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Tuesday, January 06, 2009

"Laffer-able"

Since the recession is caused by rich people deciding not to work, the solution, of course, is to cut capital gains taxes to they'll stop lounging around and do something productive:

Laffer-able, Marion Maneker, BP Cafe: ...Art Laffer ... was on Fast Money... The segment was on the proposed Obama tax cuts. Laffer didn’t think much of them. Instead, he wondered aloud, what if the government proposed a 6-month income tax moratorium: how great a stimulus would that be? After all, Laffer reasoned, freeing citizens from the undue burden of taxes would get them all out working harder and spending money.

Really? Did anyone on the panel believe that Americans of all income levels are sitting on the couch–or lounging out by the pool–instead of working because they’re unhappy with their income tax? They’re knocking off early because the marginal rates are too high and they’d prefer the leisure time to the minimal extra money? Fascinating. Unemployment moving toward double digits and the greatest white-collar restructuring in 15 years all because of onerous income taxes?

Sure, he’s a guest on the show–they’re being polite, right?–but not one of the traders said a word about this preposterous idea. They just nodded their heads in agreement and kept the bobbing up as Laffer launched into his idea that capital gains should not be taxed at all.

The slam against the Obama cuts was that the money would go into the mattress, not stimulate the economy. ... But why would the wealthy be any different? Cut their income tax or capital gains and they’ll put the money in the mattress right now too.

Not that cutting the capital gains tax would do anything to move money off the sidelines. Where would it go? What productive use would it be put to?

I’d share the segment with you but there’s no clip of his appearance on the CNBC site and the short post on the segment on Fast Money’s page is covered by an intrusive pop up. Maybe they’ve finally gotten a sense of shame for promoting this voodoo.

This tries to use a stabilization argument to implement a growth policy, which is a bad idea. We can debate whether cutting capital gains taxes is a good way to promote economic growth in the long-run, but it's clear that cutting the capital gains tax is a lousy short-run stimulus program. Even if it does promote new investment, and again that is a point that can be debated even in good times, in bad times it's hard to imagine a cut in capital gains motivating new investment when the economic outlook is so poor and so uncertain. In addition, you run into the same "are the projects shovel ready" problem you run into with public spending. For the most part, they aren't shovel ready and planning and constructing new investments, e.g. building a new production line, is not something that happens overnight. But no matter, the real goal here isn't stabilization anyway, and the long-run growth arguments are mostly a vehicle for obtaining the real goal: tax cuts for the wealthy. I hope Democrats don't give into this nonsense as they continue to compromise to get something passed.

Update: In comments to another post, where I agree that some type of tax cut may be needed as part of the stimulus package, and also say that "I am not thinking of the trickle down variety,"pgl says:

Tax cuts for the well to do - who are not borrowing constrained - will likely have NO aggregate demand stimulus effect as I have often argued (aka either Life Cycle or Ricardian Equivalence) models so if this is what the Republican Party have in mind - it is based on hogwash economics.  Tax cuts for the working poor, however, may be a good idea as these households will consume much of the tax cut.  I think this is what Obama has in mind.  If your argument is that we should go with the kind of tax cuts Obama campaigned on - I agree.  But tax cuts for Bill Gates is just stupid from a Keynesian point of view.

Update: And speaking of tax cuts of questionable value as a stimulus measure, Dean Baker:

More Money for Robert Rubin, Beat the Press: It looks like President-elect Obama is picking up President Clinton's promise to end welfare as we know it. Back in those pre-welfare reform days, welfare checks went to poor families. Welfare as we know it now seems to involve giving taxpayer dollars to Citigroup and other banks.

The media seem to have largely overlooked the Citigroup tax credit in their discussion of the latest items in President Obama's stimulus proposal. According to the Washington Post, the proposal will allow companies to write off current losses against taxes paid over the last 4-5 years, not just 2 years, as in current law.

There are relatively few companies that could benefit from this tax break since most companies will not have losses so large that they would need more than two years of tax payments to balance them against. But, really big losers, like Robert Rubin's Citigroup, and other badly failing financial institutions, are losing much more money in 2008 and 2009 than they earned in 2006 and 2007.

Did the political connections of Robert Rubin and others in the financial industry have anything to do with the decision of Obama's economic team to be so generous to them? I don't have an answer to that question, but the media should be asking it.

At best, I suppose you could argue this is a backdoor method of recapitalizing struggling financial institutions, but even then there are better ways to provide for recapitalization.

    Posted by on Tuesday, January 6, 2009 at 01:26 PM in Economics, Fiscal Policy, Taxes | Permalink  TrackBack (0)  Comments (40)

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