"Tax Cuts May Prove Better for Politicians Than for Economy
...because another round of government stimulus spending is considered politically unviable even if it were warranted, the debate over the tax cuts will be laced with promises to spur economic activity and reduce unemployment. The concept of lower taxes is so appealing to voters that many embrace them as an economic cure-all.
But economic research suggests that tax cuts...have limited ability to bolster the flagging economy because they are essentially a supply-side remedy for a problem caused by lack of demand.
The nonpartisan Congressional Budget Office this year analyzed the short-term effects of 11 policy options and found that extending the tax cuts would be the least effective way to spur the economy and reduce unemployment. The report added that tax cuts for high earners would have the smallest “bang for the buck,” because wealthy Americans were more likely to save their money than spend it.
The office gave higher marks to the proposal, now embraced by President Obama, to allow small businesses to write off 100 percent of their investment costs.
Neither of those options, though, would do as much to stimulate the economy as offering direct payments to the unemployed and Social Security recipients or reducing the payroll taxes of workers, the study found. But those proposals — as well as aid to states and municipalities — are considered politically untenable with many elected officials reluctant to even utter the word “stimulus” after the $787 billion stimulus.
...When they were signed into law in 2001 and 2003, the huge package of income and capital gains tax reductions that became known as the Bush tax cuts were hailed as a way distribute the government surplus and promote long-term economic growth. Mr. Bush was so confident in their power to generate business growth and revenue that he predicted they would enable the government to pay down $1 trillion in debt in just four years.
Those surpluses have now become crushing deficits because of a combination of factors, including the recession, the cost of the wars in Iraq and Afghanistan, the Medicare prescription drug benefit, and the $1.7 trillion in forgone revenue from the tax cuts themselves.
The specter of a ballooning national debt has led even some of the early supporters of the cuts, including the former Federal Reserve chairman Alan Greenspan, to advocate letting them expire.
...Mr. Obama’s proposal would preserve the tax cuts for families that earn less than $250,000 a year (or individuals who make less than $200,000) at a cost of $2.8 trillion over the next decade.
...the narrow confines of the debate show how successful antitax groups have been in defining the terms used to discuss tax policy.
...Edward D. Kleinbard, former chief of staff of the bipartisan Joint Committee on Taxation, said the reliance on tax expenditures had distorted the budget process because it induced the public to overlook the fact that — unless they are accompanied by spending reductions — tax cuts have the same effect on the deficit as additional spending.
...“The thought that tax cuts pay for themselves or that tax cuts alone can turn around this economy is magical thinking,” said Mr. Kleinbard, now a law professor at the University of Southern California. “The debate has become so unrealistic it makes you want to scream.”"
By David Kocieniewski
New York Times