“Ever notice how you come across somebody once in a while you shouldn’t have messed with? That’s me.”
– Walt Kowalski, Gran Torino (2008) –
Daniel Mitchell of Cato has an interesting take on the tentative tax agreement between Democrats and Republicans titled The Good, the Bad, and the Ugly of the Tax Deal. Here are some excerpts, but be sure to read the whole thing:
Tax rates next year are not going to increase. The main provisions of the 2001 and 2003 tax acts are extended for two years — including the lower tax rates on dividends and capital gains. This is good news for investors, entrepreneurs, small business owners, and other “rich” taxpayers who were targeted by Obama.
The burden of government spending is going to increase. Unemployment benefits are extended for 13 months. And there is no effort to reduce spending elsewhere to “pay for” this new budgetary burden. A rising burden of federal spending is America’s main fiscal problem, and this agreement exacerbates that challenge.
But the fiscal cost is probably trivial compared to the human cost. Academic research is quite thorough on this issue, and it shows that paying people to remain out of work has a significantly negative impact on employment rates. This means many people will remain trapped in joblessness, with potentially horrible long-term consequences on their work histories and habits.
As happens so often when politicians make decisions, the deal includes all sorts of special-interest provisions. There are various special provisions for politcally powerful constituencies. As a long-time fan of a simple and non-corrupt flat tax, it is painful for me to see this kind of deal.
Moreover, the temporary nature of the package is disappointing. There will be very little economic boost from this deal. As mentioned above, people generally don’t increase output in response to short-term provisions. I worry that this will undermine the case for lower tax rates since observers may conclude that they don’t have much positive effect.