Extending the Bush Tax Cuts

by Pejman Yousefzadeh on December 6, 2010

It looks as though it is going to happen, but it also looks as though the extension will be a temporary one. The thing is, a temporary extension of the Bush tax cuts will not be enough to stimulate the economy. Per Milton Friedman’s permanent income hypothesis, consumption patters even in the aftermath of a temporary extension of the Bush tax cuts will be tempered by long term expectations that eventually, the tax cuts may be allowed to expire. As a consequence, consumers are more apt to save money that comes from a temporary tax cut, rather than spending it in order to offer the economy any kind of economic stimulus.

Lots of people say that Republicans have rolled Democrats on this issue. But if the extension of the tax cuts only turns out to be temporary, it will be the American economy that actually gets rolled.

Tagged as: Bush Administration, Bush Tax Cuts, Economic Ignorance, economy, George W. Bush, Milton Friedman, Permanent Income Hypothesis

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deek

What part of “IT’S MY MONEY’ don’t these azzholes understand? I don’t exist to provide “revenue” to the effing government and I don’t exist to provide “stimulus” to the economy either. I will do with my money what I damn well please and if that means spend it, save it or burn it in a pile, then I will damn well do it.
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Walt

The thing is – - it’s not a tax cut. It’s the absence of a tax increase. The scheduled tax rate increase would destroy what’s left of our present anemic economy. After all, it was the present tax rates coupled with government uncontrolled spending created our present economy. A tax cut would stimulate. Not happening. Status quo for another coupla years.
Jaykest1

Take the argument a step further though, under Ricardian equivalence, any tax cut will be met with the expectation of increased future taxes to pay for it, and consumer adjusting their behavior.
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Dmk3

Assuming at this point that the two year extension will be reversed in two years is to assume that Obama will be re-elected with a Democrate majority in Congress. How likely is that? Not likely at all, so, we should expect that the next two years will see the Republicans in Congress working to limit and defund Obama’s programs and setting up real tax reform for post 2012.
alanstorm

“The thing is, a temporary extension of the Bush tax cuts will not be enough to stimulate the economy.”

Perhaps. Probable, even. However, I (for one) will settle (for now) with not making the situation WORSE, which was almost guaranteed by the expiration.
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Flandestiny

You got 8 years of tax cuts and the economy was blistering huh? I guess it was offset by the failed spending policies of Bush and the Republican congress.
Mmainello

Unfortunately this conversation will continue until the tax laws are changed.

The tax base is too narrow – almost 50% pay no taxes. Part of this was President Bush’s fault. Many receive welfare payments in the form of (not) Earned Income Tax Credits.

The Fair Tax needs to be implemented so the politicians get out of the social welfare game and revenue can flow into the government that is now being hidden.
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http://www.conservative-compendium.com Brian Garst

“As a consequence, consumers are more apt to save money that comes from a temporary tax cut, rather than spending it in order to offer the economy any kind of economic stimulus.”

This is not the problem. That’s the Keynesian style of analyzing tax reductions, which wrongly holds that the benefits of rate reductions comes from increased consumption. This is faulty. They could spend all of the extra money and it would make no difference.

The conclusion is true, but for a different reason. Tax rate cuts help the economy by reducing government disincentives on savings and investment. Temporary cuts don’t work in this regard because people make those decisions on a longer time horizon than 2 years.

Be careful not to embrace the Keynesian, demand-side premise that consumption drives economic growth. Consumption is a by product of economic growth, not its cause.
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Robert

Tax Assessment is a crucial part of every economy, and I am not sure they have got it right when they intend to pull off another tax cut act aka the Bush regime. anyway, Great post. Cheers!