David Leonhardt on tax cuts

David Leonhardt makes the point in yesterday's NY Times that I have been thinking about for awhile. If President Obama is smart (and I know he is) and if he hasn't given up on trying to save the economy from a double dip and save Congress from falling to the Republicans (of that I'm not so sure), here's what he does: propose legislation to extend the Bush tax cuts for all but the highest income earners; let the tax cuts for the top earners expire, but take the proceeds for the next two years and use them to fund a set of tax cuts that moderate Democrat, Republican and independent voters will understand and approve. These include a payroll tax holiday and investment tax credit. I'd toss in the support for community banks to finance loans to small businesses if we can all avoid calling it TARP for small banks. It's good for the economy, and it's good politics.

There's a lot of disagreement out there as to whether tax cuts of any kind, but especially tax cuts for the rich, have a stimulative effect on the economy. Leonhardt presents a very strong argument that tax cuts for the rich have very little effect: we've tried that twice in the past (1981 and 2001) and each time the tax cuts were followed by many months of continued declines in employment. Not an airtight case, but certainly if you do something twice and it doesn't work, you might want to think again about doing it a third time.