The “Tax Cut” Bill

I have problems calling the bill currently in Congress about tax rates a “tax cut” bill.  Yes, there are some genuine “cuts”.  But most of it is fake cuts.  Congress and the Bush administration made a promise 10 years ago to raise our taxes at this time.  Now the current Congress decides to not actually do the previously-promised increase.  That’s not a real “cut” in my book, it’s a reprieve from a threat.  I mean, suppose I hold a gun to your head and promise to shoot you next Sunday. Then on Saturday, I decide to drop the gun and not shoot you for another two weeks.  Can we really say I “saved your life”?

Nonetheless, since everybody seems to want to call it a “tax cut” bill, I will too.  So what’s my take on the bill? It’s bad, very bad, and very poorly done.  But it’s also necessary at this time.  It’s probably the best we can get with this Congress and this President.

Most important, while necessary, it won’t do the job people want it to do.  People want genuine recovery. People want jobs and the unemployment rate to decline from near 10% back down to full employment (under 5% at least).  This bill won’t do that.  It’s too small.  And, it’s structured wrong.

First, it’s too small.  The biggest problem with the original Obama stimulus bill (there were several problems) was that it was too small.  It was clear by December 2008 that we needed a fiscal stimulus at least twice as big as what we got. And we needed it extended for longer. Politics triumphed and we got a bare-bones.   Instead of triggering recovery, it simply stopped the decline.  This bill repeats the mistake. While at first it looks big ($857 billion), most of it is simply perpetuating the current tax rates  – little new stimulus.  What stimulus is there, the unemployment benefits extension and the payroll tax cut (Social Security tax) amounts to maybe $200 billion or so for one year.  At best, I expect this bill to help lower unemployment to 8-8.5% during 2011.  Not enough.

Second, it’s poorly structured.  Despite the fury, rage, and disdain conservatives claim to have for “Keynesianism”, make no mistake. This is a Keynesian stimulus bill.  A poorly designed one, but one just the same.  Why?

There are two ways to implement stimulus fiscal policy: increase government spending or decrease taxes.  This bill is almost all decrease taxes.  The problem with cutting taxes as a way to stimulate the economy is basic Econ 202 principles stuff.  A tax cut may get saved, put in the bank, or used to pay down debt.  Not all of it gets spent by households.  Without the spending, no stimulus.  With this bill slanted towards tax cuts for the higher income folks it is highly likely that much of it will be saved or used to pay down debt.  The only real spending part is the extension of unemployment benefits.  That stimulus money gets spent immediately and helps generates demand for jobs.  For evidence, see here.

There are more problems with the bill, but I’m out of time right now and will address them in another post.  In particular, there are possible consequences for Social Security.