Although the public works expenditure side of
President-elect Obama’s stimulus package is romantic nonsense, the tax cutting
side of his proposals deserves more support in Congress than it is getting.
The President-elect is right to inject money into the
economy, and cutting taxes is more likely to put that money in the right place,
and to have a quicker effect, than most forms of government expenditure.
Moreover, although far from perfect, Mr Obama’s tax ideas
are at least preferable to the idiotic notions of Gordon Brown’s government in
the United Kingdom.
1 The Brown strategy
was basically that the government borrow more in order to fund cuts in the
Value Added Tax (VAT) on sales – in the hope that this would lead to increased
sales; this, of course, implies increased consumer, as well as government,
borrowing, despite the fact that it was excessive consumer and government
borrowing that triggered this whole crisis!
2 The Brown strategy
appears to have failed even to meet its own objective of encouraging consumer
spending – which was entirely predictable, given that the small cut in sales
tax is unlikely to have much impact on consumer choice, especially at a time when
prices are falling anyway.
3 Though tax cuts
are always welcome, this temporary change in the rate of sales tax imposed an
expensive administrative burden on business hard to justify given it is due to
be reversed in 1 year.
4 Many businesses
did not even bother to pass the cut on to consumers – possibly because they
needed it to pay for changes to their book-keeping systems (though lousy small
business accounting software must carry its share of the blame).
5 The cut was of no
use to the smallest businesses, who do not pay VAT, or to the very poorest
families, who spend the greatest proportion of their income on basics, like
food, on which VAT is not charged.
6 Mr Obama’s
proposed tax credits would give people the choice whether to spend, to save, to
invest, or reduce their debt, according to their individual needs.
7 Tax credits would
benefit everyone, but those on low incomes would be proportionately best off –
they are, incidentally, the people most likely to spend most of what they are
8 Tax credits are
easy to understand and swift to take effect, and they impose no additional
9 Given that
existing legislative and tax burdens already make it likely that many jobs lost
in this recession will not be replaced, Brown’s increase in “national insurance
contributions” – basically a tax on jobs – is insane, but Obama’s proposed tax
credit for employers is at least a step in the right direction.
Of course, much of the good of the last proposal may be
undone if Congress passes increases in higher rate taxation and imposes
additional burdens on employers to fund healthcare. However the recession might
give Mr Obama the excuse he needs to junk some of the promises he made in the
election campaign. Indeed, he will be forced to retreat from some of them – the
question is which ones?