The Trouble With Tax Cuts

Job growth stalled in August, manufacturing activity isn’t faring much better, the demand for liquidity and safety is on the march again, and the trend for U.S. exports may face new headwinds if economic growth in emerging markets suffers, as some analysts predict. What’s a politician to do these days? Lean on the tried-and-true policy response, of course.

The latest round of gloom is raising the profile of tax cuts once more as a potential solution. But is this policy tool up to the job this time? President Obama seems to think so. He’s ready to roll out a new round of tax cut proposals in his scheduled speech to Congress this Thursday.

The president “is focusing on cuts targeted at middle-income Americans to spur consumer spending, which accounts for 70 percent of the economy,” Bloomberg reports. The article goes on to quote Peter Orszag, former director of Obama’s Office of Management Budget, who reminds that with the unemployment rate stuck at the elevated 9% “the economy desperately needs help.” Presumably that’s one of the few uncontroversial notions in Washington these days. But how to respond is as tricky as ever.

Weighing the nexus of political reality and economic need, Orszag says that the president “will probably have to lean heavily on tax cuts if it’s going to have a serious chance of being enacted.”

If Obama has any hope of re-election, he certainly needs to do something, or at least project the appearance of action on the jobs front. For the moment, he has his work cut out for him. More than half of Americans disapprove of how the president’s managing his job, and the subject of the economy is an especially sore point with the public, according to a new poll via Politico.

The question is whether fresh tax cuts will bring any relief, and by relief we’re talking jobs. Andrew Ross Sorkin recommends that we curb our enthusiasm:

…temporary tax cuts rarely result in new jobs and always result in less tax revenue.

“Tax policy is not a great lever for adjusting short-term growth,” explained Howard Gleckman, a resident fellow at the Tax Policy Center , who has reviewed dozens of studies on the subject. Most temporary tax holidays “reward people for what they are going to do anyway,” he said, adding that “the bang for the buck is very low — you’re subsidizing companies that were already going to hire.”

Sorkin also reports:

“If Congress enacts a second tax holiday, rational corporate executives will conclude that more tax holidays are likely in the future,” Chuck Marr and Brian Highsmith of the Center on Budget and Policy Priorities recently wrote. “That will make corporations more inclined to shift income into tax havens and less likely to make investments in the United States.”

Unfortunately, other job-creation plans aren’t considered quick fixes for job growth either. But the economy demands action, and cutting taxes, effective or not for our current problems, is easy for the Beltway crowd.

Even if you sign on to the tax-cuts-will-help view, there’s still plenty of room for debate. Consider that House Majority Eric Cantor, a Republican from Virginia, reportedly supports a 20% tax deduction for income of small business owners. As Roll Call notes, “Obama and Cantor favor tax cuts aimed at businesses, but there is still a significant gap between how they want to design their tax cuts.” Details, details…

Democrats prefer the payroll tax cut because it benefits millions of Americans whose incomes wouldn’t benefit from cuts to the income tax rate.

They also say money in the pockets of those in lower-income brackets is likely to be spent more quickly.

Republicans say that because the payroll tax cut is explicitly temporary, job creators don’t plan and make hiring decisions based off of it like they would a change to tax rates.

Not just any tax cut will do, depending on the talking head. But will any tax cut suffice for the problems du jour?

About James Picerno 894 Articles

James Picerno is a financial journalist who has been writing about finance and investment theory for more than twenty years. He writes for trade magazines read by financial professionals and financial advisers.

Over the years, he’s written for the Wall Street Journal, Barron’s, Bloomberg, Dow Jones, Reuters.

Visit: The Capital Spectator

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