Monday, December 13, 2010

Why Obama's "Tax Cuts" Aren't Going to Be Effective

In what came off as a surprising move, Obama is attempting to help get legislation through Congress that would temproarily extend the Bush tax cuts.  Although you would think that I would be happy with Obama supporting tax cuts, the current situation is not quite what you would think.

The first issue is that he excluded Democrats in the drafting process as much as he did with the Republicans when passing Obamacare.  This has angered Democrats enough to the point where the bill might not even pass. 

Even if the bill does pass, there is an issue with the fact that the tax cuts are only going to be for two years.  One of the more basic economic concepts is that businesses respond to incentives.  Businesses don't intend to be in business for only a couple of years.  They look to be in business in the long-run.  Therefore, any incentive you give business must be long-term.  It will be true that some businesses will respond to the tax cut extension and expand employment a bit, but for the most part, if a business is uncertain whether the extension of the tax cuts will be permanent, the incentive has become minimalist at best.

It is disingenuous to call this a tax cut bill.  The tax cuts had already been in place during the Bush II era.  The decision is whether to extend these cuts.  Congress is merely maintaining the status quo.  Yes, it is true that passing these cuts will help America avoid a second recession.  But it is as equally as true that this extension will not help speed up the economic recovery.

Another issue is that we are not learning from the Bush 43.  Bush was correct in cutting back on taxes.  However, in order for tax cuts to be effective, government spending also has to be cut.  Bush never cut back on government, and neither will Obama.  Obama has already proved this by making an extension of unemployment benefits a contingency of extending the tax cuts.  The government needs to cut back on spending, whether it is with unemployment benefits or anything else.  If Congress is not taking a serious look at deleveraging, economic growth will be stagnant for quite some time.
Plus, the expiration date of the bill makes me suspicious of Obama.  The expiration date is slated for two years, which is exactly during election time.  I would not be surprised if Obama pointed at the ineffacicy of this "compromise" and used it during the 2012 election to rail against Reupblicans and genuine tax cuts in general.

This bill will be the epitome of bi-partisan compromise.  Why?  Because when you have such compromise, nobody gets what they want.  Republicans don't get further tax cuts, and Democrats don't get to raise taxes.  And when neither side gets what they want, the bill fails miserably.  In short, this bill will be yet another failure of Congress under the Obama Administration.

No comments:

Post a Comment