It is important to note that Brittney Spears has a better chance of being alcohol free than the tax cuts have of becoming permanent anytime before the next election. Thus, I want to not only analyze the stimulizing effect of making them permanent but also the politics of the current situation.
In my second week in Macro Economics I learned that during recessions the government lowers taxes, and during times of inflation the government raises taxes. This would follow a similar principle only in this case you would remove the uncertainty of future tax increases.
The beauty of making the tax cuts permanent is that it requires no outlay of any sort of funds at all. Unlike the current stimulus package which will likely come from bonds or from other spending, making the tax cuts permanent is not only a stimulus but it is a stimulus with no extra spending. Beyond that it will likely not even require any future spending cuts necessarily. The stimulus this will provide will likely far outweigh any lost future revenue for the federal government. By 2004 and 2005, the federal government was receiving record high revenues because the Bush tax cuts had stimulated the economy so much that it far outweighed the revenue the government lost from reducing tax rates.
It is hard to quantify how much stimulus taking the uncertainty of future tax increase away will do however there is no doubt it will have a stimulating effect. The tax cuts weren't merely for income, but rather for such things as inheritence and capital gains. Capital gains taxes punish long term investors (capital gains taxes are taxes on income from investments that one has held for at least a year, like holding a stock the most common capital gain). It is hard to know how many people are holding off making long term investments to see what will happen to capital gains taxes but they are around.
The sort of long term investment that capital gains brings is exactly the sort of stimulus this economy needs. For instance capital gains affects real estate investment. What kind of a shot in the arm would the housing market get if the new capital gains tax rates were made permanent? Again, this is unquantifiable but there is no doubt there would be a stimulus.
Now, unfortunately, despite what I see as a logical way to not only provide stimulus but to do it responsibly without borrowing or taking from another group, I know there is no way this will happen this year. This reality presents an opportunity for anyone willing to take it. First, if these tax cuts aren't made permanent, they will turn into tax increases. The very same Democrats who are now characterizing the economy is an impending disaster are also ready and willing to raise taxes in the middle of this disaster. If taxes are raised during a recession, it only perpetuates it.
Thus, if income taxes, capital gains taxes, and inheritence taxes go back to their previous levels, the federal government will be artificially contracting the economy at the exact same time the economy is contracting on its own. This is what we are facing if the tax cuts are not made permanent. Unless this slow down stops and turns around and we have boom in two years, we are facing a counter productive tax increase in two years.
I believe that the Democrats have decided to play class warfare with taxes, and I believe that it won't work if the other side sells the tax cuts the way I know they can be sold. About half of all Americans invest in the stock market. That means a capital gains increase is an increase on the taxes of half of all Americans. Furthermore, I bet nearly all of those that don't would like to. The inheritence tax doesn't merely punish the wealthy but savers. For instance, if you put $100 away every month for forty years, that grows to over one million dollars by the end. That means anyone that was a saver their entire lives is likely to leave their heirs with the estate tax (also called the inheritence tax or the death tax) when they pass away. Thus, the Democrats punish savers when they force an inheritence tax on large estates. Ultimately, the necessity of making the tax cuts permanent comes from all the stimulating benefits I just described.
If the Democrats aren't willing to make them permanent, the Republicans need to argue that we need a party in power that will. While the Democrats scream about tax cuts for the rich, the Republicans just need to throw cold hard truth on it, and remind everyone the tax cuts were for all. Furthermore, they need to remind every day Americans what disaster lies ahead if natural contraction is combined with artificial contraction.
Making the tax cuts permanent makes perfect sense. In fact, it makes so much sense that of course it isn't something the pols in Washington would ever do. Given that reality, the Reps must at least use that reality to their advantage politically. The Dems think they have the economy as an issue. That is only the case if the Republicans let them.
Please check out my new books, "Prosecutors Gone Wild: The Inside Story of the Trial of Chuck Panici, John Gliottoni, and Louise Marshall" and also, "The Definitive Dossier of PTSD in Whistleblowers"