I must admit, when I saw that Mitt Romney took aim at the tax compromise (NRO – The Corner), I was initially encouraged to support it.
Then I read Romney’s column (USA Today), and I must admit, I think – finally – he understands supply-side economics.
Here’s the money quote (emphasis added):
In many cases, lowering taxes can actually increase government revenues. If new businesses, new investments and new hiring are spurred by the prospects of better after-tax returns, the taxes paid by these new or growing businesses and employees can more than make up for the lower rates of taxation. But once again, because the tax deal is temporary, a large portion of this beneficent effect is missing. What some are calling a grand compromise is not grand at all, except in its price tag. The total package will cost nearly $1 trillion, resulting in substantial new borrowing at a time when we are already drowning in red ink.
In other words, tax cuts that focus on encouraging businesses to form or expand can grow the economy in a way demand-based tax cuts cannot, but only if they are permanent; otherwise, businesses won’t see the long-run benefit, and will hold back expansion (or entrepreneurs will hold back from starting up firms).
Now, whether these tax cuts can “pay for themselves” is a question that has clouded their actual importance (history, BTW, says they can, but they’re usually asked to pay for themselves plus additional spending sprees, which they certainly can not do). In fact, tax cuts like these, because they affect supply and not demand, can be couple with spending cuts and still bring economic growth (without inflation).
Romney doesn’t go into that detail, but he does note that the expiration date on the tax cuts drains them of their economic value. Meaning they won’t grow the economy, to say nothing of government revenues.
Like Romney and Jim DeMint, I’d rather these tax cuts were permanent. Like them, I’d prefer the unemployment extensions were covered with spending reductions elsewhere. I certainly have no use for the ethanol subsidies and other ornaments that decorate this.
The more I think about it, the less I like it.
