Should progressives support tax cuts as economic stimulus?

A debate has broken out between some leading progressives and more moderate economists about the value of tax cuts as economic stimulus, with the progressives expressing anxiety about such tax cuts, especially regressive ones. While I share the discomfort, I think that there are ways to make a deal around such tax cuts under circumstances progressives could support.

It is a remote chance to be sure, but mass unemployment is a crisis worth paying a steep price to solve.

Paul Krugman, while graciously linking to a piece I wrote about pivoting away from austerity by potentially buying off Republicans with some nice juicy tax cuts, dismissed this argument as follows:

I don’t buy it, basically because I believe you need to play the political economy long game. Starve the beast is still out there as a strategy; conservatives still push tax cuts in part because they expect, probably rightly, that this will tilt the balance toward cuts in the safety net the next time the deficit becomes a big issue. Don’t you think federal spending would be significantly higher now if the Bush tax cuts had never been passed?

On the other side, John Carney takes issue with Krugman’s “starve the beast” logic, asking: If tax cuts don’t inherently reduce the size of government, and they’re the only way to get some badly needed stimulus, then why not?

So, let me outline the sort of compromise we’re talking about. Loosely speaking, I see three major categories of such a deal:

  1. Regressive tax cuts plus an equally valuable progressive priority. Think Bush-style tax cuts weighted towards the rich coupled with a big increase in food stamps, unemployment benefits, and a few hundred billion in infrastructure.
  2. Non-regressive tax cuts, like a sharp cut in the payroll tax, which is disproportionately paid by the non-rich.
  3. Regressive tax cuts alone.

For progressives, I think we can rule out number 3. Tax cuts for the rich are the worst kind of stimulus in terms of effectiveness, and there is a good case that income inequality-driven divergences in consumption are a big driving factor in our chronic shortfall of aggregate demand. Rich people already have more money than they could ever spend, only tax cuts for them would be a half step forward and two steps back. (Though Krugman is a bit skeptical of this argument.) But I don’t see the reasonable progressive case against either 1 or 2. In my view, unemployment ought to amount to by far the top priority on the progressive to-do list, and I don’t think “starve the beast” worries or anxieties about giving obnoxious one percenters yet another mountain of money they don’t need outweighs the imperative to make strong headway on mass unemployment.

This logic is a bit uncomfortable for progressives, who sometimes elide the fact that tax cuts are fiscal stimulus too — indeed, they comprised the bulk of President Obama’s Recovery Act. I too would have to hold my nose if number 1 was up for consideration, and it is true that taxes will probably have to be raised someday to pay for the government progressives want. But placing such concerns above mass unemployment seems like a poor choice. Fix unemployment now, whatever the cost to the stupid deficit, then when Dems have power again and the labor market has recovered, pass tax increases on the rich, especially capital gains (the middle class will probably have to pay a bit more too, eventually).

Again, this is all quite unlikely. Republican policymakers don’t even seem to favor cutting taxes on the non-rich — they let the payroll tax increase back during the fight over the fiscal cliff without so much as a backward glance. But some conservative writers favor it, and it would make a great rhetorical wedge against the party of Letting The People Keep Their Money. It’s the center we’d have to worry about most, actually — blowing up the deficit with such a proposal would send Washington’s Very Serious People into spasms of murder frenzy. But it’s not completely out of the question, and should it come up for discussion I think progressives ought to support it.

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