Economics

Everyone Celebrate Stimulus Thursday!

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I know, I know…in Obama's America, every day is stimulus day! But let us contemplate these two bits of stimulusiana on a fine Thursday afternoon:

*Bryan Caplan seems to endorse this temporary stimulus idea: states stop collecting sales taxes with a federal guarantee to make good the income difference for them out of its coffers. Isn't this in effect like a federal tax cut? Not exactly, he thinks:

…in a world with inflexible prices and wages, intertemporal substitution ramps up the effect of a sales tax cut, but not an income tax cut. What's the difference? When sales taxes are temporarily low, people have an incentive to buy more now. With inflexible prices, this intertemporal substitution diminishes the surplus in the goods market. Income tax cuts, in contrast, encourage people to work more now—exacerbating the surplus in the labor market.

As a proposal in an imperfect world in which I'd rather government not take any concerted action to manipulate our behavior but they are dead set on it, this strikes me on first couple of thoughts as not a terrible idea. (Yes, in the long term, where are the Feds getting this money they are rebating to the states? But where are they getting any of the money for any of the crazy crap they'll be doing in the next four years?)

*Also Caplan's partner at the EconLog blog, economist David Henderson, is in Forbes explaining how the professional work of Obama's candidate for chair of the Council of Economic Advisers, Christina Romer, seems to indicate that attempts to obviate grim economic cycles (such as the one we are now in) with federal fiscal stimulus measures of the sort Obama wants to initiate, whether on the tax or spending end, have a spotty history:

Tax changes intended to offset the business cycle, though, aren't so effective. The Romers [Christina and husband David] write, "[C]ountercyclical fiscal policy is not achieving its intended purpose." Why? "[I]t is difficult for fiscal policy to respond quickly to economic developments." The two largest countercyclical tax changes between 1947 and 2005 were Lyndon Johnson's 10% surcharge on income taxes, implemented to "cool off" the economy, and Gerald Ford's 1975 tax rebate, implemented to boost the economy.

The Romers point out that the surcharge was first proposed in January 1967 but wasn't passed until June 1968. And, although the 1975 tax rebate was passed within three months of being proposed, they note that it was not proposed until 14 months into the 1973-75 recession. They could have noted that the recession ended in March 1975, the same month the rebate was proposed and three months before it was passed.

Changes in government spending to offset the business cycle are also fiscal policy, and they have the same problem. We are well into the recession, we don't know how long it will last and we won't get an actual "stimulus" bill signed before February at the earliest. Even the pessimistic Federal Reserve is predicting a recovery beginning in the second half of 2009.

I wrote about some Romer research about the effect of tax cuts in the February 2008 issue of Reason magazine.

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  1. Even the pessimistic Federal Reserve is predicting a recovery beginning in the second half of 2009.

    They may be “predicting” it in a public statement but I highly doubt they believe it.

  2. SIV, you fool! You’ll wreck the economy with chatter like that!

  3. Naga, I think the Fed/Treasury have already done a swell job of that by saying over and over again that they were trying to give the economy “confidence”.

    Note, if you’re trying to make someone confident the last thing you want to do is tell them you’re giving them confidence.

  4. But that’s our entire business plan!

  5. cunnivore,

    That’s just crazy psycho-babble talk.

    Seriously, though, revenue at my casino is up for some reason I can’t fathom. The restaurant that I work at is way up in revenue this year versus last year.

  6. SIV, you fool! You’ll wreck the economy with chatter like that!

    That is my plan. With my relative outperformance as all asset classes decline I shall soon OWN THE WORLD!!! BwaaHaHaHa!!!

  7. There’s a huge problem with the Feds-pay-state-sales-taxes idea. It would be grossly unequal- state sales tax rates vary wildly. This would be a huge boon to places with high sales taxes, at the expense of states with lower or no sales taxes. True, the low-sales-tax states are generally the smaller states, but that’s why we have a Senate. This one of the few ways the Senate still acts to protect Federalism post-17th Amendment. Though of course because of them we also get agricultural subsidies. So perhaps it’s a wash. Either way, having the Feds step in to pay state sales taxes is a horrible and exceedingly unlikely idea.

  8. Forget the state sales tax – it’s the new Cook County rate that’s killing me.

  9. I have to go with Peter Schiff on this one. We consumed our way into this mess. How can we consume our way out when the country is broke?

  10. jason,

    Broke? Speak for yourself you boor.

  11. Thank goodness a plurality of the Reason contributors/employees did not endorse/vote for this Obama guy. That would be like an ostirich egg on the face of a Libertarian publication.

  12. Yes, that was sarcastic.

  13. I brought that up before, Guy. Apparently the “full time” employees all voted for Barr or did not vote at all.

  14. Libertarian Goddess KM-W is a principled non-voter and SHOULD BE PROMOTED TO SENIOR EDITOR IMMEDIATELY IF NOT SOONER.

  15. This year on the aniversary of the first bailout of 2008 being signed by Dubyuh we should hold massive unauthorized protests in DC and shut down major highways that are used by government employees.

  16. The states should have the federal government suspend the income tax, and then the state citizens tax themselves to provide themselves with infrastructure and services, versus the feds giving it all to the corporations in exchange for nothing.

  17. Don’t confuse me Naga!!

    P.S. Wegaial is a liberal shill!!

  18. Did I mention I hate that Weigal guy?

  19. Is that you Weigel?

  20. Didn’t Weigel leave, anyway?

  21. BDB,

    I don’t know. If it doesn’t have anything to do with KMW I don’t pay attention.

  22. But work is noble and consumerism is evil! So everyone should work and no one should be a consumer!

  23. I have to go with Peter Schiff on this one. We consumed our way into this mess. How can we consume our way out when the country is broke?

  24. Sales tax sucks and should just be eliminated. Here’s why:

    1) The customer has already had his income taxed before he gets the money to spend on a purchase. Sales tax is double taxation.

    2) The sales tax is regressive. Exemptions to sales tax, like in the purchase of food, only make up part of the day-to-day expenses most people make.

    3) It FUBARs “regular” trade among states. Did you know that if you buy a product via the Internet, and don’t pay sales tax, you need to report this and pay a “use” tax in many states?

    4) It forces businesses to become proxy tax collectors.

    5) No one, and I mean NO ONE, understands sales tax. In CA there’s sales tax on engineering work (a service) if it results in tangible personal property. But if the engineering is outsourced, and still results in the same tangible personal property, there is no sales tax. If there is race horse breeding stock or some types of diesel fuel involved, the tax can be lessened. If your customer picks up the product you sell at your facility, the customer pays the local sales tax. But if you ship it to him or deliver it to him it’s very unclear which tax agency should be payed, or how much should be payed.

  25. So, what’s the theoretical rationale for giving California and Washington both a stimulus while giving Oregon none?

    Instead, apply a negative-rate universal Federal excise tax. Say, oh, -5%, which would exceed the sales tax in 13 states, equal it in seven, and reduce it in the others to an effective rate of between 0.3% (Indiana) and 2.25% (California).

  26. Dy the way, jk, your state might double-tax, but mine doesn’t tax incomes.

  27. Instead, apply a negative-rate universal Federal excise tax. Say, oh, -5%, which would exceed the sales tax in 13 states, equal it in seven, and reduce it in the others to an effective rate of between 0.3% (Indiana) and 2.25% (California).

    That would make a lot of work for US accountants but it would not improve the competitive standing of US businesses in the world economy, nor would it make local US economies work more efficiently.

    I’m doing OK as an engineer with my own business, and maybe I’m just eating the sour grapes, but it does annoy me that I am pushed into paying accountants ( who charge an hourly rate much higher than mine ) to figure out how I should accommodate the government for the unpayed (spelled s*l*a*v*e) service of collecting sales (excise, or whatever you want to call it) tax.

  28. jk,

    To be fair, you could make the argument that businesses don’t pay taxes. They collect them. Cost of goods sold is a bitch.

  29. Naga,

    That is why I phrased it differently than you did. I recalled Matt using that employee dodge, even though they had an article bursting with Obama votes, support and obscene political acts.

  30. I’d probably support Caplan’s sales tax shift, but I’m not sure a, say, 5% cut is enough to increase aggregate demand. I do like its universality.

    I think I’d prefer a big SS cut. Maybe an immediate expensing of corporate investments in capital goods.

  31. Income tax cuts, in contrast, encourage people to work more now – exacerbating the surplus in the labor market.

    I understand this argument. With the economy slowing down, we certainly don’t want people to work more, do we?

    With the printing presses pouring out the dollars, why do we even have an income tax? At this rate, what we pay in taxes will be a drop in the bucket compared to gov’t expenditures.

  32. Libertarian,

    I think you are missing the lazy contingent.

    Some significant number of people will stop working “overtime” if they can keep a decent amount of their earnings in a regular workweek.

  33. Reasonably intelligent primate seeks employment in Palm Beach County, Florida.
    Has his own transportation. Good at writing and shit.
    Will consider the sex trade, but no weekends or holidays.

  34. Somebody break out the cold beer and fire up the grill! Yee Haw!

    Je
    http://www.privacy-tools.at.tc

  35. jk — one more problem with state sales taxes, and other commodity taxes, is that they’re vulnerable to abuse, that is, discretionary hikes for political purposes. Let’s raise cigarette taxes! Let’s raise liquor licensing fees, and make sure the restaurants that play nice with us get the plum licenses! (Ah, Chicago.)

    I can see Caplan’s logic, but I don’t know if the rebate plan could be passed quickly enough to be timely; in that way it suffers from the same problem as all expansionary fiscal policy.

  36. Income tax cuts, in contrast, encourage people to work more now. . . .

    Maybe at the margins, but the immediate impact of an income tax cut is an increase in take-home pay, facilitating more spending.

    Color me totally unimpressed.

    More significantly, though, this proposal would only exacerbate one of the major structural problems in this country – governments spending money they didn’t raise. But that’s a problem for another rant.

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