Monday, February 22, 2010

Do you have an alternative?

On Fox News Sunday Governor of Mississippi, Haley Barbour was on with Governor of Michigan, Jennifer Granholm and topic one was the now year old stimulus bill. Here's what Barbour had to say with regard the the stimulus bill he originally contested:

"State government has benefited by the stimulus package, because it's poured in billions of dollars. The problem is we need private sector jobs...The first stimulus package was twice as much money as was needed. Then they could have created twice as many jobs with half as much money. If they're going to have a stimulus package, let's do something like have a holiday on the payroll tax. Let's do something that helps small business."

Here's my issue with the statements Governor Barbour made. Who is saying we could have created twice as many jobs with half as much money? Also, let's consider the payroll tax holiday, the only solution Gov. Barbour puts forward. His intimation I guess is that if you have a payroll tax holiday it will entice business to hire more workers since they will be freed from the burden of payroll taxes. The problem here is that the tax holiday would free up money, but only temporarily making this as about as effective a policy as the gas tax holiday that was bandied about in the summer of 2008. It sounds good, but doesn't make much economic sense.

Of course the larger hypocrisy here is the advocacy for a payroll tax holiday, further cutting revenue, further driving up the deficit less than a year after decrying a budget deficit so that our "children and grandchildren will be saddled with trillions more in debt." You want to talk common sense, how is it a good idea to get a deficit under control by not collecting revenue? What business thinks they can make a profit by not charging for its products? And don't believe the supply-side argument that lower taxes means more growth means more revenue. It's nothing more then economic voodoo.

Where's a real alternative?

1 comment:

Colin said...

* I am in full agreement about the payroll tax holiday. It is a gimmick that will do nothing to change a business's long-term thinking or incentive structure. This is also why the new "jobs bill" is such a joke, which relies on similar short-term tax breaks which are economically inefficient.

* As for the description of supply-side as economic voodoo -- a term coined as I recall by George HW Bush -- I think that very few people actually believe tax cuts will produce more tax revenue. Rather, tax cuts will promote growth which will partially offset the decline in tax revenue. So, for example, a 10% reduction in tax rates -- say from 50% to 40% -- will not produce a 10% decline in tax revenue, but maybe something more like 7%. Also, in extreme cases tax cuts can produce higher revenue. A 30% tax rate will probably produce more revenue than a 90% rate, if for no other reason than tax evasion and fraud will diminish greatly at the lower rate.

* Here's a real alternative: tax reform. The model for this should be the 1986 tax reform act, which reduced tax rates in exchange for the closing of loopholes and various deductions. I would take it one step further and advocate a flat tax of, say, 20%, which would hit after the first $40K of income. I would make sure that the tax rate would be enough to ensure that the measure would be either revenue neutral or even positive (my only fear with the latter being that more money would simply result in more spending rather than deficit reduction).

Plus, in addition to promoting economic growth, this legislation would have the added virtue of throwing thousands of lobbyists out of work, many of whom devote their time to obtaining favorable tax treatment and loopholes for their clients.