Thursday, August 23, 2012

The Fiscal Cliff

John Cochrane has an interesting post on the fiscal cliff.  Here's an excerpt:

As a "standard" economist, I look first and foremost at incentives. Raising marginal tax rates lowers incentives to work, save, invest, start businesses.  That's not good. So I agree that the tax part of the fiscal cliff will drag down the economy. But not because it reduces Keynesian stimulus, but because it worsens incentives.  
The bigger problem with the fiscal cliff is the utter chaos of it all. What serious country decides its tax laws year by year, in one big chaotic crisis during the first few weeks of the year? Will estate taxes be 55% or 0% next year? Who knows? 
Moreover, this last-minute crisis atmosphere is ripe for salting the tax code with little goodies which nobody will notice until it's too late. It's a fiesta for lobbyists, tax lawyers and crony-capitalists of all stripes. 
This is not how any serious country operates, let alone the supposed leader of the free world. And annual tax chaos is certainly not good for GDP. 

The rest is definitely worth reading, but the short version is "incentives matter."

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