A few thoughts on the Obama-GOP tax deal

December 7, 2010

Let’s assume for a moment that the Democrats don’t scuttle the whole thing. And that very well may happen. It’s all very good news from a Keynesian perspective. Unemployment insurance and the payroll tax cut both score especially well in the sort of  demand-side economic models run by, say, the Congressional Budget Office. And I will certainly take even temporary tax cuts over more spending to prop up public employee unions and cater to the green lobby.

But this package does little to bring long-term certainty about public policy. The corporate tax rate is still too high, while rest of the tax code is an uncompetitive mish-mash that reflects the interests of lobbyists. I thought Goldman Sachs had an interesting take on the immediate expensing provision:

The proposal includes expensing of business investment in 2011, similar to the policy that the president proposed in September. This should reduce corporate taxes by
about $100 billion next year if enacted, but would increase corporate tax liabilities in future years. Given low interest rates and significant
spare capacity, this proposal is likely to have a limited effect on corporate behavior.

And let’s not forget what Milton Friedman might have to say about this sort of deal. Bring on the funk, Wikipedia:

The permanent income hypothesis (PIH) is a theory of consumption that was developed by the American economist Milton Friedman. In its simplest form, the hypothesis states that the choices made by consumers regarding their consumption patterns are determined not by current income but by their longer-term income expectations. The key conclusion of this theory is that transitory, short-term changes in income have little effect on consumer spending behavior.

cbo1

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[...] I haven’t seen anyone in the blogosphere/pundit universe addressing the economics of the deal beyond James Pethokoukis. His analysis is sharp and exactly what I want to see more of.I spent the second half of the show [...]

[...] I haven’t seen anyone in the blogosphere/pundit universe addressing the economics of the deal beyond James Pethokoukis. His analysis is sharp and exactly what I want to see more of.I spent the second half of the show [...]