- The Foundry: Conservative Policy News from The Heritage Foundation - http://blog.heritage.org -

The Deservedly Forgettable Obama Tax Cuts

Posted By Conn Carroll On October 20, 2010 @ 1:07 pm In Economics | Comments Disabled

[1]

The New York Times asked yesterday: What if a president cut Americans’ income taxes by $116 billion and nobody noticed? [2] the author Michael Cooper goes on to report:

In a troubling sign for Democrats as they head into the midterm elections, their signature tax cut of the past two years, which decreased income taxes by up to $400 a year for individuals and $800 for married couples, has gone largely unnoticed.

In a New York Times/CBS News Poll last month, fewer than one in 10 respondents knew that the Obama administration had lowered taxes for most Americans. Half of those polled said they thought that their taxes had stayed the same, a third thought that their taxes had gone up, and about a tenth said they did not know.

But who can blame them? The Obama tax cuts were not productive tax cuts. While Cooper does mention that Americans were allowed to take home slightly higher paychecks, he also completely fails to mention that the policy is temporary. Heritage analyst Rea Hederman explained [3] why this matters before the stimulus even became law:

Most people know that this tax cut will last only two years, just as they knew that last year’s rebate check was a one-time event. They know that in future years, the deficit will have to be repaid via higher tax rates. This makes workers even less likely to spend the additional money, because individuals prefer to have a constant consumption path. The permanent income and life cycle theories developed by Milton Friedman and Franco Modigliani respectively say that permanent increases in income increase consumption considerably more than a temporary increase does, because the decision to consume depends on an individual’s real wealth, not current real disposable income.

Temporary reductions in the amount the government takes from paychecks and tax rebates are not productive tax cuts. Real tax cuts permanently change marginal tax rates thus encouraging new labor supply or productivity. Even the federal government acknowledges this. Heritage analyst Brian Riedl explains [4]:

Tax rebates fail to increase economic growth because they are not associated with productivity or work effort. No new income is created because no one is required to work, save, or invest more in order to receive a rebate. In that sense, rebates that write each American a check are economically indistinguishable from government spending programs. In fact, the federal government treats rebate checks as a “social benefit payment to persons.” They represent another feeble attempt at creating new purchasing power out of thin air rather than focusing on productivity.

Tax rebates in 1975, 2001, and 2008 all failed to create economic growth. By contrast, large reductions in marginal tax rates in the 1920s, 1960s, and 1980s were each followed by large surges in economic growth. More recently, the 2003 tax-rate reductions immediately reversed the job losses, sinking stock market, declining business investment, and sluggish economic growth rates that had followed the 2000 recession. These gains continued until unrelated economic developments brought the most recent recession in December 2007.

So the reason, why no one has ever heard of the Obama tax cuts is because they were small, temporary, and failed to produce economic growth. Instead, Americans are now suffering under the threat of the largest tax hike in American history: [5] the Obama tax hikes [6].


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2010/10/20/the-deservedly-forgettable-obama-tax-cuts/

URLs in this post:

[1] Image: http://www.foundry.org/wp-content/uploads/TaxCalculator.jpg

[2] What if a president cut Americans’ income taxes by $116 billion and nobody noticed?: http://www.nytimes.com/2010/10/19/us/politics/19taxes.html?hp

[3] explained: http://www.heritage.org/Research/Reports/2009/01/Building-a-Better-Stimulus-Bill

[4] explains: http://www.heritage.org/Research/Commentary/2010/01/Why-Government-Spending-Does-Not-Stimulate-Economic-Growth-Answering-the-Critics

[5] the largest tax hike in American history:: http://www.atr.org/six-months-untilbr-largest-tax-hikes-a5171

[6] the Obama tax hikes: http://www.foundry.org/tag/the-obama-tax-hike/

Copyright © 2011 The Heritage Foundation. All rights reserved.