Public opinion is behind tax cuts. In a recent poll, 58% of Americans said they would oppose a new fiscal stimulus program if it did not include tax cuts. While it is natural that Americans should want tax cuts, we should be careful about the methods we choose to achieve that goal.
Tax cuts have been proposed as a part of the fiscal stimulus program for the Obama administration. Obama has proposed that 40% of his $775 billion “fiscal stimulus” be devoted to so-called tax cuts. Democratic senators, like Diane Feinstein, oppose such large tax cuts.
Perhaps the most disturbing part of this discussion is the failure of so many people to recognize the illusory nature of the Obama tax cuts, which would reduce the immediate tax burden for some Americans by increasing the federal deficit. A switch from tax-financed spending to deficit-financed spending does little to change the existing division of resources between the private and public sector.
Obama’s tax cut does not shift resources into the private sector, as a true tax cut would. What Obama is proposing is deferred taxation. He wants to spend now and tax later. The Obama deficits will increase the interest payments by the federal government, draw money in capital markets away from private investment, and ultimately result in higher future tax rates.
Of course, the government could just refinance this debt over many years. So we might not see higher tax rates to pay this debt for a long time. But this just means that we will be crowding out private investment for a longer period of time. The more the government borrows, the less private investors can borrow. Obama wants to “jump start the economy” by deferring some of the taxes we pay to some indefinite future time period. This will stimulate some parts of the economy. The people who get these tax deferments will spend at least some of the money on things that they want now. Some businesses will get more revenue. But this will just draw money from other business investments. Continue reading . . .
