The NY Times has an article about the Tax Cut Nobody Heard Of.
First question that comes to mind is, “why hasn’t anyone heard of it?”
For starters, because,
a provision of the stimulus bill had cut taxes for 95 percent of working families by changing withholding rates
Hmmm… let’s see… the stimulus bill that was 1,419 pages long, and which Nancy Pelosi was saying “you have to see the language” while not making it available until the day of the vote?
That stimulus bill.
How clumsy of us not to notice!
So what the Times is talking about it government spending, bigger government, and after spending your money, the government’s largesse shows itself, how?
Actually, the tax cut was, by design, hard to notice. Faced with evidence that people were more likely to save than spend the tax rebate checks they received during the Bush administration, the Obama administration decided to take a different tack: it arranged for less tax money to be withheld from people’s paychecks.
They reasoned that people would be more likely to spend a small, recurring extra bit of money that they might not even notice, and that the quicker the money was spent, the faster it would cycle through the economy.
Because, heaven forfend that the Obama administration would trust that you would know what to do with your $65.
Economists are still measuring how stimulative the tax cut was. But the hard-to-notice part has succeeded wildly. In a recent interview, President Obama said that structuring the tax cuts so that a little more money showed up regularly in people’s paychecks “was the right thing to do economically, but politically it meant that nobody knew that they were getting a tax cut.”
“And in fact what ended up happening was six months into it, or nine months into it,” the president said, “people had thought we had raised their taxes instead of cutting their taxes.”
Stephen Spruiell (from whom I stole the title of this post) points out,
To me, this demonstrates just how much of the administration’s thinking is guided by Keynesian economics, pump-priming, aggregate-demand-goosing, whatever you want to call it. If the problem you’re trying to solve is how to get people to spend more money faster, then you are absolutely committed to a profoundly flawed set of views about what ails this economy and what is likely to help it grow. Early on, this administration decided that the banking system couldn’t handle the rapid, large-scale resolution of all the bad debt that is still clogging the system and causing innumerable economic problems for borrowers and lenders large and small. Fine. I disagreed with the administration’s decision to duck those problems, but I lacked then and continue to lack the knowledge required to adequately assess whether the FDIC, the Treasury, and the Fed could have managed the resolution, nationalization, and/or liquidation of one or more of the big money-center banks last year — or, for that matter, what would have happened if we hadn’t TARPed the economy. But I think we should all be able to agree that spending is just a symptom of a symptom. Should we give people their temporary tax rebate all at once or a little at a time? Tell you what: If my car has a hole in the gas tank, I’m not going to spend a lot of time agonizing over whether to use premium or regular unleaded. I’m going to try to fix the hole.
This is not to say that government shouldn’t always be working to make the tax code less of a drag on economic activity. When conservatives talk about cutting taxes, that’s usually what they mean — not this Keynesian demand-management stuff. The economic bang-for-the-buck that comes from cutting taxes has to do with incentives, not spending. The Times advances the thesis that, whatever the economic merits of the decision, doing a stealth tax cut was not very smart politics, and the administration officials who talked to the Times do their usual routine of saying self-gratifying things about their political bravery when faced with doing the right thing vs. the politically popular thing. But in giving small tax rebates to middle-income workers — workers whose incentives are mostly fixed — the administration chose to do the politically popular thing instead of the right (or correct, if you prefer) thing. The right thing to do, if you’re going to cut taxes, is to cut them for businesses and high earners so as to strengthen their incentives to expand, invest, produce more, and work more efficiently. Of course, these are the groups whose taxes Obama seeks to raise.
Spruiell assumes that the Obama administration was interested in doing the right thing. He is incorrect. The Obama administration was simply doing a politically expedient move, only that they went about it the wrong way.