The Shotgun Blog
Saturday, December 27, 2008
The right stimulus plan: cut taxes
While some "pro-enterprise" and "pro-market" think tanks are calling on more government spending, and confusing everybody about the very meaning of those words, others are slowly speaking out about what would really work -- tax cuts. Now that's a pro-market position that I can endorse, and I'm glad to see that the demand for tax cuts, at least amongst certain members of the blogosphere, are gathering steam.
For example, Greg Mankiw, professor of economics at Harvard, is suggesting payroll tax cuts (albeit with increases in gasoline taxes, which I'm not keen on). He writes:
How about an immediate and permanent reduction in the payroll tax, financed by a gradual, permanent, and substantial increase in the gasoline tax? Make the two tax changes equal in present value, so while the package results in a short-run budget deficit, there is no long-term budget impact. Call it the create-jobs, save-the-environment, reduce-traffic-congestion, budget-neutral tax shift.
Permanent tax cuts offer a much better option. The incoming chairman of the Council of Economic Advisers, Christina Romer, has estimated that the macroeconomic benefits of tax cuts can be two to three times larger than common estimates of the benefits related to spending increases. The relative advantage of tax cuts over spending is even clearer when the recession is centered on the household balance sheet. Some relatively minor changes, like making the current 15 percent tax rate on dividends and capital gains permanent, would not only help household cash flow, but also put a floor under equity prices much as their introduction did in 2003. This would help protect against further wealth destruction and balance sheet deterioration.
But the centerpiece of any tax cut should be employment taxes: in particular, a permanent halving of the current 12.4 percent Social Security payroll tax on the first $106,800 of wages, split evenly between workers and employers. The direct revenue effect of that would be a bit under $400 billion per year, roughly in line with the present quantitative needs of the economy.
There's more, of course, but this is enough, I hope, to whet your appetite, and give you, dear pro-free market, pro-small government devotee, just a little bit of reason for optimism. Because I'm looking high-and-low for reasons to feel optimistic.
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