November 28, 2008


Karl Rove, via a Matt Browner-Hamlin tweet, quotes Michael Boskin:

Stanford economist Michael Boskin reminds us that conservatives favor permanent, or long-lived, measures to revive the economy -- incentives like lower income-tax rates, actions to speed recovery of capital costs like bonus depreciation, and steps with an immediate effect on job creation such as cuts in corporate tax rate.

He left out the fairy dust.  What makes them think that they can just keep repeating this stuff, over and over again, and thus make it true?  Any cuts like this are necessary temporary, mostly driven by manipulation of tax returns, and proven not to work over the eight year Bush administration implementation of such policies.

Permanent policies like this can't have any particular effect. One of the things that is bad about such policies is that, if markets work, their value gets incorporated into the price of whatever securities are involved. Take the home mortgage deduction. The value of that tax deduction is in the price of the house you buy.  Look at this two ways. First, if you've ever been to a realtor, they have this work sheet, entitled "How much can you pay?"  and work up the highest possible monthly payment you can afford, net of the tax benefit.  This was true even when banks required 20 percent downpayments.  Second, think what would happen if the mortgage tax deduction were eliminated. Prices would fall, right?

Same thing here. If investors demand X% return after tax, lowering taxes can only have a one-time effect, not a permanent effect. In practice, what happens is that these taxes get jerked around, shifting spending according to the tax calendar rather than business requirements.  In a first best world, there would be no corporate income tax in any case.  There would be individual taxes, at the rate regardless of source.

(And, in my first best world, confiscatory estate taxes.) 

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