Ezra worries that the tax cuts in the forthcoming (just a few weeks now!) stimulus legislation suggest a continuation of the “tax cuts solve every problem” line of fiscal policy that has been a mainstay of the ol’ bipartisan consensus for several years now. And it’s a reasonable worry, but I think Matt's analysis, especially regarding the proportions of the cuts, is a little more relevant. Obama made tax cuts a central part of his campaign platform, and in so doing beat McCain on one of the few issues where the Arizona senator had a real advantage; though under-appreciated, the political battles over tax cuts (remember McCain taxing your health insurance for the first time in history?) helped negate the “socialism” message that the GOP used to close out campaign season. Obama has to pass his middle-class tax cuts as promised; to do otherwise would be politically suicidal going into 2010 and, yes, 2012. Imagining how the federal deficit will increase after the stimulus package works its way through Congress, this may be the only chance the new administration will get to push the cuts through.
For that reason, the purpose of the tax cuts seems first aimed at solving that political dilemma and only second at coaxing reluctant Republicans aboard the good ship stimulus, but messaging demands that Obama posture as a bipartisan man of compromise and not a politician covering his flanks. I'm skeptical, even with the cuts, that many on the right will vote for the stimulus legislation. But if they choose to oppose it, congressional Dems will have a lovely message in the 2010 elections: My opponent voted against a $300 billion tax cut. How times change!
Policy-wise, tax cuts are a reasonably effective short-term stimulus (economists argue they're the main reason we saw GDP growth in the third quarter of 2008) but they don't create long-term economic value or jobs like responsible investment — guess how much an unemployed person values a cut in their income tax. The real worry — and this is Ezra's point — is that government needs revenue, particularly when it has the kind of responsibilities and debt that the U.S. government maintains. Tax policy needs to be looked at as a temporary, circumstances-based fiscal tool, not some kind of god-given birthright. The first test of the Obama administration's tax policy will be where the cuts in the stimulus legislation are aimed: if the bulk target the middle-class or payroll taxes, that's positive, but if they are mainly aimed at writing down equipment depreciation and other business boondoggles, or at the wealthy, that's a problem. The second test of the Obama administration will be if it fails to let the Bush tax cuts expire in 2010; should that happen, I'll hang up my hat and go chill with David Sirota.
— Tim Fernholz
