“Mr Mankiw cites a recent study by Christina Romer and David Romer, economists at the University of California, Berkeley, who found that each dollar of tax cuts raises GDP by about $3 (€2.30). Such studies, based on past data, may have little to say about the situation the world now faces. Americans confronted with debt, shrinking retirement accounts, houses worth less than mortgages and a tough credit environment will save more of their money than in the past. That was the experience with the February 2008 tax cut, where less than half of it has been spent. It matters who gets the break – if it is lower income Americans, the fraction spent will, on average, be greater than for wealthier Americans.”
“Tax breaks for business may prove to be a sink-hole as bad as the troubled assets relief programme. Particularly worrisome are rumours that companies will be allowed to set off their losses against profits made in the past five years to get tax rebates – a big gift to those who mismanaged risk, including banks such as Citibank. Some suggest that, having exhausted the more transparent bail-out strategy, banks are seeking less transparent help through the tax code. We learnt the lesson from Tarp: we need to link handouts to changes in behaviour. We should have insisted banks commit to more lending. Now we should insist any tax breaks for business are linked to investment.”
“Tax breaks for business may prove to be a sink-hole as bad as the troubled assets relief programme. Particularly worrisome are rumours that companies will be allowed to set off their losses against profits made in the past five years to get tax rebates – a big gift to those who mismanaged risk, including banks such as Citibank. Some suggest that, having exhausted the more transparent bail-out strategy, banks are seeking less transparent help through the tax code. We learnt the lesson from Tarp: we need to link handouts to changes in behaviour. We should have insisted banks commit to more lending. Now we should insist any tax breaks for business are linked to investment.”
This is a variation of the supply arguments that have gone on for the last two decades. Do we create more stimulus with putting money in the pockets of the taxpayers or would we be better off targeting the money for specific expenditures that that could add to productivity such as infrastructure.
This will be a fight of whether growing government will be better or growing net after- tax income. The data does not help in analyzing the problem. The February 2008 tax cut was not effective because much of the excess money was saved, less multiplier. Stiglitz makes a good point that if states raise taxes when the Federal government cuts them there will be no net positive gain. The historical record from the research of Romer is that the tax cut has a bigger multiplier. So who is right? The evidence is not clear if you argue from the February cut. The data in the past tells a different story.
The current proposal with a mix of both may be effective. A tax cut especially to lower income families will lead to more consumption and can be used to pay-down debt. The impact will be immediate relative to large public works projects that may take time to start. Do we have $800 billion in shovel ready projects? Watch the debate on this issue because we are seeing an interesting mix of politics and economics.
This will be a fight of whether growing government will be better or growing net after- tax income. The data does not help in analyzing the problem. The February 2008 tax cut was not effective because much of the excess money was saved, less multiplier. Stiglitz makes a good point that if states raise taxes when the Federal government cuts them there will be no net positive gain. The historical record from the research of Romer is that the tax cut has a bigger multiplier. So who is right? The evidence is not clear if you argue from the February cut. The data in the past tells a different story.
The current proposal with a mix of both may be effective. A tax cut especially to lower income families will lead to more consumption and can be used to pay-down debt. The impact will be immediate relative to large public works projects that may take time to start. Do we have $800 billion in shovel ready projects? Watch the debate on this issue because we are seeing an interesting mix of politics and economics.
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