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NYT Invents Controversy Around Obama Budget
1) Tax breaks pay for themselves.
2) Tax breaks, especially in recessions, can stimulate growth.
Okay, those are two very different statements. Virtually all economists would disagree with statement 1. There is a huge amount of research on this topic by economists who range the political spectrum. In the context of an economy near full employment, tax breaks can at best trigger enough growth to replace 30 percent of percent of the lost revenue and most estimates are considerably less.
On the other hand, virtually all economists would agree with statement 2. In the short-term, tax breaks will stimulate growth, especially when the economy is below full employment, as it is now.
President Bush and many Republican leaders have been found of asserting statement 1, even though almost no serious economists would support this position. On the other hand, President Obama and his advisers have been arguing a version of statement 2, although in reference to spending rather than tax cuts.
For some reason, the NYT wants to accuse President Obama of arguing a version of statement 1. This is entirely an invention of the NYT. Neither President Obama nor any of his top advisers have claimed that his spending will pay for itself in the form of higher tax revenue. While they have argued that it will boost growth, which will help to cover the cost of the spending, the assertion that the spending will pay for itself comes from the NYT, not the Obama administration.
It is unfortunate that trees had to die for this story.
--Dean Baker
COMMENTS (6)
Why would statement #2 be true -- if recessions continue because private parties save instead of spend then tax cuts just give them more money to save which aggravates the problem.
Posted by: H-Bob | May 1, 2009 2:16 PM
I didn't realize Dean was so ruggedly handsome. Oh, wait, that's Harrison Ford. Sorry.
Posted by: dougokeefe | May 1, 2009 9:23 PM
In the context of an economy near full employment, tax breaks can at best trigger enough growth to replace 30 percent of percent of the lost revenue and most estimates are considerably less.
Tsk: come along Dean, add the other caveats to that argument. It depends upon what your starting tax rate is. There is curve there after all, even if none dare utter the word "Laffer".
And it also depends upon what you're taxing. Returns to labour? Returns to capital?
Posted by: Tim Worstall | May 2, 2009 5:02 AM
Never mind what economists say, proposition 1) is empirically false - big tax cuts have resulted in increased deficits and have not even boosted private investment. And high marginal rates did not impede prosperity. Empirically, Laffer territory must be over 91% if it exists.
Posted by: skeptomist | May 2, 2009 11:53 AM
Isn't it a matter of the time frame for when tax breaks "pay for themselves"? Assuming no decrease in expenditure, if they stimulate growth, and if that growth gathers momentum and eventually results in generating enough revenue to bring the budget into balance, haven't the breaks by definition "paid for themselves," even if over, say, an 8-year period? Of course, it depends on who gets the breaks: as we saw proved during the Bush administration, tax reductions mainly for the rich will never generate sufficient growth to do this.
Posted by: urban legend | May 2, 2009 6:13 PM
"It is unfortunate that trees had to die for this story."
Oh, damn! Dean always knows just the right way to make me smile. I read that line as narrated by Samuel L. Jackson.
If school had been as fun and usefully educational as Dean's blog, I wouldn't have taken up smoking behind the gym. :-}
Posted by: Erisian23 | May 3, 2009 5:47 AM