Permanent Vs. Temporary Tax Cuts, and Take Tax Changes Out of Government Hands

One thing I wish economists would stop teaching is that there is a real difference between temporary and so-called permanent tax cuts.

In a text book where there are no politicians, there are no 'procedures', and there is not concept of dynamic change over time, that may be true: but in reality that is NEVER true.

A President/Congress today could pass a 'permanent' tax cut, only to be wiped out by a future President/Congress

A 'temporary' tax cut today can be extended tomorrow, and then extended the day after that, and so on....

So in reality, due to (political) uncertainy, which textbook economics doesn't consider at all, there is no real difference to a "rational" person between a 'temporary' or 'permanent' tax cut. The only thing that differs is the subjective probability that each individual gives as to whether or not a cut today will exist tomorrow. And that 'probability' is not define-able in any real sense and even if it were, it would be subject to change on an almost daily basis.

I should point out that economists 50 years ago did recognize this distinction, but over time, in the media and in the classroom, I have observed economics teachers 'assume' that just because something is labeled permanent, that the masses will think it is permanent, etc. That is not the case and I think the degree to which that assumption is roughly valid changes over time. In our present time, I would argue that the assumption is not at all a representation of reality, given how divided we are as a nation on issues of taxation and debt, and how uncertain everyone is about the future of our economy.

By the way, this is one reason I don't believe that tax cuts should be used as stimulus in the Keynesian tradition, ever. It just adds to the uncertainty. If I were redesigning the US (which we really need), the first thing I would redesign is congress and the second thing I would redesign is our tax system to make it so that it can never be used as a political or short-term economic 'tool' - in favor of a more static tax system with static rate(s).

Indeed, a major problem is that government has control to change taxes and spending at their whim (and can borrow from the future). If government were limited to just being able to change spending, and have a given long-run tax system, things would be much clearer. Government could spend, for a given level of tax revenue out of their control and in instances where revenue fell short, they would borrow but their future revenues would be completely controlled by the private economy now and into the future. This would provide incentive to government to borrow more efficiently and live within means. Large projects of course could still be financed with borrowing and solvency in the future would depend entirely on the solvency of the private market-driven tax revenues. Why should government be able to control the value of its costs and its revenues. No other entity on Earth can do that.

If it didn't have this duel control, people wouldn't be worried about whether they would be taxed more in the future or not and whether the government would remain solvent; they'd be worried solely about whether or not the government would remain solvent - providing an incentive to people to actually participate in their government.

Technically speaking people would still have to worry about inflation, but discussion of the so-called 'independence' of our central banking system at present, is for another time ;)