Back in 2001, when the Bush tax cuts were first passed, the NY Fed took a look back at past Tax Rate changes and compared actual changes in consumer behavior with expected changes in consumer behavior driven by tax rate changes. Their key takeaway is that the most efficient tax policy is permanant tax cuts combined with temporary tax increases.
I think it is incredibly important to consider the changes in Tax Rates that are going to happen at the end of 2012 (and probably on into 2013) with the expiration of the Bush Tax cuts, the launch of many tax code changes due to the Obamacare legislation, and the expiration of many temporary tax and spending policies enacted since 2009 to try to stimulate the economy.
Since 2001, our nation's leaders have been giving us temporary tax cuts combined with permanant increases in government spending - contrary to the prescription of many Economists. The Medicare Drug entitlement, Obamacare, and No Child Left Behind have been big, permanant increases in government spending. Coupled with the always temporary nature of the Bush Tax Cuts, it should come as no surprise that the U.S. Economy has underperformed expectations. It has always been clear to me that the Bush Tax Cuts would go away and then taxes would rise even further, if only temporarily, to pay for the orgy of government spending put in place over the past 2+ decades.
The 2012 Federal Elections will go a long way towards determining what mix of revenue increases and spending cuts will take place over the next decade. If Obama is reelected I would not be surprised to see a Debt Crisis like the European Debt Crisis to hit the U.S. in the next 3-5 years as the U.S. follows the same path trod by the likes of the Greeks and the Spanish - Austerity through more social spending and higher taxes. My fear is that the only solution Obama sees to closing the fiscal gap is Austerity through tax increases - a solution which just leads to more pain when total government debt surpasses 100+% of GDP.
The policy I would prefer is a permanant paring back of entitlements combined with a temporary increase in tax rates to kick start the fiscal balance back onto a sustainable path. In other words, I would like to make the Bush tax cuts permanant, but see the imperative of higher rates over a 3-5 year period to pay for the orgy of spending that has occured over the past dozen years on entitlements and overseas contigency operations.
Tell me what you think...