« Paul Krugman: Drilling, Disaster, Denial | Main | FRBSF Economic Letter: Is the “Invisible Hand” Still Relevant? »

Monday, May 03, 2010

"Obama Tax Increase Misperception Grows"

Brendan Nyhan provides evidence of false beliefs about taxes:

Obama tax increase misperception grows, by Brendan Nyhan: Earlier this year, I noted a CBSNews.com post showing that 24% of Americans thought President Obama had raised taxes for most Americans and 53% believed taxes had been kept the same. The numbers, which were drawn from a CBS/New York Times poll conducted February 5-10, were even worse among Tea Party supporters -- 44% thought taxes had been increased and 46% thought taxes were the same. In reality, Obama cut taxes for 95% of working families.

The latest CBS/New York Times poll, which was conducted April 5-12, asks the same question:

So far, do you think the Obama Administration has increased taxes for most Americans, decreased taxes for most Americans, or have they kept taxes about the same for most Americans?

The findings show that misperceptions about changes to taxes under Obama have gotten worse. The percentage of respondents who think taxes have gone up under Obama has increased from 24% to 34% among the general public and from 44% to 64% among Tea Party supporters:

It's the all-too-predictable result of combining misleading rhetoric suggesting Obama has raised taxes with people's biases toward their pre-existing beliefs.

This is partly the administration's own doing. There is a theory that says people will spend more of their tax cuts if they are unaware that they have happened, so the administration decided not to publicize the tax cut portion of the stimulus bill.

This was successful in that people were (and are) generally unaware that 40% of the stimulus package came as tax cuts. And some of this money was spent and that helped to stimulate aggregate demand. But it was politically unsuccessful for two reasons. First, as documented above, many people believe taxes have increased when, in fact, they have decreased for most taxpayers. Second, the administration has not been able to take credit for the stimulus that resulted from the tax cuts (and the criticism over the government spending portion of the stimulus package generally fails to recognize the large component of the package due to tax cuts).

My view is that the attempt to hide the tax cut from consumers wasn't needed. This was a balance sheet recession -- consumers took huge hits to the value of their houses and retirement savings -- and consumers aren't going to go back to their usual consumption habits until the balance sheets are repaired. The faster that balance sheets are repaired, and tax cuts can help with that, the faster that consumers will return to normal levels of consumption. That means saving is needed, not consumption, and attempts to hide tax cuts from consumers and fool them into doing the opposite, consuming rather than saving. That would not be their first choice if they were fully informed.

I think it would have been better to use tax cuts to help households repair their balance sheets as quickly as possible so that, once that was done, they could go back to more normal levels of consumption. That is, use tax cuts to allow balance sheet rebuilding (including paying credit bills), and use other means such as government spending to stimulate aggregate demand. Note, however, that if the tax cut portion is going to be saved rather than consumed, then the other part of the stimulus package, i.e. the government spending portion, must be correspondingly larger (which, unfortunately, it didn't happen).

Paul Krugman has a different view:

The Augustine Economy, by Paul Krugman: The good news from the consumer spending release is that consumers are, in fact, spending. The bad news is that they’re not saving: personal savings are now back down to 2.7 percent of income.

This can’t go on; American households have to bring their debt levels down. And yet …

We’re still in a liquidity trap, with Fed policy constrained by the zero lower bound. And a liquidity trap world is a paradox-of-thrift world, in which the virtuous individual decision to save more is a vice from the point of view of the economy as a whole. For now, it’s actually a good thing that consumers are behaving irresponsibly.

So my wish is that we be made chaste, continent, and thrifty — but not yet.

Again, my preference is different. Let consumers bring debt levels down and do the balance sheet rebuilding they need to do, and use government spending (or tax cuts of a different kind, say, business investment tax cuts) to provide the stimulus to aggregate demand (though the latest consumer spending release does suggest that consumers will return to higher levels of consumption before their balance sheet problems are completely repaired).

There are different types of recessions, and this one hit balance sheets hard. Another type of recession, one where household balance sheets aren't destroyed to the extent they were in the present case, would call for a different policy, one that induced consumers to spend rather than save. But in this case, I think we have to use policy to both stimulate the economy and to repair the damage to balance sheets, and that requires a two-pronged strategy.

    Posted by on Monday, May 3, 2010 at 09:45 AM in Economics, Taxes | Permalink  Comments (52)


    Feed You can follow this conversation by subscribing to the comment feed for this post.