Tax cuts that do what?

New York Times economics columnist David Leonhardt has a piece today entitled "Tax Cuts That Make a Difference" which advocates the use of tax breaks rather than broad-based rate reductions. The Times columnist opens his column by citing the alleged failure of marginal tax rate reductions enacted by Presidents Bush and Reagan in sparking job growth:

Mr. Bush signed his original tax cut in June 2001, when the economy had been losing jobs for four months. It then shed jobs for two more years. In the decade that followed the tax cut, economic growth was slower than in any decade since World War II.

If the goal is short-term stimulus, even Ronald Reagan’s much-lauded 1981 tax cut doesn’t appear to have worked. After he signed it, the economy lost jobs for 16 straight months. It didn’t start gaining jobs until after he had raised taxes, to reduce the deficit, in late 1982.

There are a few items worth noting about these tax cuts that go unmentioned by Leonhardt. The first is that the Reagan tax cuts were phased in over a period of three years, and thus were not fully in place until 1984. Second, the tax cuts also took place at the same time the Federal Reserve was raising interest rates, with the federal funds rate hitting a peak of 20 percent in 1981. Suffice to say this exerted significant economic headwinds on the economy.

The story is somewhat similar with the Bush tax cuts of 2001, as wikipedia notes:

Many of the tax reductions in [the Economic Growth and Tax Relief Reconciliation Act of 2001] were designed to be phased in over a period of up to 9 years. Many of these slow phase-ins were accelerated by the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), which removed the waiting periods for many of EGTRRA's changes.

Coincidentally, unemployment peaked in June 2003 at 6.3 percent and made a slow, steady decline to 4.4 percent in December 2006.

Leonhardt continues his column by bizarrely citing the cash for clunkers program as the type of government action worth emulating:

The ideal solution tries to leverage government dollars with private dollars. The cash-for-clunkers program did precisely this last year, causing a jump in vehicle sales...The tension with such tax cuts is between targeting and simplicity. Targeted ones can avoid showering too much money on households and businesses that were going to spend anyway.

This is correct, handing out vouchers to consumers for the purchase of new vehicles resulted in the increased purchase of vehicles. Not terribly surprising. But what happened next? Leonhardt doesn't say, but this chart speaks volumes:

Source: Coyote Blog

After the initial spike in auto sales we then see a pronounced decline. It's almost as if the program showered money on households that were going to spend anyway, the very thing Leonhardt argues against. One almost gets the sense Leonhardt is being guided far more by ideology than facts.

Update: Jeff Jacoby has more on the disaster that was cash for clunkers.