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James Surowiecki on Obama’s Tax Cuts

This is actually several days old, but James Surowiecki summarily makes the argument for Obama’s “tiny” tax cuts in this week’s New Yorker. Money quote:

The key factor . . . is whether people think of a windfall as wealth or as income. If they think of it as wealth, they’re more likely to save it, and if they think of it as income they’re more likely to spend it . . .

So what does this mean for making a rebate work? If you want people to spend the money, you don’t want to give them one big check, because that makes it more likely that they’ll think of it as wealth and save it. Instead, you want to give them small amounts over time. And you want the rebate to show up as an increase in people’s take-home pay, because an increase in steady income is more likely to translate into an increase in spending. What can accomplish both of these goals? Reducing people’s withholding payments.

A perfect description of the tax cuts Obama is proposing. With one added bonus: Obama is targetting these tax cuts on the economic classes most likely to spend the extra money: lower and lower middle class taxpayers.

Of course, Republicans want to hand mega-checks to the wealthy, but Surowiecki makes a good summary argument why Obama’s tax cuts will make a bigger economic bang.

Now, I pretty much buy everything said and written by Richard Thaler, on whose work Surowiecki is drawing. But the Obama tax cuts are much more relevant to our readership. The people Obama is targetting and the small increase in income these people will enjoy means great news for small businesses. Those of us who run small businesses in large part succeed and fall with the working classes of the country. And there’s no bailout money coming for Art’s Hardware or Maui Tacos.

Conservatives have a predictably different tack. Now, before I pull the quote, close your eyes, touch the envelope to your head, and guess what supply-sider anti-tax maven Stephen Entin proposes as a fix for the economy in today’s Wall Street Journal? Really, it’s easy. Just guess in as much detail as you can.

Now read:

We need a permanent improvement in the production climate. What would help? A lower corporate tax rate, as well as a permanent extension of the 2008 expensing provisions and the 2003 dividend and capital gains and top marginal income tax rates. On the regulatory side, lifting the burdensome auto fuel economy standards and alternative fuel requirements would help, as would an elimination of restrictions on oil drilling.

Remember when Republicans were the party of “ideas”?

What Entin blithely ignores is that the downturn, precipitated by the credit crunch in September, is now in large part being caused by excess inventory. As anyone who has spent anytime near a mall in January can attest, the problem isn’t that manufacturers aren’t investing in new production. It’s that all the production they made in the last few months is sitting on the shelves as excess inventory. And is getting marked down more and more every day. Hell, one Florida Dodge dealership was running a 2-for-1 deal if shoppers bought a Dodge Ram. That’s right: buy one Dodge Ram, get a second car of equal or lesser value free. I’d sure like to know what the corporate tax rate and the tax rate on the wealthiest people have to do with that.

Economists are saying that there is a danger of deflation; not to worry, there’s no deflation yet. Prices haven’t officially come down, but only because they’re lowering in the form of sales. Sure, a shirt costs what it cost three months ago, but you can get a second shirt free just by buying one. Sure looks like deflation to me.

Fortunately, we have Paul Krugman dealing with that argument in today’s New York Times essentially refuting Mr. Entin:

The point is that nobody really believes that a dollar of tax cuts is always better than a dollar of public spending. Meanwhile, it’s clear that … public spending provides much more bang for the buck than tax cuts — and therefore costs less per job created (see the previous fraudulent argument) — because a large fraction of any tax cut will simply be saved.

In small business, solopreneur, and entrepreneur terms, permanent tax cuts don’t mean a hill of beans for the next twelve months. The Obama plan as it’s shaping up is turning rapidly into the best plan for the enterpreneurs (and consumers) in this country.

But just in case you believe that permanent tax cuts are the way to an economic recovery, Lawrence Mishel of the Economic Policy Institute just posted his analysis of the data from Bush’s “stimulus tax cuts” in 2003 and 2008:

Even worse were the Bush tax cuts of 2003, which the administration claimed would generate 1.4 million jobs on top of the 4.1 million jobs that were expected to be generated over the eighteen months following June 2003.

EPI tracked the initiative’s effectiveness through a website,, and found that it fell far short of its goals. Not only did the promised 1.4 million additional jobs not appear, but the 4.1 million jobs expected with no action also failed to materialize. In all, only 2.4 million jobs were created—1.7 million short of the administration’s projection without their new policy. Thus, by the Bush administration’s own metrics the tax cut program fell short by a total of 3.1 million jobs (149,000 pr month).

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