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Monday, May 12, 2008

Brad Delong quotes Bruce Bartlett with a strategic simulation of approval

Bartlett Prays for Fiscal Sanity from the GOP
He prays in vain: >The GOP's bait-and-switch tax strategy - Los Angeles Times: The rhetoric defies reality, when what the nation really needs is a permanent plan. It is an article of faith among Republicans that tax cuts are the cure for every problem the economy faces, and that tax increases are the equivalent of economic poison. Any hint by Democrats that the current administration's tax cuts should be revisited in light of changing economic or fiscal conditions is met with charges that they are proposing the largest tax increase in history. >The truth is that President Bush's tax cuts didn't do much good for the economy; they were mostly giveaways to GOP political constituencies and were little different conceptually from pork-barrel spending. Although there were some good elements to the tax cuts, such as the reduction in marginal tax rates, they were fatally undermined by their temporary nature. >The fact is that the massive tax increase Republicans claim the Democrats are proposing is entirely the result of the GOP's penny-wise and pound-foolish policies. Rather than expend the effort to make their tax cuts permanent in the first place, they attached expiration dates to every major provision. Most will expire automatically at the end of 2010. The alleged tax increase that would result is simply a consequence of the tax system returning to what it was before 2001, when the first tax cuts were implemented.... >Republicans respond that they had no choice; they didn't have the votes to enact permanent tax cuts, so it was temporary cuts or nothing. This is not true. They could have made them permanent, but that would have required bipartisanship and more political capital than Republicans were willing to spend. So they took the easy way out, figuring that Democrats wouldn't dare oppose extending the tax cuts when the time came, lest they be accused of favoring a vast tax increase.... >This sort of political game may be fun for Republicans who think that they have boxed Democrats into a corner. But this game has had real economic consequences. Because the tax cuts are not permanent, their economic impact has been severely diminished. All economists know that permanent tax changes have far more effect than temporary ones because people won't change their behavior significantly unless they have some assurance that the tax regime will be in effect for the long term...

Republicans denouncing Republicans are fun, but Bartlett is, as usual, full of it. Economists (including Douglas Holtz-Eakin heard of him ?) often argue that the effect of a temporary tax cut can be larger than the effect of a permanent tax cut. Anyone who knows anything about economic theory is familiar with the phrases "substitution effect" and "income effect." supply siders either don't know what an income effect is, assume that income effects must be small or, (most likely) are trying to trick people who don't know what income effects are. A very temporary tax cut has a small income effect. This means that the effect of a temporary tax cut can be much greater than the effect of a permanent tax cut. In fact, the model Holtz-Eakin could come up with in which incentive effects due to the Bush tax cuts paid for the largest fraction of the direct revenue loss was the one in which it was assumed that economic agents assumed that the tax cuts would be temporary, and, therefore, the tax cuts had a large effect on labor supply [citation needed].

The fact that incentive effects of temporary cuts can be greater than incentive effects of permanent cuts was also noted by Paul Krugman who called the bill the "throw momma from the train act of 2001" as heirs facing the sudden reappearance of the inheritance tax might resort to homicidal estate planning strategies [citation needed].

Why does this post on Bartlett contain a link to Brad DeLong ? [echo-chambering]

Echo chambering is better than linking to BB, but I do need citations. The throw momma from the train act was named here.

The observation that the way to get large supply side effects from the tax cuts was to assume that they were temporary (and ignore adjustments costs which BB has in mind is here

FOR THE HANDFUL of people who read the report in its entirety, there is another surprise. Of the nine different economic models used to analyze the president's plan, only two showed a large improvement in the deficit over the next decade as a result of "supply side" effects. Both those models got their results by assuming that after 2013, taxes would be raised to eliminate the remaining deficit. The theory is that people will work harder between 2004 and 2013 because they know that their taxes will be going up, and will want to earn more money before those tax increases take effect.

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