Why are we doing this?

Posted by Don Fullerton on Sep 10, 2010

Filed Under (About this Blog, U.S. Fiscal Policy)

The primary purpose of this blog is to help citizens to read the newspaper and understand some public policy debate from more analytical perspectives.  Each of us truly believes that economic analysis has something to say about the world, and particularly about public policy.  So we give examples of what economics would say about one problem or another.

Often, when I explain some economic analysis, somebody says “well, that’s just good common sense!”.   Exactly.  Good economic analysis should be just good common sense.  Think about direct effects, and indirect effects, and then line up all the pros and cons.  The problem is that good common sense is just so rare these days.  Especially in politics.

I don’t mean to make political statements here, in this blog about how to analyze economic problems.  But let’s look critically at some statements by politicians AND economists, and use some good common sense.  Consider what you’ve heard: “I support a new research and development tax credit, because it will create jobs”.  Really?  Maybe.  But that can’t be the true primary purpose.  What does your common sense say?  If the true goal were to create jobs, then create jobs!  Government could hire people, or provide specific tax incentives targeted toward new hires.  The purpose of an R&D tax credit ought to be incentives to do R&D!  It should stand or fall on those merits.

There may be plenty of good reasons to enact an R&D credit, but let’s discuss THOSE reasons.  Let’s have an informed discussion.  Most importantly, let’s help newspaper readers decipher this kind of pandering, reject it, and insist upon hearing the true advantages and disadvantages of the policy.  Let’s have an informed debate and make the best decisions.

For another example, take the current debate about whether to extend the Bush-era tax cuts that are soon to expire.  Some say that this recession is the wrong time to raise taxes, while others point to huge budget deficits that would be made worse by cutting taxes. In particular, President Obama wants to make permanent the tax cuts on those earning less than $250,000 per year, and not extend the cuts on those earning more.  (Actually, of course, you have undoubtedly noticed the semantic problem, where Republicans say it would “raise taxes”, while Democrats say “not extend the Bush-era tax cuts”).

Let’s look critically.  This debate raises THREE separate issues, where many commentators have deliberately confused the issue by talking about one when they really mean something else.  The three issues are (1) details of good tax policy, (2) the recession, and (3) how much to tax the rich compared to the poor or middle class.

First, policymakers could raise some taxes and lower others.  The analysis of good tax policy involves many such choices about each credit or deduction, which requires details and debate on each such feature of the tax code.  Raising or lowering the rate of tax is not the only option; policymakers COULD provide targeted credits (i.e. for jobs or for R&D), or they could simply enforce existing laws and collect from those who currently cheat!

Second, both sides of the debate point to the recession, as a reason to cut taxes on the middle class, or as a reason to cut taxes on the rich.  Both of those arguments are beside the point.  Politicians like to appeal to the fears of voters by invoking the recession and jobs.  But it can’t possibly make much difference to the recession whether we cut taxes on the rich, or cut taxes on the poor or middle class – for the same overall tax revenue.  

Third, the key to this debate is not whether to raise or lower overall taxes.  It’s about the balance of taxes on the rich vs. poor.  On THAT debate, economics has no special role!  It’s a matter of personal preference, ethics, or social justice.  Society must decide how much to take from the rich in order to help the poor through tax cuts or social safety net.  Both sides of the debate are being disingenuous by appealing to other arguments, that a tax cut will hurt the deficit or help the economy.  We are not debating any major tax cut or stimulus here; the debate is all about how much to tax the rich vs. how much to tax the poor or middle class, those under $250,000 per year.

Economistmom.com has an excellent insight into this debate over the actual utility of the tax cuts and what their designed goal is versus their stated goal.  I encourage you to check out her post from 9/13, “Those ‘Best for Nothing’ Bush/Obama Tax Cuts”.  In it she makes the case that “for whatever economic goal you can think of, whether short-term or longer-term, there’s some fiscal policy even better suited for that goal.  So the Bush/Obama tax cuts aren’t ‘good for nothing.’  They’re just ‘best for nothing’.”