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REAL WORLD EVENT DISCUSSIONS
Bush v. Obama tax cuts
Sunday, October 24, 2010 7:48 AM
NIKI2
Gettin' old, but still a hippie at heart...
Quote:At Pig Pickin’ and Politickin’, a barbecue-fed rally organized here last week by a Republican women’s club, a half-dozen guests were asked by a reporter what had happened to their taxes since President Obama took office. “Federal and state have both gone up,” said Bob Paratore, 59, from nearby Charlotte, echoing the comments of others. After further prodding--including a reminder that a provision of the stimulus bill had cut taxes for 95 percent of working families by changing withholding rates--Mr. Paratore’s memory was jogged. “You’re right, you’re right,” he said. “I’ll be honest with you: it was so subtle that personally, I didn’t notice it.” Few people apparently did. Democrats' tax cut of the past two years, which decreased income taxes by up to $400 a year for individuals and $800 for married couples, has gone largely unnoticed. In a New York Times/CBS News Poll last month, fewer than one in 10 respondents knew that the Obama administration had lowered taxes for most Americans. Half of those polled said they thought that their taxes had stayed the same, a third thought that their taxes had gone up, and about a tenth said they did not know. the tax cut is invisible by design. Obama and his advisers feared that many taxpayers receiving a one-time rebate of a few hundred dollars would save some if not all of the money, which is great in normal times but lousy when the economy needs more consumer spending to revive growth. (Many economists believe this is what happened with the 2008 tax rebates.) With that in mind, Obama and the Democrats decided to cut taxes by reducing federal tax withholding, which meant the average family saw paychecks rise by $65 a month. People were far more likely to spend that money, thus stimulating economic activity, but they were less likely to notice it.
Quote: The very things that seem unusual about Obama’s rebate plan—that it will be handed out by reducing withholding, instead of in one lump sum, and that it will add a small but steady amount to Americans’ take-home pay—are precisely why it’s more likely to succeed. Past tax rebates, as many economists have argued in recent weeks, haven’t seemed to boost consumption as much as was hoped. Some estimates suggest that when a rebate was handed out in 2001 less than half of it was spent. The key factor in these kinds of distinctions, Thaler’s work suggests, is whether people think of a windfall as wealth or as income. If they think of it as wealth, they’re more likely to save it, and if they think of it as income they’re more likely to spend it. That’s because many people tend to base their spending not on their long-term earning potential or on their assets but on what they think of as their current income, an amount best defined by what’s in their regular paycheck. When that number goes up, so does people’s spending. In Thaler’s words, “People tend to consume from income and leave perceived ‘wealth’ alone.” So what does this mean for making a rebate work? If you want people to spend the money, you don’t want to give them one big check, because that makes it more likely that they’ll think of it as an increase in their wealth and save it. Instead, you want to give them small amounts over time. And you want the rebate to show up as an increase in people’s take-home pay, because an increase in steady income is more likely to translate into an increase in spending. What can accomplish both of these goals? Reducing people’s withholding payments.
Quote:Voters are buying the GOP spin: The most likely reason, says Jonathan Bernstein in Salon, is that Republicans have been relentlessly insisting that Democrats have "done nothing but raise taxes from Day One." Anybody who listens to Rush Limbaugh and watches Fox News would naturally believe Obama and the Democrats are tax-hungry fiends. And conservatives complain about the power of the "liberal media."
Sunday, October 24, 2010 10:40 AM
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