Friday, January 09, 2009

Democrats Against Tax Cuts

It seems that the Democrats are unhappy about Mr. Obama's proposed tax cuts.

WASHINGTON – President-elect Barack Obama's proposed tax cuts ran into opposition Thursday from senators in his own party who said they wouldn't do much to stimulate the economy or create jobs. Senators from both parties agreed that Congress should do something to stimulate the economy. But Democratic senators emerging from a private meeting of the Senate Finance Committee criticized business and individual tax cuts in Obama's stimulus plan.

They were especially critical of a proposed $3,000 tax credit for companies that hire or retrain workers.

"If I'm a business person, it's unlikely if you give me a several-thousand-dollar credit that I'm going to hire people if I can't sell the products they're producing," said Sen. Kent Conrad, D-N.D., a member of the committee.

"That to me is just misdirected," Conrad said.

Sen John Kerry, D-Mass., said, "I'd rather spend the money on the infrastructure, on direct investment, on energy conversion, on other kinds of things that much more directly, much more rapidly and much more certainly create a real job."
And what kind of energy conversion mosts interests the Democrats? The conversion of your energy into theirs.

I looked at the question of tax cuts a few days ago and came to the conclusion that they give a bigger economic boost than straight spending increases.
One of those studies was done by Obama’s new chief economic advisor, Christina Romer of UC Berkeley, who found $3 in increased Gross Domestic Product (GDP) for every $1 in tax cuts. Increased spending generates at best a mere 40 cents of GDP growth on the dollar. Third, that 40 cents actually goes to special interests like labor unions, politically influential contractors in favored industries and state and local political allies of the party in power.
So tax cuts promote the general welfare and spending increases amount to political payoffs.

The rhetoric of the Democrats is lofty. The intent is corrupt. I see a theme here. The most effective tax cuts would be on businesses. That means that profitable businesses could expand faster. Which in a rational world is exactly what you want. But then the politics of envy kicks in and the politicians want to punish winners and reward losers.

It will be interesting to see what comes out of this mess. Nothing good I'd wager. If I had any money to bet.

Christina Roemer has edited a book about motivation and inflation. Reducing Inflation: Motivation and Strategy.It is a collection of essays by various economists discussing the problems of inflation and how to set up incentives to keep it under control. I sure hope Mr. Obama reads it. It was published by the University of Chicago Press which would tend to indicate that Christina was influenced by the Chicago Boyz. That would be Milton Friedman of Free to Choosefame and others of the monetarist school of national finance.

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