Federal Reserve Bank of Minneapolis Narayana Kocherlatkota Gets One Very Wrong
links for 2010-08-17

Mark Zandi's Take on the Obama Tax Cuts

The Obama administration thinks that, after taxes revert to their 2001 levels next year it should provide the middle class with a permanent tax cut equal to the Bush 2001 tax cut. I disagree: I think that the Obama administration should provide the middle class with a temporary two-year tax cut equal to the Bush 2001 tax cut.

Now comes Mark Zandi--who I respect, and who you have to respect--to argue that the Obama administration should provide the middle class with a permanent tax cut equal to the Bush 2001 tax cut and the rich with a temporary two-year tax cut equal to the Bush 2001 tax cut.

The Tax Cut We Can Afford: UNLESS Congress and President Obama act soon, Americans’ taxes will increase in 2011, when the cuts enacted under President George W. Bush are due to expire. Almost everyone agrees that this makes little sense given the economy’s fragility. But consensus ends there. The president supports permanently extending the current tax rates for all except the highest-income households, while Congressional Republicans want the entire basket of cuts to be made permanent. The prudent middle ground would be to forestall any tax increases in 2011 and to phase in higher rates on upper-income households in 2012, when the economy will be on firmer ground.

The president’s plan would be taking an unnecessary gamble with the struggling recovery....

In most times, raising taxes on the wealthy by such a modest amount has had little impact on the economy. But these aren’t most times. The well-to-do appear unusually sensitive to changes in their finances, probably because their nest eggs are significantly smaller with the drop in stock and housing prices. Only the top 3 percent of households would have to pay higher taxes if the president got his way, but this rarefied group currently accounts for a fourth of consumer spending. If they pull back, even a bit, the recovery could be derailed....

Some people make a more nuanced argument that higher taxes on the wealthy could pay for additional economic stimulus — like a bigger job tax credit or resurrected 1930s-style work programs. This view has theoretical merit — some of my own analysis has been used to support it — but it is asking too much of our political system now to get it just right....

On the other hand, the Republican proposal to keep the current tax rates permanently in place even for the wealthy takes an unnecessary gamble with our long-term fiscal outlook. Tax cuts do not pay for themselves. Even when President Ronald Reagan slashed much higher tax rates in half, this argument failed; in the current tax debate, it is unsupportable....

Once the recovery is off and running, and stock and housing prices are consistently rising, allowing the Bush tax cuts for high-income households to expire — over, say, a three-year period — would not harm the economy... the economy performed admirably in the 1990s when high-income households paid the same higher tax rates. And the wealthy would benefit as much as anyone from reducing the federal deficit, because that would keep interest rates low, spurring investment and job creation....

In this recession, the government has necessarily made a string of momentous economic policy decisions. Some have worked well; others have been a disaster. We can’t afford any more mistakes.

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