In the post-election commentary, you will hear numerous voices – definitely on the right but also on the left – arguing that we could not possibly increase taxes this year or next, as this will push our economy back into recession. Do not believe them – this is just the latest disinformation put out by people who agree with Grover Norquist that the real goal of politics should always and everywhere be to reduce taxes and shrink the size of government. It is exactly such policies that have brought us to our current economic predicament.
But once he has vetoed Bush cuts, President Obama can immediately propose a new set of tax cuts – the Obama tax cuts – to Congress. These would cut taxes for lower income Americans, for example by lowering payroll taxes (which should also encourage job creation). Would the House Republicans really vote against a tax cut for 100 million Americans?
These new tax cuts should be linked to the state of the economy – for example, they could phase out automatically as employment rises relative to population. This would both help the economy in the short-run and put our budget onto a much more sound footing for the coming decades.
This last paragraph is an excellent example of making policy that adjusts to the economic cycles. Rather than enshrining permanent economic shifts in government policy into law to solve temporary problems, we enact temporary solutions for temporary problems.
By enacting hard to get rid of tax cuts when they were not needed, George Bush and the Congress at the time created a structural deficit in the budget. In other words a deficit that will still be there even when the economy was at full employment. In fact the economy was at full employment when they foolishly enacted permanent tax cuts when temporary tax cuts were not even needed.
There are people who do not seem able to or willing to understand the difference between what George Bush did and what President Obama ought to be doing now. In a cyclical situation, timing is everything for the right policy. On the other hand timing is nothing for a policy that is permanently wrong.