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Wednesday, April 30, 2003

Reductio Ad Adsurdum-Ben Domenech pointed out a pernicious quote from a Jonathan Weisman Wapo article on Bush's tax cut. The article is skeptical of the stimulative effect of further tax cuts and
"Some members of Congress support tax relief but say my proposal is too big," Bush said in his Saturday radio address. "Since they already agree that tax relief creates jobs, it doesn't make sense to provide less tax relief and, therefore, create fewer jobs."
Weisman then cites this denizen of academe
But few economists would argue that tax policy is so straightforward. Taken to its extreme, Joel Slemrod, a tax economist at the University of Michigan, said that Bush's argument would support eliminating taxes altogether for the sake of job creation. "Logically, the statement that more tax cuts are better is certainly wrong," Slemrod said.
Dr. Slemrod is working on a reductio ad adsurdum strawman. If we did have a zero income tax rate, we'd likely not have enough revenue to run the needed functions of the federal government, unless we substituted some other revenue source. Such a minimalist government might lead to more anarchy than is helpful and harm the economy. However, we're not talking about scrapping the income tax entirely, but marginal tax cuts from the current levels. Such tax cuts would have a stimulative effect on investment and a related stimulative effect on job creation. A tax cut will have some people decide not to work, taking some moms, retirees and students off the payroll from the income effect of a tax cut. However, other people will be encouraged to work harder given higher take-home pay from extra hours worked. If you look in the longer term, a tax cut will encourage investment, both by giving people more money to invest and by making the after-tax returns on investments more rewarding. That should increase investment; if it increases investment more than the amount of the tax cut, it will add to private-sector investment, which will create new jobs. Once the new businesses, plants and equipment are built, someone will have to staff them. The big question in my mind would be whether investment would go up enough to cover the deficit needed to finance them. If not, then job growth might not be that great and might be negative due to the crowding-out effect. However, if the combination of higher incomes and higher return on investment should add more investment than the dollar amount of the tax cut, then you'd have more investment and eventually more employment. Not "certainly wrong" Dr. Slemrod. "Probably wrong" I could see, coming from a Harvard Ph.D. However, it's a wee bit of hubris to conjure up "certainly wrong." He may be right, but I'm not certainly wrong.

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