lines above the enumerated provisions therunder shall follow on to the boats in order to enforce said provisions.
Any objecting individual(s) must Swear on Oath that:
1. That individual has received Pre-Obama bailout funds (and is not a former Goldman Sachs employee) or
2. That individual Swears on Oath that he or she abandoned all the principals he or she previously Swore to Uphold.
Provisions under Article 2 include but are not limited to: being a director, board member, oil-company executive whose company holds it’s major cash reserves outside the jurisdictional boundaries of the US – any elected official – and/or anyone not earning in excess of $50,000 annually who agrees to pass bottled water on the deportation boats and/or does not plan to return to the immediate environs of Crawford Texas. (For the purposes of this law – all former owners of Professional Baseball Teams are not, nor shall be held subject to any of the obove Provisions.)
Jan 19, 2009 - 1:59 am 21. naomi mccown:Hi, Obama. why low income people have pay for taxes if youre on fixed income. i’m widow lost my husband from cancer. had kentucky medi insurance for he died. then gov takes my insurance away. so im rasing son who is 14, so why should middle class people need pay taxes when things go bad in washington d.c then we the people of american , they want us pay for the money back, where did the money go…. we are not stuiped american’s so i hope and pray god .and i beleive you can get usa back on our feet. i voted for you have been dec. all my life.our insurance health ,needs help and widows also./ and why should kentuckians need pay taxes on gas prices? i wont miss big tuseday you been sworn in. God bless ,we love you Obama. p.s if any can take big job on it is you to do. i myself has faith, will be at home tuseday, watching the great day for you be sworn in……….. we love you
Jan 19, 2009 - 7:13 am 22. Thom Fisher:pretty lame argument. A vast majority of analysts, and the rublican administration’s own numbers, show that the biggest bang for the buck for job creation are 1) food stamps 2) extending unemployment benefits 3) infrastructure development 4)aid to state governments 5) across the board tax cuts 6) capital gains tax cuts 7) corporate tax cut
extended Bush tax cuts.
read it yourself.
http://wonkroom.thinkprogress.org/2009/01/13/progressive-investment/
but don’t let facts get in the way of your ideology. I work for a major corporation, with defense contracts, and I’m more than pleased to have republican loyalists vote to benefit me and not themselves.
Jan 19, 2009 - 5:05 pm 23. Thom Fisher:I hope the conservatives never wake up.
It’s amazing the entire Republican mission is to lower taxes for the richest people. The highest bracket was 38% before Bush took over. Then he lowered it to 35%. That 3% is what the screaming is all about. Raise it from 35% back up to 38% and many of our nation’s problems get solved, and all the rich peopel will get their passports and move their families to the Cayman Islands. Fine by me. If 3% breaks these people, send ‘em away. I have no time for their whining.
Jan 19, 2009 - 5:10 pm 24. Lily:Hey Thom: The Rich are the one’s who pay taxes. You cannot lower taxes on people who don’t pay them.
Also, I don’t care what your ’study’ says (it says what those who paid for it wanted it to say), a dollar spent in the private sector has more ‘bang’ in the economy than a dollar spent in the public sector. The private sector seeks to maximize efficiencies whereas the public sector’s decisions are effected by all sorts of ‘noise’ that interferes with its ability to make the best decisions monetarily. – for example, government pushed lenders to make loans to lower income (often uncreditworthly) borrowers for socially desirable outcomes, that turned out to be financially foolish and harmful, most especially harmful to those they purported to help.
Jan 20, 2009 - 9:51 am