The Heritage Foundation has been arguing that temporary tax breaks are a poor stimulus substitute for permanent ones. They argue that permanent tax breaks, unlike temporary ones, change the long-run outlook for entrepreneurs and encourage them to launch otherwise nonviable ventures – stimulating the market with new business.
I’m somewhat nonplussed by this argument. Given our existing debt, the large amount of new debt that the stimulus plan will entail, the reduction in the tax base caused by the recession, and President Obama’s stated intent to expand entitlements, it is unclear to me how any “permanent” tax cut would be credible. Tax rates must rise to make up the difference between the larger amounts that the government is spending and its smaller tax receipts.
I suppose Heritage’s response would be that President Obama should promise to make up the shortfall with large entitlement cuts after the recession. This is a defensible policy, but I’m not holding my breath for our new Redistributer-in-Chief to adopt it.