NCPA - National Center for Policy Analysis

Tax Policy Manipulation Won't Fix the Economy

September 22, 2010

Last week, President Obama called for an end to tax cuts for "the rich," and proposed a range of new tax cuts for those making $250,000 a year and small businesses looking to grow.  The Republicans have also laid out a tax plan that includes making the Bush-era tax rates permanent, fixing the alternative minimum tax and tweaking the estate tax.  While the two parties disagree over specific policies, both are stumbling into the same trap: using tax policy to manipulate the economy, says Anthony Randazzo, director of economic research at the Reason Foundation.

In the current debate over whether or not to extend the Bush-era tax policies there are three key questions: 

  • Would letting the tax law expire be a return to normal or a tax hike?
  • How would the policies impact the economy and recovery?
  • And what's the purpose behind letting them expire or cutting taxes?

To start, people and businesses have been working with the current tax structure when writing their yearly budgets for nearly a decade.  Business plans are designed to function best in the current paradigm.  So, at the very least, allowing the current tax laws to expire will feel like a tax hike to many, says Randazzo.

A tax increase, real or perceived, would have a negative impact on economic growth.  From unemployment to housing to gross domestic product growth, nearly every economic indicator has been trending downward in the recent months, has flat lined or has a dismal outlook for 2011.

  • The White House wants to bump up the tax rate in order to help pay down the deficit, believing an increase will create a net increase in revenues.
  • Conservatives argue that increasing taxes would derail the recovery by slowing economic growth and disincentivizing businesses.
  • But both sides want to use taxes as a means of generating a recovery -- which shouldn't be the purpose of tax policy.

Source: Anthony Randazzo, "Tax Policy Manipulation Won't Fix the Economy," Reason Magazine, September 15, 2010.

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