Bush tax cuts impact

Bruce Bartlett notes that the Bush tax cuts did little to stimulate growth, and that tax cuts of this type are very
poor at what we need the most right now, countercyclical stabilization:

Bush Tax Cuts Had Little Positive Impact on Economy, by Bruce Bartlett, Commentary, Fiscal Times: Republicans are heavily invested in permanently extending the tax cuts enacted during the George W. Bush administration, all of which expire at the end of this year exactly as the legislation was written in the first place. To hear Republicans, one would think that the Bush tax cuts were the most powerful stimulus to growth ever enacted and only a madman would even think of allowing any of them to expire.

The truth is that there is virtually no evidence in support of the Bush tax cuts as an economic elixir. To the extent that they had any positive effect on growth, it was very, very modest. Their main effect was simply to reduce the government’s revenue, thereby increasing the budget deficit, which all Republicans claim to abhor.

Not sure I agree that all Republicans abhor deficits. Republicans trying to play the "starve the beast" think deficits brought about by tax cuts create the right incentives from their small government perspective (some Republicans were clearly confused about how to execute this strategy as they increased the deficit by spending increases rather than tax cuts). Anyway, back to the article:

It’s worth remembering where the Bush tax cuts came from in the first place. In 1999, in the midst of one of the biggest economic booms in American history, then Texas Gov. Bush convened a group of Republican economists to draft a tax plan for him. Contrary to Ronald Reagan’s 1981 tax cut, which was a simple across-the-board marginal tax rate reduction, the Bush plan was a hodge-podge of tax gimmicks designed more to win the support of various voting blocs than stimulate growth. ...

No Reaganites praised the Bush plan... Rather than defend his proposal as one that would increase growth, Bush argued that its main purpose was simply to deplete the budget surplus, which had grown under President Bill Clinton to $126 billion in 1999. Surpluses were dangerous, Bush and his advisers repeatedly warned, because Congress might spend them.

By the time Bush took office in January 2001, the economy was clearly in a slowdown; diametrically opposite economic conditions from what they were when his tax plan was first proposed. ... The rational thing to do under the circumstances would have been to rethink the tax plan... Instead, Bush sent to Congress the nearly-identical proposal he had endorsed two years earlier. His one concession was to permit the addition of a one-shot tax rebate — classic Keynesian policy that was opposed by all supply-siders and most mainstream economists as well, since previous experience with rebates showed that they had no stimulative effect whatsoever.

Bush’s economic advisers tried to talk him out of the rebate, but ran into a brick wall. He had made up his mind ... to support the rebate even though it was completely contrary to everything Republicans traditionally believed about taxation. ... Subsequent analysis showed that the rebate had virtually no stimulative effect, exactly as economic theory predicted. ...

In 2003, the economy’s continued weakness caused the White House to propose another tax cut that was more oriented toward supply-side thinking. The key elements were a reduction in the tax rate on capital gains and dividends to 15 percent. The tax cut on dividends was especially large...

Subsequent research by Federal Reserve economists has found little, if any, impact on growth from the 2003 tax cut. The main effect was to raise dividend payouts. But companies cut back on share repurchases by a similar amount, suggesting that only the form of payouts changed.

 Unfortunately,... we are now faced with the political reality that our only real choice is to extend all the Bush tax cuts or allow a large tax increase to take effect on Jan. 1. Under those circumstances, the tax cuts must be extended. But no one should delude themselves that continuing tax cuts that did nothing for growth over the last 10 years will do anything to stimulate growth in the future.

I'm don't think that the only choice is to extend the tax cuts for all, or have them expire for all. Allowing the cuts to expire for the wealthy, and be retained for everyone else, is viable option. One reason to think the Republicans are worried about having to vote on retaining all but the tax cuts at the upper end is that they are looking for ways to get around being forced to cast a vote on this option. Paul Krugman explains:

Temporary Tax Cuts For The Rich? No, by Paul Krugman: Greg Sargent notes the growing number of Republicans suggesting a “compromise” in the form of temporary extension of high-end tax breaks, and urges Democrats not to take the bait. His argument is essentially political: Republicans are obviously aware that they’re in a fix, and Democrats shouldn’t help them out.

But there are reasons beyond partisan maneuvering to reject any deal here.

First, temporary tax breaks for the rich are stunningly bad economic policy. As I tried to explain, basic economic theory — Milton Friedman’s theory! — tells us that affluent taxpayers are likely to save the great bulk of a transitory tax break. And bear in mind that while a 2-year extension wouldn’t increase debt as much as a permanent extension, it would still be much more expensive than measures like aid to the unemployed and to small businesses that would do far more for the economy, yet spent months held up in Congress because of alleged concerns about the deficit.

Second, this is obviously — obviously — a setup. The whole point is to avoid a vote on the middle-class tax cuts while Democrats control the House; when and if Republicans regain control, they can refuse to let anything but a full extension reach the floor. So the goal is actually permanent extension; what they’re offering isn’t a compromise, it’s a trap.

So just say no.

Democrats could say they'd consider transferring the tax cuts from the wealthy to the not so wealthy where they will do more good, but there's no reason to give in to the compromise described above.

Source : http://economistsview.typepad.com/economistsview/2010/09/bush-tax-cuts-had-little-positive-impact-on-economy.html