Permanent vs. Temporary Tax Cuts

As a general rule of thumb, always be skeptical when someone advocates a temporary tax cut. Economic theory states that permanent tax cuts are much more effective than temporary tax cuts. Milton Friedman's consumption hyptothesis states, and has ample evidence to support it, that transitory changes in tax rates have little impact on current fiscal decisions.

With this in mind, I want to fisk one critique from Jonathan Chait. He remarks that:

The first is that, in some cases, you actually get more bang for your buck in the short term with a temporary tax cut than with a permanent one. The most obvious example is a tax cut designed to stimulate business spending. If this tax cut were permanent, then businesses wouldn't bother altering the timing of their spending, since it would make no difference, from a tax standpoint, whether they spent the money now or later. It's only if the tax cut expired in, say, a year that they'd have to move quickly to get their benefits.

Actually, that is not the case. As the American Enterprise Institute puts it:

Short-term investment tax breaks, in contrast, have little effect on decisions to undertake long-term investments, and often waste resources by benefiting investments that were already in the pipeline.

Perhaps the tax cut could have been skewed a bit more towards the middle class. But income taxes are so progressive that if any permanent cut in income taxes was to be undertaken, it was inevitably going to skew towards wealthy Americans.