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Morning Bell: Permanent Tax Cuts Only Please

Posted By Conn Carroll On December 29, 2008 @ 9:06 am In Ongoing Priorities | Comments Disabled

There are still plenty of terrible economic stimulus ideas coming out of President-elect Barack Obama’s transition team, but there were some encouraging admissions from Obama senior adviser David Axelrod this Sunday on Meet the Press [1]. Asked by NBC’s David Gregory if Obama would break his promise to the American people to lower taxes, Axelrod said:

Look, we feel it’s important that, that middle-class people get some relief now. He’s promised a middle-class tax cut. This package will include a, a portion of that tax cut that will become part of the permanent tax cut he’ll have in his, his upcoming budget. It’s, it’s, it’s vital people are, are–need money in their pockets to, to spend. That’ll help get our economy going again.

We hope that this statement by Axelrod signals the acceptance by the Obama administration of a long held conservative belief, namely: that temporary tax cuts are ineffective at stimulating the economy while permanent tax cuts are the best way to encourage both short and long term economic growth. [2] As former Treasury undersecretary John Taylor recently explained [3]:

According to the permanent-income theory of Milton Friedman, or the life-cycle theory of Franco Modigliani, temporary increases in income will not lead to significant increases in consumption. However, if increases are longer-term, as in the case of permanent tax cut, then consumption is increased, and by a significant amount.

The Washington Post reports that the incoming Obama administration has not yet determined what form these permanent tax cuts will take, but to maximize effectiveness the cuts should be as broad as possible and not limited to narrow tax loopholes restricted to only those families who engage in activities that Washington decides are worthy. [4]

As encouraging as Axelrod’s commitment to permanent middle-class tax cuts was, his blind devotion to tax increases on the most productive Americans was equally discouraging. Asked by Gregory if Obama still planned to raise taxes Axelrod said:

Well, look, the question is on the Bush tax cuts for the very wealthiest Americans, and it’s something that we plainly can’t afford moving forward. And whether it, it, it expires or whether we repeal it a little bit early we’ll determine later, but it’s going to go. It has to go.

At a time when the Obama team is proposing $775 billion in new spending, calling tax cuts “something that we plainly can’t afford” is laughable. We hope that before Obama pursues this course he consults with his Council of Economic Advisers chairman Christina Romer, who has published economic studies concluding that: 1) tax increases harm economic growth [5]; 2) tax cuts lead to greater economic activity [6]; and 3) government spending has at best a small effect on stimulating economic activity [7].

Furthermore, we hope that the President-elect’s team isn’t falling back into their dangerous idea of “major” redistribution of wealth.  Axelrod went on to say:

In other words, when you add up the tax cuts and the change–the expiration or the repeal of, of the tax cut for the wealthy, it’ll amount to a net tax cut for the American people.  It’ll just restore some balance, David, which we badly need.

“Balance” can only mean redistribution, which will inevitably lead to lower levels of entrepreneurial activity, reduced investment and lower wages for all workers, especially those in lower-skilled jobs.  We hope that President-elect Obama recognizes the needs for permanent tax cuts across the board, for all Americans.

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URL to article: http://blog.heritage.org/2008/12/29/morning-bell-permanent-tax-cuts-only-please/

URLs in this post:

[1] Meet the Press: http://www.msnbc.msn.com/id/28408003/

[2] that temporary tax cuts are ineffective at stimulating the economy while permanent tax cuts are the best way to encourage both short and long term economic growth.: http://www.heritage.org/Research/Taxes/wm2152.cfm

[3] recently explained: http://online.wsj.com/article/SB122757149157954723.html

[4] the cuts should be as broad as possible and not limited to narrow tax loopholes restricted to only those families who engage in activities that Washington decides are worthy.: http://www.heritage.org/Research/Taxes/sr29.cfm

[5] tax increases harm economic growth: http://www.nber.org/papers/w13264

[6] tax cuts lead to greater economic activity: http://www.econ.berkeley.edu/%7Ecromer/draft507.pdf

[7] government spending has at best a small effect on stimulating economic activity: http://www.nber.org/papers/w4765

[8] lowest level in more than 50 years: http://www.usatoday.com/news/nation/2008-12-28-copdeaths_N.htm

[9] initial steps: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/12/28/MN4G14QMVE.DTL

[10] settled the lawsuit filed by environmentalists: http://www.nytimes.com/2008/12/29/us/29sonar.html?ref=todayspaper

[11] global trade will shrink: http://www.usatoday.com/money/economy/2008-12-28-global-import-export-trade-slump_N.htm

[12] lowest level since the mid-1970s: http://www.usatoday.com/news/nation/2008-12-28-bordercrossings_N.htm

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