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tax cuts and subsidies

OK, let's stipulate that there are many times that a tax cut is a good idea. In principle, that should be roughly as often as tax increases are a good idea -- maybe more so, if you buy the theory that governments always want to expand and there should be a thumb on the scale to oppose this. I'm not talking about that right now.

It is also inarguable that tax cuts are a popular form of panem et circenses in an election season, so perhaps there should be a thumb on the scale to oppose this as well. I'm not talking about that right now either.

Just at the moment, however, we're coming up on the abrupt, scheduled end of a tax cut that has been with us for ten years. Even if we weren't in a particularly bad recession, did anybody really expect that tax cut to not be extended? When a hundred million Americans expect to see their paychecks shrink next month, this can easily outweigh some abstract concern about racking up government debt for our children and grandchildren to pay. In other words, if you enact a tax cut to apply for a specified length of time and then end, it will almost certainly not end at that time. Which means that any advance estimate of the cost of a tax cut is almost certainly an underestimate, which puts a thumb on the political scale in favor of the tax cut. So how do you fix this?

If you actually want a tax cut to expire on schedule, have it taper off rather than ending abruptly. In fact, the same goes (even more so) for any kind of targeted subsidy -- to sugar producers, or oil drillers, or underwater basketweavers, or whatever. Have the subsidy run for (say) five years, then taper off gradually over the following five years. This will produce less sense of imminent disaster, and allow a more rational decision-making process with a longer time horizon.


This rubs against the differences between fiscal policy and politics. Politicians, when they lack more creative solutions, engage in brinksmanship; having the threat of "OMG everyone's taxes will go UP!" means they can push through ridiculosity, rather than having a rational conversation about it. Also, it helps clearly delineate issues to campaign on. ("The other side wants to STEAL YOUR WALLET!")

This is one reason I'm keeping an eye on "increased oversight of the Fed", which was NPR's hot-button topic this week. While I'm all for accountable fiscal policy, I'm not sure it's in everyone's best interests for them to be accountable to elected officials.