Tax Cuts vs Stimulus

February 10, 2009

Tax Cuts vs Stimulus

February 10, 2009


This week America is being avalanched with conservative warnings about the economic stimulus plan. Tax cuts, say senators from South Carolina and Texas, are better than stimulus spending because (1) they are not government, (2) they leave the initiative in the hands of a million individuals who know more about what they need than any government could ever know; and (3) they can take effect quickly.

Government is indeed clumsy and tax cuts do not require a bureaucracy. That much is true. But the idea that tax cuts actually save the economy is something else; it is, essentially a faith-based hope.

The argument that tax cuts will produce quickly assumes that (1) the taxpayer knows the amount of the cut; (2) that he knows that amount before April, 2009, or that is, immediately, (3) that he decides as soon as he knows that he will spend the savings, and (4) that his spending will reemploy Americans and not go to China, or Dubai or Azerbaijan. These are huge assumptions.

A tax cut might indeed deliver an undetermined amount to the economy that may be spent at an undetermined time in the future by undetermined persons in response to undetermined opportunities. Or the money might not be spent at all. The tax-cut does not mandate the critical last step: it does not actually spend the money. It creates conditions of possibility; hoping that someone will create jobs. It therefore requires us to hope that milli ons of unknown people with unknown interests will invest or spend. If it applies to 2009 taxes, the money will only be available in 2010. That is not as quick as a stimulus package for which some spending will begin in 2009.

Tax-cut proponents hope, further, that that in a world of declining confidence, John Doe will go out and start a business or buy a house, or a car, this year, now, before he has the money. That hope, as trusting and unrealistic as it is, is the bedrock of the conservative faith.

The very wealthy, it is true, can plan ahead and theoretically might be willing to invest millions already this year when the legislation passes and before they file their returns next year. But maybe they won’t spend at all, or maybe they will put it in a Swiss bank or just buy Treasury Bills. And they don’t have to spend on projects of advantage to most Americans. They can move their headquarters to Dubai, as Haliburton did. They can decide to hunt whales, or drill for oil in the Artic, or hire sweat labor in China, or lobby the Congress for subsidies for industrial farms. They can invest in speculative securities of imagined value such as collateralized debt obligations or credit default swaps.

When a tax cut goes to Chevron it may as likely be spent to drill for oil in the Caspian Sea as here. Its multipliers will be in Azerbaijan, not here. When a tax cut goes to Haliburton it may as well be spent in Dubai as here. Its=2 0multipliers will in the Middle East, not here.

A stimulus package by contrast guarantees that some spending will occur, knowing where and for what, and aims at projects that are in the public interest or that produce real wealth with significant economic multipliers here, in the U.S.. Stimulus says, “do that bridge, and that science, and that medical program. Start now.”

So the advocates of tax cuts are hopeful, but the argument is faith based and no one knows for sure how or when the money might be spent. Stimulus, by contrast, can get started on the schools and hospitals and bridges and research for better batteries, and wind farms and, yes, assistance to the arts, and job training, and Head Start. We can direct stimulus at our greatest common needs. That is for most of us a far more secure, more promising and more responsible course.