Wednesday, October 8, 2008

Cut taxes

Greg Mankiw writes:

There is broad agreement among economists that what the financial system needs right now is not only an injection of liquidity but also a recapitalization....

The question for the moment is, How can we get capital back into the
financial system?

All economist should hate the payroll tax. Therefore, as a free market solution, economist should advocate aboloshing the payroll tax as a means of getting capital back into the financial system. It would not go directly into the financial system, but it would definetly free up capital for the financial system. It also might have the added benefit of addressing one of the fundamental causes of the crisis (i.e., falling home prices). Additionally, economist should advocate that the government cut income taxes as much as possible (while adding a small consumption tax for those who pay no income tax). Cutting taxes would add capital to the financial system, but many might be oppossed to cutting taxes for the following reasons:
  • Taxes can not be cut without an act of Congress.
  • The seriousness of the situation may not allow the time that is need to implement tax cuts.
  • The lost tax revenue would add to the deficit.
  • The capital added to the economy would not flow directly to the financial system.
Nonetheless, the payroll tax is one of the most economic inefficient taxes this nation has to bear. If this crisis can be used to get rid of it, economist should jump at the opportunity.