Saturday, September 11, 2010

More on the Bush tax cuts

Jeffrey Mirron wrote a piece for the NY Times.
This claim is true in part; lower tax rates on the high income earners are obviously beneficial for those earners. Yet this is only part of the story. To stimulate work, saving, and investment, tax cuts have no choice but to favor the taxpayers who respond most to taxes, as well as those likely to save and invest. That means high income earners. So policy must accept some inequality in exchange for more efficiency.
 In theory this is true, but the reality is not nearly as neat as Mirron would like. The wealthy barely responded to the initial tax cut, will there by a lot of change if the tax rates on those making $250,000+ increase?

And in the case of dividend and capital gains taxation, the economy can have its cake and eat it too. These taxes appears to hit wealthy capitalists, but in reality they fall partly on consumers, via higher prices, and on workers, via lower demands for their services when corporations shut down or move overseas. So low taxation of dividends and capital gains helps both low and high income taxpayers.
Warren Buffet has said repeatedly that he does not think it's fair that he pays a lower tax rate than his house cleaner. For those that earn income on investment (via capital gains) they pay an tax rate of 15%. This is lower than more pay on earned income. A lower capital gains tax allows for riskier behavior. One can not writing off the reduction in the capital gains taxes in 2003 as a potential cause of the housing bubble. All of the sudden those make speculative real estate purchases were paying less in taxes.

President Obama is opposed to extending the Bush tax cuts and is instead proposing to allow full write-off of business investment through 2011. This proposal is reasonable, but the impact is likely to be small; this policy merely allows businesses to deduct investment now rather than later as depreciation. Given currently low interest rates, this shifting of expenditure is not worth much.

A different problem with the president’s approach is that it emphasizes short-run stabilization, not long-run efficiency. To prosper over the long haul, the economy needs certainty about taxes, rules, and regulations, not ever-evolving policy initiatives.
Mirron is right on here. Obama needs to allow business to deduct the full amount of their investments permanent. A one year benefit will only create more uncertainty.  I have address the uncertainty of a patchwork policy framework in a previous post. We need to end uncertainty over governmental policy. This could have been done two years ago when we passed ARRA. We should have addressed the tax cuts (my view is to extend the cuts for all tax payers and then in 1-2 years have a slow increase for the high income earners perhaps conditional on economic growth), to counter the impact on future deficits we can offset the tax cuts with reductions in spending (but not until 2015).

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