Targeted Tax Cuts as Fiscal Stimulus
Current economic conditions are testing the wisdom of the Keynesian-style stimulus package delivered by the Obama administration via the US Congress in 2009. Though the economic strength of TARP investments has become clear, the $787 billion in stimulus plans, now mostly expended, seems less than impressive.
Keynes became the leading proponent of deficit spending as an aid in stabilizing a recessive economy with the 1936 publication of his General Theory of Employment Interest and Money. While observers of the Great Depression often credit Roosevelt’s support of Keynes’ theories for bringing an end to high unemployment and staggering deflationary pressures, there’s actually much more to it. What is overlooked by many, though thankfully not by Federal Reserve Chairman Ben Bernanke, is that it was the combination of federal budget deficits and aggressive monetary policy responses that helped turn the country’s economic fate; that and the onset of World War II.
What many forget is that Keynes proffered deficit spending at the federal level without mandating how such deficits might best be employed. It’s a detail that offers important insight into the state of the US economy today, especially after implementation of the largest stimulus package in history and amidst the most substantial budget deficits our nation has ever experienced. Arguably, such deficits may provide long-term crippling problems for the US, but there’s more than one way to create a federal budget deficit and the differentiating factor is who ends up in control of how the deficit is to be spent: tax payers or bureaucrats.
There’s much debate over whether the federal government is the best body to determine how taxpayer monies should be spent. Sadly, that debate rarely occurs inside of Washington DC. In fact, such debate is at the heart of the Tea Party movement currently wreaking such havoc for incumbents of both political parties. Most understand that deficits arise when Congress adopts spending plans in excess of revenue generation (tax collection). Such spending programs may be similar to President Obama’s stimulus proposals, while others may be needed to support military action, as was the case in the 1940’s. While few can credibly argue that war time deficits are worth the ultimate cost, many debate whether or not stimulus programs rooted in transfer payments and “infrastructure investments” are ultimately worthwhile.
What about the other deficit-creating stimulus program? The one where the American people directly impact how monies are spent rather than delegating the task to elected representatives. We’re talking about tax cuts and though they may be less popular with lower income households, who decides how funds are to be spent is a matter of to whom the cuts are directed, not whether cuts might be popular.
The outcome of supply-side theories promoted by economist Dr. Arthur Laffer during the Reagan era rendered tax cuts a less desirable mechanism for economic stimulus and fiscal conservatives haven’t done a very good job of countering the arguments against them. The problem lies in the fact that most of the time such tax cuts are discussed the topic is coupled with promises that the increased economic activity the cuts may yield are likely to create more federal tax revenue than the cuts initially cost. While this is an interesting and enticing possibility, it’s difficult to support through objective observation.
The issue that ought to be addressed is that tax cuts are simply another form of deficit-creating economic stimulus and when viewed through any other lens the picture loses focus. An important attribute to tax cuts is that they put spending authority into the hands of taxpayers rather than elected officials; a move that’s feared to threaten the political lives of those it might otherwise save. How likely would it be for Tea Party activists to find credible support had the voters been those empowered to spend nearly $800 billion in stimulus funds authorized by the current congress? Not very!
The error fiscal conservatives make is in running from Keynesian concepts when economic times indicate monetary policy alone isn’t up to the task of redirecting a recessive economy. Rather than completely derail possible stimulus plans, the political right would do well to join their counterparts on the other side of the aisle and help frame the debate. Likewise, progressives hold too tightly to their superiority as it pertains to making spending decisions for the American public. Were each side to shift their thinking slightly, the outcome may well assure sought after political victories. More importantly, it’s likely to spark the very increases in consumption needed to thwart unemployment and housing market concerns, while also offering a boost to equity values.
Most opponents of tax cuts forget that it’s the House and Senate that determine to whom such cuts are to be extended and while it’s naïve to think that higher income households wouldn’t stand to gain from such activity, it’s just as erroneous to suppose that cuts can’t be targeted to lower and middle income households that may have been among the hardest hit in the recent recession.
Not to be misunderstood, I’m not advocating extending the federal deficit farther than its current stratospheric level. However, if additional stimulus activity is deemed warranted by federal policy makers and our elected representatives, either in the current Congress or the next, then a move to put spending authority into the hands of the voters may yield benefits beyond the obvious. Whether or not Keynes accurately predicted the impact deficit spending might offer a recessive economy isn’t the issue of the moment; how to encourage consumption and capital investment is and there’s nothing like a tax cut – aka stimulus program – to make things happen.
