Tax Cut Hysteria

Whenever I need a good laugh, I just type in "tax cut" and "liberal" into my google webpage. Then I can read all the nonsense and hatred I want. But recently, a couple of economists had a debate on the merit of George W. Bush's tax cuts. For those unfamilar with macroeconomics, textbook macro theory states that during a recession governments, if they want to lessen the extent of a recession, should pursue countercyclical discretionary policy (ie cut taxes and increase spending.) This really isn't a partisan issue. JFK pursued the same policy during the 1960's. Rather, the point of contention among serious economists is how effective (justified?) The Bush Tax Cut was.

Noam Scheiber of The New Republic writes:

Liberals in Congress and at places like the Economic Policy Institute complain that the Bushies should have targeted the bulk of their tax cuts toward the working poor and middle class, who were more likely to spend their tax savings than more affluent beneficiaries were...

...[However] there is evidence that affluent people spend a higher proportion of their income than economic models have traditionally predicted. And, Democrats' complaints notwithstanding, the tax cuts provided plenty of stimulus when it counted. In all, according to Stephen Roach, Morgan Stanley's chief global economist, the tax cut provided about 1.5 percentage points of economic growth last year (which amounts to about $150 billion in a $10 trillion economy)."

Arnold Kling, another economist, notes the following:"The complaint that the tax cuts went to "the wrong people" simply does not fit the macroeconomic facts."

But, as he later points out, this doesn't stop the partisan economists from having seizures. Brad Delong, a liberal economist who served under Clinton, said that
"A fiscal policy that redirected tax-cut-for-the-rich money to the states, that compressed the deficit and delivered more short-term stimulus, and that did target more tax cuts at the non-rich would have had no trouble delivering twice as much stimulus."

Arnold wants him to use some econometrics to back up his assertion. He should. But I think there are a few other points here that are worth pondering. Who exactly pays taxes? If we are going to actually meaningfully cut taxes, how do we go about doing it? Well the top 50% income earners pay 96.09% of all taxes (IRS). Any tax cut that is implemented is going to skew towards the rich because the rich pay almost all of the taxes. You cannot have a standard tax cut for lower income wage earners because they do not pay all of the taxes.

In order to implement Dr. Delong's policy, one would have to come up with some sort of redistribution plan, ie taking tax money from the rich and giving it to the poor. But this would most likely have to be temporary. But then temporary tax cuts do not have as strong an affect on output as permanent tax cuts. So what does Dr. Delong want to do, create a permanent redistribution program? Does he want to skew income taxes even more to the rich?? I hope not.

While in the short term this may be stimulative, it would have long run negative consequences I am not comfortable with (every recession we would be cutting taxes for the middle class. Eventually, what happens is only the rich pay taxes and it becomes impossible to cut taxes for the middle class anymore....kinda like what we have now). Rather, it is prudent to cut taxes across the board in order to mitigate this effect. To the extent that Bush has done this is the point I am most interested in.

All in all, I would give Bush a B on economic policy. I think the tax cut implemented was based off of both theory and prudence and was thust justified given the current climate. Dr. Delong would be more justified in criticizing Bush's spending priorities rather than his tax policies (NASA just had their Mars space probe hammer a rock yesterday, yeah thats not a waste of money)

Update-It occured to me that Delong may advocate something along the lines of a payroll tax cut, as poorer people tend to pay more in payroll taxes than rich people (its a regressive tax). After talking this over with a few people, I believe that in an ideal world Dr. Delong is right. The payroll tax may, on average, deliver more stimulus than an income tax cut. However, in order to implement this policy the payroll tax would have to be permanent because temporary tax cuts do not stimulate as much as permanent tax cuts. There may be an argument here for a permanent tax rate cut (such a payroll tax cut may force congress to start getting serious about future benefit grants in the social security system). But this is the third rail of American politics. If Bush were to argue for a permanent payroll tax cut, he would be bashed by both the left and the right for raiding social security. It would have been a political ticking time bomb.