Friday, January 18, 2008

oh no, another sub-optimal tax cut from Bush?

Among income tax cuts, economists distinguish between those that
a.) simply send money to people; and
b.) those that cut marginal tax rates on income.

Bush's two modest tax cuts, early in his administration, were one of each. And most of what I'm hearing about contemporary proposals is cutting more checks for people.

Unfortunately, economists are not nearly as excited about A as they are about B. Both types of tax cut can put the same amount of money in people's pockets-- and thus, both increase consumption and investment. But only B gives people a greater incentive to engage in productive behavior (since they get to keep more of the fruits of their labor).

Connecting this to economic theory, A is a Keynesian tax cut and B is a "Supply-side" tax cut (since it directly changes the incentives for product and labor supply). Bush's tax antics are making it easier for me to teach Macro. But it's a sub-optimal policy choice.

The other problem with A is that it does not increase productive behavior. So, it is merely moving resources from one area to another-- or here, from the future to the current. We would finance such tax cuts with more debt. Thus, future taxpayers will pay a greater tab while current taxpayers catch a break.

Unfortunately, a crucial point like this will probably be relegated to the sidelines, trampled by the political excitement of sending and receiving a big check from the government. The argument will get some play, but probably not enough to influence policy-- when most of our leaders don't understand basic concepts in economics.


At February 18, 2008 at 4:33 AM , Anonymous Anonymous said...

This comment has been removed by a blog administrator.


Post a Comment

Subscribe to Post Comments [Atom]

<< Home