The Funny Farm

The Wall Street Journal's Gerald Seib has an excellent column this morning on the impending depression threat of an economic downturn and the relevance (cough) of tax cuts to reignite the economy. (And I note the insidious way that Republican'ts use tax cuts as a universal panacea) He notes that Republicans have an important opportunity to push tax cuts as a spur to the slumping economy, whereas Democrats are still stuck with a tired tax-hike message and an obsessive desire to undo the Bush tax cuts. (And I note the way that Kudlow takes the Democratic position of enforcing the sunset of the pRetzelDunce's tax giveaways to the rich - which was the only way that they were allowed to be enacted - and turns it into an obsessive desire to undo the Bush tax cuts. And the loaded terms used to describe any long overdue tax revisions as tired tax-hike messages. But this one note symphony has rung hollow to my ears ever since the Ray-Gun experiment that tripled the national debt - after his handlers belatedly started raising taxes at the end of his second term - took place.)

Seib does not go into the incentive effects of lower marginal tax rates versus the one-shot demand-side effects of temporary tax cuts. (And Kudlow completely ignores the clusterCheney going on as the result of years of tax giveaways to the corporate welfare queens that renders any fantastical discussions about more tax giveaways to the rich moot)

Former Clinton Treasury Secretary Lawrence Summers* (along with an increasing wave of concerned economic gurus) is now predicting a 2008 recession. But he's calling for temporary tax cuts for low and middle-class families. Unfortunately, history clearly shows this approach will not work. (Unfortunately, Kudlow does not show us why he believes that history clearly shows this approach will not work - which I, unfortunately, think that history clearly shows will work - nor does he explain why his belief is more realistic than anyone else's)

Many years ago, the late Milton Friedman wrote about the permanent-income hypothesis. The basic idea is that temporary additions to income (from tax cuts) won't be spent, they will be saved. On the other hand, permanent reductions to personal tax rates will be spent, will be saved, and will be invested. (said hypothesis going out the window when any additions to income are spent treading water financially and trying to ease the increasing pressure involved with stagnant wages and rising costs)

Moreover, Nobel Prize–winning economist Ed Prescott has successfully argued that economic behavior is highly responsive to changing tax rates. (Funny - I only see refernces to Kudlow claiming that this is what Prescott is successfully arguing) So there's a big difference between the Republican approach and the Democratic approach. (So there's a big hole in Kudlow's argument right here)

Democrats also will try and make the case that taxes should be cut for the so-called middle class, and raised on upper-income earners. (As do many who do not agree with the regressive nature of the current junta's tax giveaways to the rich) This is futile. (I'm not sure that I agree with this statement. It's too bad Kudlow doesn't feel obligated to explain the futility of this strategy) It's also bad politics for rich Republican'ts. Taxing successful earners is a tax on capital and investment (as opposed to taxing less successful earners more on the lesser income they have to subsist on), which has recently become scarce during the american economic meltdown caused by the Republican't tax giveaways to the rich housing crisis.

Republicans should take care to give the lesser mortals a bit of largesse propose lower tax rates on middle-income earners, as well as more tax giveaways to the rich successful investors. The real cheese supply-side "bang for the buck" comes at the top-end (and the rich Republican'ts), but across-the-board rate reductions (in times of prosperity) do have positive economic and political benefits. Collapsing the middle-income brackets — 15 percent, 25 percent, and 28 percent — would make a lot of sense. (Perhaps if Kudlow had left us a clue as to where they would be collapsing to, his unfounded allegations about the unsubstantiated effect of his undefined increases in the tax giveaways to the rich could be considered in an analytical manner)

GOP presidential hopeful Fred Thompson's embrace of the House Republican Study Committee's plan for a two-rate tax choice of 10 percent and 25 percent would really fit the bill (as far as the elite are concerned). For joint filers, that would be a 10 percent tax rate up to $100,000 and 25 percent above that. Not only is that considerable reductions to the unsustainable tax giveaways scheduled to expire soon good tax reform and simplification, it would really help middle-income tax payers (and really really help upper-income tax payers) and it would reduce their combined Social Security and income-tax burden (while further starving the government of revenue and gutting Social Security. Ladies and gentlemen , I give you the Republican't twofer!).