Want more stimulus? Consider alternatives to extending the Bush tax cuts

If the Obama administration has new ideas to stimulate the economy, why not consider them as replacements for Bush tax cuts, instead of an addition to them?

The key word in the title of this post, from my perspective, is “alternatives”–not “additions.” The Obama Administration is reportedly considering some new proposals for a variety of business tax cuts that they believe would be particularly effective in creating jobs quickly. As the AP’s Julie Pace reports:

WASHINGTON — Seeking ways to spur economic growth ahead of the November elections, President Barack Obama will ask Congress to increase and permanently extend research and development tax credits for businesses, a White House official said Sunday.

Obama will outline the $100 billion proposal during a speech on the economy Wednesday in Cleveland, the official said. The announcement is expected to be the first in a series of new measures Obama will propose this fall as the administration looks to jump-start an economy that the president himself has said isn’t growing fast enough.

The motivation for this longer-term cut in business taxes is probably largely political, because while there are other types of tax cuts or spending that would be more effective as true “stimulus” in increasing aggregate demand immediately, these types of permanent business-side tax cuts are less likely to be opposed by Republicans, even if they are deficit-financed (or maybe even especially if they are deficit-financed). Again from the AP story (emphasis added):

“I don’t think this is something that has … as immediate a job impact as, say, movement on the current tax credits for the unemployed or extending a payroll tax holiday of some sort. But I think it’s very important in terms of job creation over the longer term,” [Laura] Tyson [,a member of the President's Economic Recovery Advisory Board,] said.

While the idea is popular in Congress, coming up with offsetting tax increases or spending cuts has been a stumbling block. Obama will ask lawmakers to close corporate tax breaks for multinational corporations and oil and gas companies.

Congress has previously passed research tax credits on a temporary basis. The credits expired last year and a proposal for renewal is pending in the Senate.

While research credits generally have bipartisan support, Washington’s contentious political atmosphere means the White House isn’t taking anything for granted. Officials have watched other proposals they deem necessary to economic growth, including a bill to extend credit and cut taxes for small businesses, languish on Capitol Hill.

My first complaint about these new ideas for tax cuts is that they’re not really new at all; they’re repeats of essentially permanent (only technically temporary) tax cuts that are repeatedly renewed. The Obama Administration seems to have adopted the mindset that many policymakers in Congress (and not exclusively those from one side of the aisle) have long had–that the prescription for any kind of economic ailment is more deficit-financed tax cuts. But given the fiscal and economic outlook and how the CBO explains they interact over the longer term (large deficits reducing economic growth), there’s no justification for deficit financing permanent tax cuts–even tax cuts that may be good for longer-term economic growth (via the supply side of the economy) like the research tax credit. Deficit-financing is only justified for policies that are designed to effectively and immediately boost economic activity where idle capacity exists–that is, policies designed to stimulate aggregate demand.

But let’s set aside that complaint and assume that the Administration thinks they have some good new ideas, better ideas, for effectively and immediately jump-starting the economy. My suggestion: If these types of tax cuts (or spending increases) have greater bipartisan support than other current proposals for additional stimulus, and if economists believe some of these ideas would be more stimulative than any portions of the expiring Bush tax cuts, why don’t we start considering these proposals as substitutes for the (already presumed to be) deficit-financed extensions of the Bush tax cuts? (Why consider these proposals only in addition to the deficit-financed Bush tax cuts, which continue to get a “free pass” in this town?) Substituting policies that are better at boosting the short-term economy (i.e., policies better at the “three Ts” in being “timely, targeted, and temporary”) would maximize the stimulative “bang per buck” while avoiding an additional, more permanent increase in the deficit that could undermine the longer-term economic effects.

Policymakers need to put together a list that ranks fiscal policies (tax cuts and spending increases) from most effective to least effective–and I mean including the various elements of the Bush tax cuts that are scheduled to expire at the end of this year–settle on how much of a short-term increase in the deficit they are willing to put up with (and that our economy can tolerate), and only “accept” the proposals (and the deficit financing of such proposals) that fall above the cut-off line. And I mean regardless of the low bar they have already set for the full complement of the Bush tax cuts via the Administration’s policy baseline and the exemptions under statutory PAYGO rules. In my mind we should be “leveling the policy playing field” and letting the Bush tax cuts “compete” with the rest of these proposals under fair terms.

------------------------------

Add/view comments on this post.

The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.