16 Dec 2010

The Reality of the Tax Deal

Economics, Shameless Self-Promotion 2 Comments

You won’t believe it, but today at Mises.org I have unqualified praise for two GMU economists, and I illustrate my arguments with a series of curves. (Thanks to Kathy White for creating them.) I may be subject to a boycott in the near future; we’ll see.

Here’s the conclusion:

Most of the pundits — let alone the politicians — debating the tax cut deal have no idea of the impact a payroll tax cut on employees could have on labor supply. Consequently, if the deal goes through, many people may be surprised to see the headline unemployment rate “stubbornly” refuse to fall — or even increase — despite all the “stimulus.”

“What?” you ask in disbelief. “Paul Krugman assures me that cutting payroll taxes on employees will boost spending. How could unemployment possibly go up?”

Read the article.

2 Responses to “The Reality of the Tax Deal”

  1. Country Thinker says:

    There is also some basic human psychology involved. Tax “holidays” look more like a year-end bonus than a pay raise to most workers. Thus, temporary tax cuts tend to get saved at a higher rate than permanent cuts. That’s what happened to the Bush refund checks, and I suspect it will happen with the payroll tax holiday as well.

  2. Silas Barta says:

    1) I’m quite surprised, Bob, that you were able to cogently argue that one kind of tax is better than another without making 90% of the article a bunch of caveats that, “Well of course _all_ taxes are bad.” Usually you avoid saying anything that could be taken to mean any tax could be good, even in a relative sense.

    2) Am I the only one sick and tired of people arguing over which method is best at “getting people to spend their money rather than save it”? The way I see it, any “economy” that depends on people spending some arbitrary, high level money is not an economy I care about. If your economic system depends on people constantly spending at some state-decreed level, it’s not built on a very sound foundation.