The Corner

Obama Administration Mopes About Its Tax Cuts

The New York Times has an interesting piece today reporting a previously unknown (to me) tactic the Obama administration used in an attempt to make its temporary Keynesian tax rebates (brought to you by the stimulus bill) more stimulative:

Faced with evidence that people were more likely to save than spend the tax rebate checks they received during the Bush administration, the Obama administration decided to take a different tack: it arranged for less tax money to be withheld from people’s paychecks.

They reasoned that people would be more likely to spend a small, recurring extra bit of money that they might not even notice, and that the quicker the money was spent, the faster it would cycle through the economy.

To me, this demonstrates just how much of the administration’s thinking is guided by Keynesian economics, pump-priming, aggregate-demand-goosing, whatever you want to call it. If the problem you’re trying to solve is how to get people to spend more money faster, then you are absolutely committed to a profoundly flawed set of views about what ails this economy and what is likely to help it grow. Early on, this administration decided that the banking system couldn’t handle the rapid, large-scale resolution of all the bad debt that is still clogging the system and causing innumerable economic problems for borrowers and lenders large and small. Fine. I disagreed with the administration’s decision to duck those problems, but I lacked then and continue to lack the knowledge required to adequately assess whether the FDIC, the Treasury, and the Fed could have managed the resolution, nationalization, and/or liquidation of one or more of the big money-center banks last year — or, for that matter, what would have happened if we hadn’t TARPed the economy. But I think we should all be able to agree that spending is just a symptom of a symptom. Should we give people their temporary tax rebate all at once or a little at a time? Tell you what: If my car has a hole in the gas tank, I’m not going to spend a lot of time agonizing over whether to use premium or regular unleaded. I’m going to try to fix the hole.

This is not to say that government shouldn’t always be working to make the tax code less of a drag on economic activity. When conservatives talk about cutting taxes, that’s usually what they mean — not this Keynesian demand-management stuff. The economic bang-for-the-buck that comes from cutting taxes has to do with incentives, not spending. The Times advances the thesis that, whatever the economic merits of the decision, doing a stealth tax cut was not very smart politics, and the administration officials who talked to the Times do their usual routine of saying self-gratifying things about their political bravery when faced with doing the right thing vs. the politically popular thing. But in giving small tax rebates to middle-income workers — workers whose incentives are mostly fixed — the administration chose to do the politically popular thing instead of the right (or correct, if you prefer) thing. The right thing to do, if you’re going to cut taxes, is to cut them for businesses and high earners so as to strengthen their incentives to expand, invest, produce more, and work more efficiently. Of course, these are the groups whose taxes Obama seeks to raise. 

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