The complicated alchemy of tax policy

Hugh sent me this article today. It's an interesting read if you're prepared to slog through it:

http://www.tax.com/taxcom/taxblog.nsf/Permalink/UBEN-8LFJPB?OpenDocument

And if you're not, here's the nutshell wrap-up:

1) The benefit (or harm) in changes to top tax brackets on on jobs isn't as great as some would like you to believe but is easy to 'spin' using different ways of measuring small businesses and high earners.

2) As far as tax cuts go, if the goal is near-term stimulation of the economy you'll get the most bang for your buck if you aim it for the general payroll, since these people are more likely to spend the money.

3) But for long-term growth, 'flattening' tax rates would be beneficial by reducing distortions and by long-term encouragement of saving & investing

4) If the goal is deficit reduction, however, raising top tax rates has a demonstrable benefit to public savings (benefits of savings make little distinction between public and private)

Now, on #3 I have a nit to pick as it oversimplifies by focusing on just the income tax, which is still somewhat progressive, but there are a host of other taxes that are either flat or regressive, and if there is to be a discussion of tax-rate distortions it would have to be more holistic to take those opposing forces into account. Also, there is the capital-gains tax rate which scrambles things further by effectively making a special lower bracket for another kind of income.

#2 is intuitively obvious: workers at the lower and middle rungs don't have the spare give in their lifestyles to save much, so if they get a tax cut chances are they'll spend it and stimulate the economy, creating jobs and so on. If you target a tax cut to the upper brackets, odds are they'll save it -- which usually isn't bad, but it's not what you want in a recession.

With 30-year bonds yielding 3.x% and CD's yielding 0.x%, it's clear that investor cash for savings and investment is currently in extreme surplus. Adding to that cash pile won't help anything, that money is too scared to invest in job creation until the consumer shows some serious commitment. So you see that cash chasing unproductive investment exercises such as bidding up the prices of gold and treasuries (two types of investments that should NOT be rising at the same time) The push, the spark, needs to come from the demand side, the supply side is already piled high with money.