So, let's talk economics.
The Washington Post has this article purporting to deal with 5 myths about the "Bush tax cuts". According to the article, these are tax cuts enacted in 2001 and 2003, which will expire at the end of 2010 unless something is done.
I happen to think that the article gets it wrong in quite a few areas, mostly because the article comes from a Keynesian point of view. I am coming from an Austrian point of view, and found some major flaws.
1. Extending the tax cuts would be a good way to stimulate the economy.
This is a myth according to the article because you need to get a "big bang for your buck". In other words, because the rich (who will get a lot of the tax breaks) do not spend all their income, the stimulus will not be as big as it could be if we did something else.
This is wrong, because it looks at spending as if it is the whole end of the economy. Savings is seen as bad, with no look at what happens when somebody saves. When somebody saves, they typically will also invest (especially if they are rich). This investment gets funneled through the economy, so saving and investment are actually good. Savings essentially increases the size of the pie that is the economy. This is the distinction between what is seen and what is unseen. Spending is immediate, which means we see it right away, while saving takes time to see the effects, so it is frequently missed.
And what if the saver just stuffs it in a mattress? Well, even then there is less money chasing the same goods. So prices go down, and people are able to afford more, which is a good thing.
2. Allowing the high-income tax cuts to expire would hurt small businesses.
The article says that if we let the high-income tax cuts expire while keeping the rest, then we could have our cake and eat it too. Small businesses (which create most of the jobs) do not make enough to put themselves in the "high-income" tax brackets, so we can soak the rich and still let the small businesses off the hook.
Once again, the unseen is what kills this idea. What happens when the rich person fires his cleaning service, or switches to a car that is less expensive to maintain? Or what happens when the funding for a new business to get off the ground isn't there because we soaked the rich? We are all economically connected to people of various incomes, and hurting one will hurt us all.
3. Making the tax cuts permanent will lead to long-term growth.
The article says that this is a myth because government debt will grow bigger, which is going to more than cancel the growth the private sector will see from the cuts.
I have to admit, this is half true. I dislike the assumption that government spending is going to stay the same, but that will be dealt with later. Instead, for this one I'm going to approach the original myth. There will not be much long-term growth because the tax cuts are already there, we aren't talking about adding new tax cuts. However, making them "permanent" (like they couldn't vote to raise them on us later?) would at least remove some of the uncertainty of the current situation, which would encourage more people to invest and grow their businesses, so there would be some growth.
4. The Bush tax cuts are the main cause of the budget deficit.
This one is actually a myth. However, so is the author's counter argument that it is the recession. The main cause of the budget deficit is the government spending, whether stimulus, entitlements or other spending. More on this below.
5. Continuing the tax cuts won't doom the long-term fiscal picture; entitlements are the real problem.
The author says that the tax cuts are actually a significant amount of the deficit through 2020. And so the long-term picture would be a lot better if we let them lapse.
This is true, as far as it goes, but it doesn't go far enough. First of all, after 2020 Social Security, Medicare, and Medicaid will start shooting up, if they wait that long, because more and more people will be drawing on them. Saying that things would look significantly better 10 years down the road is fine, but in 20 years, we're going to be sunk by entitlements if we do not do something soon, so we might want to start thinking of "long-term" as longer than 10 years. I will probably live for another 50, and I'd like not to spend more than half of that in abject poverty due to entitlements.
The other problem with all of this (especially his points on 3 and 5) is that actually cutting government is completely ignored. Government must exist at at least the level we have it or something so horrible will happen that the mere thought can not be entertained. Please. This is silly, there are plenty of things that government could cut without effecting anybody. The entitlements will have to go in the long run, they are unsustainable, but even beyond that there is no way we need every dollar of our spending just to maintain civilization. We got to this stage without most of it, and we would make do again if government would just let us.
