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.

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