Friday, December 03, 2010

Let Them Expire!

I honestly can't think of any reason why Obama and Congressional Democrats should try to extend the EGTRRA and JGTRRA (i.e. the "Bush tax cuts").

The Democrats are afraid of being branded as "tax-raisers"... but that's already been happening for the past 2 years (despite the fact that they have reduced taxes) and won't change if the Bush tax cuts are extended.

The Democrats are afraid of paying a political price if they let them expire, and perhaps doing badly in an election... but that's already happened.

The Democrats (some of them, at least) may be afraid that the rise in tax rates in January will hurt the economy... but as Menzie points out, the impact on the economy is actually likely to be quite small. Furthermore, it seems highly probable that, if the Bush tax cuts expire, there will be a serious push early in 2011 to cut taxes, resulting in the negative fiscal shock to the economy being very small and very temporary (and even reversible, if you do things right).

What's more, if it comes to a brand new tax cut package in 2011, then the Democrats can have significant impact in shaping the nature and design of those tax cuts (unlike the Bush tax cuts, which they had almost no role in shaping)... AND the tax cut would clearly and unambiguously be marketable as "the Obama tax cuts".

Remind me again why the Democrats should try to extend the Bush tax cuts?


Tuesday, September 07, 2010

Creative Stimulus

This strikes me as a very good idea:

Obama to Propose Tax Write-Off for Capital Investments

As part of his emerging program to jolt the economic recovery from its stall, President Obama will call this week for allowing businesses to deduct from their taxes through 2011 the full value of new equipment purchase, from computers to utility generators, to increase demand for goods and create jobs.

The upfront deduction would allow businesses of all sizes to keep more money now and would give large corporations, many of which are sitting on cash because of uncertainty about the economy, an incentive to spend and invest.

I tend to think of the problem of kick-starting the economy again as largely a timing and coordination issue; businesses will hire people again at some point (2011? 2012? 2013?), and will without doubt expand their productive capacity at some point in the future, but they are waiting for evidence that the demand for their output will be there before they do so. But of course, if lots of corporations pushed forward that increase in investment and hiring to today, then that would do a lot to help create that missing demand, resulting in a happier outcome for both individuals and firms.

This substantial tax break to be proposed by the administration will provide a serious incentive to businesses to go ahead and undertake that investment and expansion that they have been holding back while they have been waiting for evidence of growing demand. I speak with corporate executives (including corporate tax people) every day in the context of my consulting work, and I have little doubt that this sizeable incentive would indeed have a real impact on many corporate planning decisions.

And what about the deficit? It's an excellent way to provide a short-term bang (around $200 bn over the next 18 months, according to the article) while automatically recouping most of that tax expenditure over subsequent years, leaving a negligible total impact on the total deficit over the next ten years - and therefore a negligible net impact on the government's long-run fiscal situation.

Politically, therefore, this is also one of the few measures the Obama administration could have proposed that may actually garner some Republican support. It's a tax cut. It's for businesses. And it has virtually no impact on the US government's long-run deficit or debt. Given the support that this idea will certainly have from the Chamber of Commerce, Business Roundtable, and other corporate interest groups, it will be problematic for Republicans to mount vehement opposition. Of course, I understand that it's still possible that Republicans will oppose the idea - I've learned never to underestimate the ability of Republicans to be both intellectually and temporally inconsistent. But I do think that it will be difficult for them to be stridently against it.

So full marks go to the administration for a creative proposal that could possibly be a quite effective way to actually help the economy, and that could actually stand a good chance of passage, despite the Republican party's depressingly consistent policy of trying to block all efforts to improve the economy.

- Kash