John Taylor writes in today’s Wall Street Journal (12/21/11)-Want Growth? Try Stable Tax Policy:The payroll tax cut is one of 84 tax provisions expiring this year, 10 times as many as expired in 1999. (may require paid subscription)
Like the one-time rebate of 2001, the temporary tax cut of 2008, the cash-for-clunkers and stimulus payments of 2009, or similar policies tried back in the 1970s, these temporary policies consistently fail to stimulate sustainable recoveries. And as this history shows, extending the temporary reduction from two months to six months or even to 12 months would be at best a marginal improvement.
Even economists who claim that these policies stimulate—such as those at forecasting firm Macroeconomic Advisers—admit that they cost jobs as they are turned off, leaving the recovery no better off. Republican presidential candidates Michele Bachmann and Mitt Romney are right to call the payroll tax scheme, respectively, a “temporary gimmick” and “just a Band-Aid.”
But the policies are worse than doing nothing at all. Rather than stimulate the economy, they hold the economy back by creating policy unpredictability and by distracting Washington from crucial long-term reforms that are key to restoring economic growth and creating jobs.
Short term stimulus does not encourage long term investment. Any tax break with a deadline will be limited in its impact. We need a consistent policy. Temporary tax cuts and stimulus has even less effect in our environment when you have a credit contraction and citizens and businesses are reducing debt exposure, some by choice and some because the banks have by necessity become more prudent. Federal largess is offset by personal debt reduction and by states governments reducing expenditures. But temporary cuts must end and even if you concede that such actions actually do stimulate then what is the expected result when they end?
It is interesting that when the administration spoke of ending the Bush era tax cuts they did not consider that a tax increase, but merely an expiration of the Bush program. Yet when the recent cut in payroll/ Social Security tax is not renewed, the President clearly calls it a tax increase on the middle class.