A Chequer-Board of Nights and Days

Kevin Drum's idea of a rebate in the face of difficult economic times is as follows:

. . . Instead of, say, a one-shot rebate of $1,200, why not a monthly rebate against payroll taxes of $100 for 12 months? Add to that a 12-month boost to unemployment compensation, and you'd get a short term increase for everyone who works as well as for those temporarily idled by the recession.

Sure, a permanent increase might be psychologically superior, but knowing that you were going to get a steady stream of money for 12 months might prompt a little more spending confidence than a one-time windfall. Why not give it a try?

The problem with this suggestion is that it is only a temporary stimulus and it likely comes too late to do anything about difficult economic times; remember that most economic indicators are lagging and by the time any stimulus package takes effect, any recession that comes about may well be over and a stimulus such as the one Drum recommends will probably have no effect. Indeed, if this is the kind of stimulus that we are considering, it is far better to have no stimulus at all.

The curious thing about Drum's post is that he seems to ignore the very lesson he excerpts concerning the 1975 recession. Here is that lesson:

[Milton Friedman's] research had led him to conclude that consumer spending was less a function of liquidity than something he called "permanent income." Friedman observed that when workers lost their jobs, they didn't immediately cut back on spending. They borrowed or drew down savings to maintain spending, in the expectation of finding a new job shortly. Conversely, consumers didn't immediately spend windfalls. They kept spending on an even keel until they achieved a promotion at work, or other increase in their long-term income expectations.

....Subsequent studies by MIT economists Franco Modigliani and Charles Steindel, and Alan Blinder of Princeton, showed that Friedman's prediction was correct. The 1975 rebate had very little impact on spending and much less than a permanent tax cut -- which would change peoples' concept of their permanent income -- of similar magnitude.

So if we really want to stimulate the economy, we need a permanent tax cut. Drum turns up his nose at the idea but the phenomenon of the Laffer Curve is very real indeed and we have plenty of room to cut taxes. No, we shouldn't cut them to zero because there comes a point at the end of the curve beyond which tax cuts will negatively effect revenue collection. But it is possible for us to cut taxes significantly before reaching that point. More importantly, it is possible to reform the tax system and create a flat one that will truly be progressive, drop tax rates on individuals and broaden the base at the same time so that revenue collection increases.

Just follow the link here and you will see how it works. And again, I ask the question that has been bugging me for many years now: Can we finally get tax reform please? There is no reason, after all, to continue with an inferior tax system.