Saturday, January 01, 2011

The stimulus tax cuts

Every now and again the claim is made that roughly 35 percent of the stimulus package ($300 billion out of $862 billion) consisted of tax cuts. This is a nice trick on the part of the left, as it both demonstrates alleged bipartisan outreach efforts ("We tried to meet Republicans halfway with tax cuts)" and helps insulate the stimulus against charges it didn't work (tax cuts failed).

The problem with this narrative, however, is that confuses permanent tax rate cuts -- which were completely absent -- with tax credits and deductions best understood as tax expenditures and government spending by another means. To understand this, take a look at the various tax provisions of the stimulus package helpfully detailed by the Wall Street Journal (click to enlarge):

A quick reading of these provisions reveals it to be in large part a grab bag of tax favors for various favored constituencies. Among these include special bonds for high-speed rail, special provisions for steel and lumber companies, tax credits for plug-in vehicles and various forms of renewable energy.

Such tax measures are properly understood as a further distortion of the tax code which confuses economic decision making. Rather than promote growth and prosperity, such tax credits encourage the misallocation of resources away from more productive ends to less productive ones (after all, if the area receiving the tax credit would receive resources anyway the tax credit is superfluous, as people don't need to be incentivized to seek high returns on their investments).

Equating such measures with permanent reductions in marginal rates is a perversion of pro-growth tax policy. Growth does not result merely from depriving the government of revenue, but minimizing the distortions that factor into economic decision making. Tax credits, such as those in the stimulus package, and genuine tax cuts are two very different animals.

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