I wrote a somewhat provocative op ed in yesterday's New York Times that sparked a lot of feedback. My modest proposal was to accelerate the expiration of the Bush tax cuts by two years—to 2009. I said that doing so would generate a burst of economic activity in 2008 while reducing the budget deficit, a rare feature for a stimulus.
Some of the feedback was positive. A few people even saw the humor in turning the tax cut advocates' arguments upside down. But others took a dimmer view. It turns out I am: an arrogant, stupid, crypto-Nazi, communist who lacks a tenth-grade education.
Here's a response to some of the comments.
Chill! Congress isn't going to vote for a big tax increase in an election year or during a recession, regardless of what anyone says in the op ed pages of the New York Times. My diabolical plans to confiscate your hard-earned money will be thwarted, at least for a while.
So why did I make this impractical suggestion?
President Bush inspired it when he said that extending his tax cuts, which don't expire until the end of 2010, would be an effective fiscal stimulus in 2008. This makes no sense. If you believe the supply side models, extending future tax cuts will encourage people to save more (that is, spend less) now, work less (because current labor is no longer taxed less than future labor), and realize fewer capital gains. All of those responses would tend to depress current consumption. Over the long term, lower consumption could be good for the economy, but Keynesian short-term stimulus—what politicians of all stripes embraced—requires a spending spike. In theory, that additional demand keeps companies busy and stems the tendency to lay off workers, averting or calming a recession.
I just turned the argument on its head. If the tax cuts were going to expire sooner, people would have an incentive to save less and work harder, boosting the economy right now. If people thought the capital gains tax rate was going to rise in 2009, they'd have an incentive to sell assets; and if they spent some of the proceeds, that would also boost demand.
That last insight prompted a lot of scorn. With the stock market skittish, a big sell-off by individuals might trigger a crash. When I drafted my proposal (about ten days before it was published), the market was doing fine and I was thinking back to 1986, when stock sales doubled (thanks to stockholders avoiding the scheduled capital gains tax rate increase in 1987) and there was no immediate effect on asset prices. (Some point out that the market did take a dive in October 1987 and attribute that to the capital gains tax rate increase, but that stretches credulity. Why would the price response take a year? And why did the market boom through the 1990s, despite capital gains tax rates at historically high levels?) Nonetheless, for the record, I agree that announcing a future capital gains tax rate increase right now is probably not a great idea.
Some wrote that the logical extension of my argument is that the government should promise to confiscate all income in 2009. Huh?
Some complained that I don't understand that tax cuts pay for themselves. That's because there's not a shred of evidence that this is true at current rates. For example, a 2006 study by the Treasury Department implied that the additional revenues stemming from higher economic growth would offset at most 10 percent of the estimated revenue loss arising from a tax rate cut—and that is under implausibly optimistic assumptions. But, the logical extension of my detractors' argument is that we should get rid of all taxes to maximize revenue.
For the record, I proposed just that in a Marketplace commentary in 2004.
Thanks for writing.
Update: See what other bloggers are saying about Len's op ed:
