More on Tax Cuts

Here's my former co-blogger Ari's (who is a PhD economist) take on tax cuts as an economic stimulus:

Tax cuts clearly are not the answer. All we've done over the last seven years is push off the inevitable. We were headed for a recession in 2000 that was temporarily stemmed off by the extra $300 or so that people received that year. That should have left us with a low level of growth, but enough that we wouldn't be in a recession in 2001. The reason we did go into a recession then was due to the market crash in September following 9/11. That said, we've never really had any solid growth since then. All we've done is lengthened the impending downturn by fiddling with the economy.

Our economy is governed by two (sometimes opposing) forms of policy:
monetary (the Fed) and fiscal (the government). Time and time again, we've seen that the government messes things up because politically and ideologically driven motivation to change the economy often work contrary to the concept of slow, sustainable growth.

For instance, this current administration decided that it would be a good idea to devalue the US dollar to help US corporations increase their exports. Cheaper dollars mean more sales overseas and therefore more profit (in terms of dollars). The problem was that when faced with the choice between selling something here for $10 or something abroad for $12, the choice was simple -- raise domestic prices. Couple that with the inflation we've been facing on food and fuel, and you've got a situation where the top 1% benefited at the cost of the bottom 99%.

Thirdly, Bernanke's operating as a Bush partisan right now and working to further bail out business by cutting rates any time the market hits a speed bump.

So right now, if we're looking for a quick fix, offer up a tax rebate on payroll taxes. Give working people credits against the first 15,000 they earn on the job which, mind you, is fully taxed for social security and medicare. That'll let them afford those goods that they no longer can buy at current prices.

Then later for a better long term fix, instead of rescinding that program, alter it so that it gets paid for by removing the cap on payroll taxes where people earning six figures pay the same total amount in taxes as upper middle class people (payroll taxes only affect the first $90K or so of your income).

Why would that fix work in the short run? Simple. Poor people spend every cent they have. Rich people spend a smaller portion of it. That quick boost could help us smooth out our consumption over this tight period that has now become inescapable. And in the long run? It should still provide a large enough stream of income to keep our entitlements from drying up.

To really fix the system... We're going to need to clean house of all the supply-siders in the Fed and Treasury Department and go back to what worked in the 1940s, 1950s, 1960s, and 1990s. And that's going to take a few years and a patient Democratic president.

Labels: Economy

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