Follow by Email

Thursday, December 9, 2010

Tax Cuts or Targeted Spending?

The debate over whether the Bush-era tax cuts should be extended (see e.g., "Tax Deal Suggests New Path for Obama") has highlighted two ways that Federal and State governments can spend or infuse money into the economy.  One approach is to fund government programs (e.g., unemployment benefits, Social Security, Medicare, etc.) that target specific groups of individuals (e.g., the unemployed, the retired, the elderly).  The other is by cutting taxes, which puts more money into the hands of individuals who then can spend these extra dollars as they see fit.  I am well aware that cutting taxes is not technically a form of government spending, but in the aggregate, it matters little whether the government spends $800 million through government programs or collects $800 million less in revenues because of tax cuts. In both cases the government has $800 million less in is coffers (and its debt has increased by $800 million), while the market has $800 million more.

Needless to say, economic conservatives (e.g., libertarians), who tend to trust the efficiency of the market over the collective wisdom of the government, generally prefer cutting taxes, while economic liberals (e.g., Rawlsian egalitarians), who often concede that the market is highly efficient but are doubtful about its fairness, typically prefer targeted spending through government programs.

Since the market is almost always more efficient when it comes to allocating dollars to where they are needed most, I believe that tax cuts are generally the way to go if we are looking for ways to stimulate the economy.  However, while the market is very efficient, it can be brutally so, often leaving in its wake a trail of destruction and broken lives.  Thus, while tax cuts should probably be the primary method by which the government stimulates the economy, there will always need to be some government funding of programs that addresses the needs of those that the market, at least in the short term, leaves behind or in the lurch (e.g., those of us who are currently unemployed, those of us who, because of circumstances beyond our control, have no choice but to work in low-paying jobs, and so on). The trick, of course, is finding the right balance.

Nothing so far in this discussion has addressed the morality of whether the Bush-era tax cuts should be extended to the 2% of Americans earning over $200,000 (individuals) or $250,000 (couples), or whether President Obama's initial plan to extend the tax cuts to the other 98% of Americans was sufficient.  In a time when so many Americans are out of work and the Federal deficit is running so high, I don't see why the upper 2% of Americans can't sacrifice a bit of their wealth for the benefit of those who haven't been as blessed, at least in monetary terms, as they have been. It 'tis the season, after all. Evidently, I'm in the minority on this one, though.

(As an aside, I don't see how at this point President Obama has much of choice but to compromise with Republicans on the tax cuts.  If the Democrats who are currently criticizing the President for caving in to Republican demands really cared as much as their current posturing suggests, then they should have been a bit more proactive and done something about it prior to the mid-term elections.  To criticize the President at this point and time strikes me as little more than self-serving. To be sure, some Democrats in the House and Senate did try to do something about this prior to the elections, but collectively they didn't try too hard.)

No comments:

Post a Comment