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Tax Cut Ironies

James Kwak writes about the Tax Cut Capitulation on Baseline Scenario web site,

(Note to Barack: If you want to win a negotiation, you have to be willing to walk away. Take my daughter. If I threaten her with a three-minute timeout, she says, “I want a timeout for eight hours!” If I threaten to take away an episode of Dinosaur Train, she says, “I don’t want to watch Dinosaur Train ever again!” You have two daughters, right?)

Good stimulus policies bring about economic improvements that are larger than the government money spent.  In economics this is called a multiplier that is greater than 1. Kwak quotes Mark Zandi about the multiplier on the package just “compromised”:

According to Mark Zandi (via Menzie Chinn), the multiplier for the Bush income tax cuts is 0.29 and the multiplier for accelerated depreciation is 0.27.

There is another thing wrong with the Obama capitulation other than the low multiplier:

Second, this can no longer be considered a two-year tax cut. This year, the Democrats gave in to the framing that letting the cuts expire would be a tax increase. President Obama has already nailed himself to the cross of “stop[ping] middle-class taxes from going up.” With that on his resume, how is he going to flip-flop and let those taxes go up in 2012? He won’t win a vote to cut taxes just for the middle class with fewer Democrats in Congress than he has now. So if he wants to preserve the middle-class tax cuts, he’ll have to compromise again.

Following along in the vein of Greenberg’s Law of Counterproductive Behavior he says:

So finally, you have to ask, what does Barack Obama want? Does he really like most of the Bush tax cuts? Does he really think the bulk of the tax cuts are good for the country, and that going along with the tax cuts in the top brackets is a reasonable price to pay to keep them?

In a footnote explaining why the Bush  (now Obama) Tax cuts were bad policy, he points out:

How bad? Here’s one example. In order to pass the bill using reconciliation–the first time reconciliation was ever used to pass a deficit-increasing bill–they had to limit the ten-year cost of the bill. One way they did that was by adding a provision that allows upper-income taxpayers, in 2010, to convert their traditional IRAs to Roth IRAs. This is unambiguously good for upper-income taxpayers, because it’s optional, so you can decide if you want to do it. So in the long term, it will result in lower tax revenues. But it artificially juices tax revenues in 2010, because when you convert you have to pay tax on the conversion amount now. That increased the amount by which they could cut taxes elsewhere in the bill. So, as my tax casebook puts it, the bill uses tax cuts for the rich to fund more tax cuts for the rich.

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