Is DeMint crazy to oppose Obama-GOP tax deal? No.
For many conservatives, the thumbs-up from Rep. Paul Ryan of Wisconsin is reason enough to support the Obama-GOP tax deal — well, that and the fact so many liberals are in a purple rage about it. And certainly there is nothing wrong about letting individuals and businesses keep more of their money — even for a little while. But Sen. Jim DeMint of South Carolina, another lover of tax cuts and hater of bloated big government, says he will oppose and even filibuster the ginormous stimulus package. Here is DeMint on the Hugh Hewitt radio show:
I’m glad the President recognizes that tax increases hurt the economy. I mean, I guess that’s progress. But frankly, Hugh, most of us who ran this election said we were not going to vote for anything that increased the deficit. This does. It raises taxes, it raises the death tax. I don’t think we needed to negotiate that aspect of this thing away. I don’t think we need to extend unemployment any further without paying for it, and without making some modifications such as turning it into a loan at some point. It then encourages people to go back to work. So there’s a lot of problems with it. I mean, and frankly, the biggest problem I have, Hugh, is we don’t need a temporary economy, which means we don’t need a temporary tax rate. A permanent extension of our current tax rates would allow businesses to plan five and ten years in advance, and that’s how you build an economy.
DeMint might have a point, several actually – and the implications are huge. The perceived failure of the 2009 Obama stimulus plan has again discredited the idea that government can spend America back into prosperity. But liberals, including many in the White House, protest that conclusion. They argue that the $900 billion package was both clumsily designed and too small given the depth of the Great Recession. But sorry big spenders, you only get one chance to fire a trillion-dollar bullet.
Of course, Republicans may find themselves in the same position if the $900 billion (mostly) tax-cut plan fails to reignite job growth in 2011 and 2012. Oh, the folks with the Keynesian demand-side, static analysis economic models say not to worry. Wall Street firms such as Deutsche Bank, Goldman Sachs and JPMorgan — as well as the Congressional Budget Office — think a) extending the Bush tax cuts, b) cutting payroll taxes, c) allowing business to immediately expense investment and d) funding more unemployment insurance will add as much as a percentage point to GDP growth next year and reduce the unemployment rate by around a third of a percentage point.
But if this new trillion dollar bullet doesn’t work as promised, the power of the tax-cut message would be greatly undermined. And there is good reason to think the results will be disappointing:
1. DeMint thinks America needs a “permanent economy,” not a temporary one. Milton Friedman would agree. Uncle Miltie’s Permanent Income Hypothesis says short-term changes income don’t change spending habits, changes in long-term expectations do. PIH has been backed up by numerous studies (such as here and here and here) and argues for permanent tax cuts, not ephemeral ones.
2. The much-hyped payroll tax cut is not a supply-side cut. The Institute for Policy Innovation nails it:
One of the proposed provisions in the deal to extend the Bush tax cuts is a temporary 2 percentage-point reduction in the Social Security payroll tax, from 6.2 percent to 4.2 percent. Tax cuts that stimulate real economic growth operate at the margins–affecting an additional dollar of income, or an additional dollar of savings and investment–not the first dollar of income. Supply-side tax cuts encourage additional production by stimulating additional work, saving and investment.
A payroll tax cut is not a supply-side cut and won’t have much impact on economic growth. Rather, it embraces the Keynesian idea that the economy is stimulated by putting a few hundred dollars in people’s pockets so they can consume more. … If there has to be a payroll tax cut, it actually makes more economic sense to give it to the employer half of the payroll taxes than to the employee. That would at least mitigate some of the risks of hiring new employees that have been imposed by Obama administration policies.
3. All of these temporary tax cuts will do little to lower policy uncertain among business and investors. There is still plenty of reason to worry about taxes and spending in the near future. Business is already sitting on a mountain of cash, and even Goldman Sachs wonders if the expensing provision will do much in this environment:
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.
4. The 13-month renewal of emergency unemployment benefits will almost certainly keep the unemployment rate higher than it would otherwise be. Research from the San Francisco and Chicago Federal Reserve banks suggests the unemployment rate would be 0.4 percent to 1.7 percentage points lower if not for the extended unemployment benefits.
Republicans didn’t own the Mega-Stimulus. They will own Mega-Stimulus 2.0 in the eyes of the public. Before they sign off, they may want to seek a second opinion Dr. DeMint.