2009-02-05

Tax cuts are a bad idea

A stimulus package should encourage spending. In that respect, it's ironic to rely on this tool, since an orgy of debt heavy consumer spending on credit cards and silly mortgages is what got us here in the first place. A mild, several year long recession would likely be good for the economy in the long-term.

What it needs is a controlled burn in the forest to clear out the dead wood. That's what a mild recession would do for us, and we probably should have had one a couple years ago. But we didn't, and that controlled burn has now turned into a massive conflagration set to level a major metropolis. It's too severe to just let it burn. Thus, I am resigned to a massive stimulus package.

That package should focus on infrastructure -- transit systems, roads, new power transmission lines, enhanced nationwide broadband access, new energy technology, new materials, bridges, space exploration, and other items of that ilk. Some of these projects may be pork, but that's okay. The point is to put people to work -- get those private construction companies moving again. Make sure their employees spend money in their communities and employ even more people.

At the end of the stimulus period, either the economy will be moving again, or it won't. If it is, that's great. If not, well, at least we will have all this new infrastructure which we desperately need. And people had work. The money will not be wasted.

An additional benefit of the massive infrastructure spending is that not only will we get this cool new stuff, we'll get it cheap. People will work for less money. Steel, oil, and other raw materials are cheaper than they have been for years.

Plus, if we make these investments only when "we can afford it" in a strong economy we are also stealing labor and resources from the private sector's own growth initiatives. Let's get the infrastructure done now when we don't have to compete with the private sector. The country will be stronger for it and already have the key blocks in place when the next boom begins.

Of course this is all money the government is borrowing and we have to pay back, but that is also cheaper than it has been for years.

If you have the capacity to borrow and spend money this is now the best, cheapest possible time to do it.

There was a lot of stuff like that in the House version of the bill.

My concern is the tax cuts. The $800 billion package include more than $200 billion in tax cuts and rebates. The latest details are a bit challenging to nail down.

The problem with tax cuts and government stimulus checks in a bad economy is that they don't encourage spending. Responsible people will not spend that money on new stuff. Instead, it will go to pay down bills. Or it will go into savings for the hard times ahead.

And that's exactly what people should do with those savings. That demonstrates great personal responsibility.

But it won't stimulate the economy. It won't get other people employed. It won't bring more manufacturing on line. It won't drive increased investment by technology companies.

In short, it won't move things forward.

But I don't see anyone opposing middle class tax cuts anytime soon. As much as I hate to say it, the best compromise will be to leave the tax rates alone. Don't send out a "stimulus" check. Instead, provide tax credits for purchases.

I normally don't like tax credits and deductions. They make completing tax forms more complicated than they should be and are one of the reasons our tax code is such a mess.

But the point of the tax reductions in the bill isn't to save people money. It's to stimulate the economy.

So let's replace those tax cuts with rebates for buying things. For education. Or for buying a new, energy efficient car. Or for making substantial home improvements (spend $10K on your kitchen? Get a $5K tax credit). Or for paying for child care. Or for moving to a part of the country that needs a specific set of skills.

By putting those tax reductions in the form of tax credits, we take the money out of the savings accounts and put it to working creating jobs for people. The people in those jobs can now, in turn, make their own purchase.

Saving money doesn't move the economy forward. Spending does. Whether that spending is private or tax payer funded doesn't matter. Nothing happens until someone buys something. And that's what a stimulus package needs to encourage.

Tax credits for buying stuff will do that. Tax rate cuts and generic stimulus checks will not.

8 comments:

Carol said...

It's a simple solution, and yet, people can't see beyond the end of their nose and will hear tax cuts and be all for them. You are so right. We need to spend money to get this economy going. Too bad Obama didn't add you to the cabinet. :)

Chameleon said...

I heartily agree on the infrastructure spending - it has to happen and should have been happening all along. If it had been, we wouldn't be seeing bridge collapses and water main breaks and widespread flooding and power outages. I don't like stimulus checks either. What I do support is a temporary tax cut that goes directly to people's paychecks for six months to a year - not with the intent of getting people to go out and buy new things, but to loosen up the strings that have people afraid to go buy a cup of coffee at the diner. A $500 check isn't going to stimulate anything. $25 extra a week in the paycheck is a different story. It will go into groceries and gas and the "little luxuries" that people are forgoing right now in the interests of being frugal 'just in case'. We don't need people to go on buying sprees. We need them to spend normally, and managed tax cuts will do just that.

Sadie said...

I completely agree with you. Here's my thing. Why not cut government spending instead of cutting taxpayer spending? Use the money to boost the economy from the ground up. Isn't that what he promised to do before he got into office?

Shinade said...

I think this is one of the best written posts relating to this issue that I have ever read.

I agree that we are too far gone now to simply ride this out. We are going to have to do something.

I think you have lain out a great plan here in this post.

As for the tax cuts I don't agree that people can't see past there noses.

At least not all of us. I would like to see tax credits given for such things as home improvement.

We for instance could truly benefit if we could afford new storm windows and doors. We also would love to install some solar power.

But, we cannot afford to do it alone without some help from some where. Tax credits would help us be able to do this.

This would put money out into the economy as we buy the products and also help with our energy problem.

Great post!!:-)

Cromely said...

@Carol: Thanks. I'm waiting for their call and am looking forward to my Senate confirmation hearing.

@Chameleon I don't think you need any legislation to do that. A quick trip to HR and a new W4 should make it easy to reduce paycheck witholdings. OF course, you have to make up for it by April 15 2010. Tax credits can reduce that burden, however.

@Sadie Be late Sepetember, at least, I don't think Obama was promising to cut spending. He was promising to cut waste and to cut corruption. He was talking about give tax breaks to those earning less than $200,000/year. However, I think much of the savings was from cost reduction in places like Iraq. But the situation deteriorated so rapidly in October and November, I think it's important for his plans to adapt to this new and challenging environment.

The problem with just cutting taxes and letting it build form the ground up is that people won't spend the extra money that comes from those cuts. Everyone is too scared to spend the money.

We need massive activity to get the economy going, and right now, the Federal Gov't is the only instituion that can do that. That activity will then spur individual economic activity and helps us get things going again. Plus we get the added benefit of much needed infrastructure imporvements.

@Shinade: Thanks. I appreciate taht. The credits for helping people with their own infrastructure will help both the ecnomy an their own lives.

Book Calendar said...

I would like regular taxes to stay the same and for them to introduce some luxury taxes and fees which are not as visible. Maybe we could have a high fructose corn syrup tax to reduce its consumption... a hummer and giant vehicle tax... cigarette taxes... alcohol taxes... candy taxes... ridiculous taxes.

This could be balanced by some incentives like an energy conservation incentive... a small business investment incentive..., etc.

Denise Lee said...

This honestly is the most fair and balanced post that I have read about the whole stimulus thing. Well done and I totally agree. And I love your explanation of where we've been and where we are going,all that in such a short Colin friendly post-:)

Harrison said...

Giving tax credits to businesses will allow them to buy new inventory, expand advertising, and hire people... that is what is needed but instead we get pork.