April 24, 2012

Eric Cantor's Temporary Tax Cuts Are Bad Economics

Veronique de Rugy

George Gibbs Chair in Political Economy
Summary

Republicans should stop playing favorites and give fundamental tax reform a try. That means a broader base and lower rates for all.

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This excerpt originally appeared in US News and World Report. Read the full text here.

In January 2013, the 22 million small business owners who pay their taxes through the personal income tax will see their top marginal tax rate increase to 41 percent.

Most people don't want to pay more taxes.

Everyone loves small businesses.

Take these three sentences, shake well, and you get the legislation backed by Majority Leader Eric Cantor, Republican from Virginia, to cut taxes on small business by 20 percent.

By design, the GOP plan would cut the top marginal rate from the current 35 percent to 28 percent and avoid reverting to the pre-Bush tax cuts rate of 39 percent for firms that have fewer than 500 employees.

While I am all in favor of lowering marginal rates and tax burden of businesses, this bill is a terrible idea. In fact, it is the perfect example of how not to cut taxes. It is temporary and it only caters to a special interest group rather than everyone.

A temporary tax cut is precisely the sort of half-baked intervention that accomplishes little more than injecting even more uncertainty into an already murky economic situation. Reducing tax rates can help spur investment and job creation, but "temporary" tax cuts never have that effect precisely because producers and consumers know a change is coming soon.