(1) Having just criticized Uwe Reinhardt, I found his short post on capital gains and corporate taxes at Economix very helpful:

Whenever proposals are made to raise the tax rates on capital gains, a howl goes up from supply-side economists, who argue that an increase will stifle economic growth and job creation. They assert that the tax would discourage investors from risking their capital on the creation of businesses or the job-creating expansion of existing businesses.
This argument is persuasive as far as direct investments in expanding productive capacity is concerned. It much less persuasive when applied to long-term capital gains on transactions in existing assets, be they outstanding financial securities or real estate, such as residential homes. And it is completely unpersuasive when applied to art or coin collections.

With that in mind, Reinhardt writes:

In short, instead of raising or lowering the current long-term capital gains tax, Congress should consider aiming the tax preference at only those investments in capital assets that directly and powerfully contribute to economic growth and job creation. Mere bets on the movement of prices of already existing assets should be taxed as ordinary income.

The problem, of course, is determined which investments “directly and powerfully contribute to economic growth and job creation,” and it would be helpful for Reinhardt to give us some sketch of how he intends to administer the tax in question at reasonable cost.

(2) Via Will Wilkinson, economist Vernon L. Smith has written a mini-manifesto on how to revive the economy for The Daily Beast. Part of Smith’s piece is inaccurate:

So what has been the government’s response in the current crisis? Besides spending stimulus, it was tax incentives for new home buyers and cash for clunkers if you bought a new car. All three are programs for borrowing output, homes and cars from future production and sales. Using subsidies to pump up home sales beyond what people could afford was the problem that led to the crisis. Now the problem is touted as the solution.

I take Smith’s broader point, yet he cites $860 billion federal stimulus bill as the heart of the government’s response to the current crisis and the composition of the federal stimulus bill wasn’t quite as he (seems) to describe it.

Though I certainly think the home buyers tax credit and cash for clunkers weren’t attractive policies, the real problem with ARRA is that it paved the way for a number of new permanent spending initiatives, as the CRFB pointed out back in February:

In fact, the budget includes over $1 trillion to extend policies which were enacted under the ARRA. In fairness, the majority of this money comes from continued AMT patches — something which was “current policy” long before it was put into the stimulus bill (which is why it should not have been there in the first place). However, even when this is excluded, the budget spends at least $376 billion to make permanent ARRA measures. Worse still, many of these policies are includedin the baseline, hidden away as “current policy” when they in fact are anything but. (Following our blog post on this, the Wall Street Journal called the ARRA ’The Eternal Stimulus’.)
If the President’s budget were enacted into law, and we exclude future AMT patches, what was originally supposed to have been a $787 billion bill will result in closer to $1.4 trillion of spending and tax cuts. And even that assumes policymakers do not make futher extensions to any number of termporary stimulus measures.
This is why we have argued repeatedly that stimulus should stimulate, not push an agenda. And to keep policy makers honest, we believe that all future stilmulus spending should be be fully offset — even if these offsets occur in the out-years. Otherwise, the medicine meant to heal an unhealthy economy can become addictive, and ultimately do far more harm than good.

To that end, Smith proposes a stimulus that stimulates.

Our best shot at increasing employment and output is to reduce business taxes and the cost of creating new start-up companies. Don’t subsidize them; just reduce their taxes even as they become larger; also reduce any unnecessary impediments to their formation.

The inevitable rejoinder to this, from Karl Smith and others, will be that we’re dealing with a demand problem, and there’s obviously something to this. I’m sympathetic to Smith’s argument, yet I’m hard-pressed to think of how we design the kind of tax incentive we’d need to spur job creation. Greg Mankiw has described the problem with targeting marginal jobs. Perhaps the time has come for a payroll tax cut, and accepting that much of the impact will be inframarginal, giving many families an opportunity to repair their balance sheets at the expense of increasing public debt levels. (Niklas Blanchard has a fascinating post on this theme at Modeled Behavior.)

(3) Megan McArdle makes the case against extending the Bush tax cuts:

Given the deficits we have, until we find and enact actual offsetting spending cuts (no, I don’t want to hear any more about starving the beast), those tax cuts have to go. And a temporary extension is simply going to make it harder to let them expire next year, for the same reasons that the AMT keeps getting “fixed” on an annual “temporary” basis. It is going to be hard enough, psychologically, for people to give up tax breaks they have had for ten years. Stretching it out longer just makes the pain more fierce.
If you’re worried about the macroeconomic effects, then enact a different temporary tax cut that helps many of the same people–payroll cuts, high standard deductions, a rebate, whatever. But don’t let a tax cut we can’t afford live so long that it becomes immortal. [Emphasis added.]

I think Megan is absolutely right. I want the U.S. to have low taxes. But extending the Bush tax cuts is not the right way to get there, as the Bush White House implicitly acknowledged with its excellent 2005 Tax Reform Commission. As Howard Gleckman suggests, rather than extend the Bush tax cuts we should use their expiration as an opportunity to push tax reform.

Would extending the tax cuts stimulate the economy? Donald [Marron]’s view is this step would boost short-run demand. But, he warned, that prediction comes with several caveats. When it comes to stimulus, all tax cuts are not created equal. Those targeted to low- and moderate-income households would produce more stimulus than those aimed at the rich, who would be less likely to spend the money. And, he added, much of the stimulus would not kick in until 2012, when families would get their 2011 tax refunds.
In the long run, the benefits of extending the tax cuts are less clear, especially if they are not offset with other tax hikes or spending cuts. This is important since, at the moment, neither President Obama nor very many members of Congress are interested in paying that bill.

Rosanne Altshuler, also of the Tax Policy Center, gives a useful overview of what the 2005 panel accomplished, and how it might guide today’s policymakers:

The 2005 panel did make some hard choices, but ones that would have provided real benefits. For example, we already addressed one of the key areas identified for reform by the Volcker panel: simplification of family and work credits. We proposed a new family and work credit to replace the cumbersome hodgepodge of work and family subsidies in the code now. We also eliminated the Alternative Minimum Tax and kept rates no higher than they are today. To do that, we eliminated numerous individual and business tax preferences. Among other changes, the mortgage deduction was capped and converted to a credit, employer provided health benefits above a cap were taxed, and the state and local tax deduction were removed along with other itemized deductions. Such tough choices are necessary to produce a stable, fair, and efficient tax system.

Unfortunately, I’m increasingly convinced that the Obama White House will always choose the more politically expedient course of action, even if it means taking a step endorsed by congressional Republicans.