Following up on yesterday’s post, I’ve been trying to understand - I really have - the economic arguments in favor of dividend tax cuts. For the neo-cons are sincere in their belief that this cut will help the economy. The explanations I’ve encountered have ranged from smart (as in the Economist) to dumb (as in the Hoover Institute’s rantings on the PBS NewsHour) to just baffling (like the guests on Greater Boston, who just talked about “capital formation” without explaining how the tax cut would help. As far as I’ve been able to gather, the reasons tend to divide into three responses. First, is the ideological reason - dividend taxes are bad because they tax income twice. Second, that it will boost the stock market and therefore counter the “reverse wealth effect” we presumably have been experiencing at the bubble’s burst. Third, it will reverse the tax preference corporations currently get for taking on debt (the interest is tax free). I won’t debate these other than to point out that an excellent paper at the Brookings Institute refutes each point.
One thing that’s striking is the right’s assumption that only permanent tax cuts work because economic agents (i.e. people) factor in the length of the tax cut into their decisionmaking. While this makes sense from an accounting perspective (businesses figure out present value from all future cash inflows), it’s of course dubious as an explanation of how ordinary people and households save or spend money. What we seems to have is a deep split between Republicans, who are fixated on a microeconomic view of the world and Democrats, who look instead to a macroeconomic view. While I concede there are times the left could use a healthy dose of microeconomic thinking (in debates over rent control, say), I’m flabbergasted at how the Republicans are championing corporate tax reform as the way out of our recession while being seemingly unconcerned about the vast fiscal shortfalls the states are suffering and the macroeconomic impact that will have. For people able to calculate present values, it’s perverse to be unable to figure out the multiplier effect of a state laying off ten percent of its workforce.
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