[quote name='Prefect' timestamp='1314109672' post='4852787']
Congratulations, you've bought the Ricardian equivalence propaganda hook, line and sinker. (Short summary: Ricardian equivalence is the theory that private actors anticipate future tax changes and adjust their savings accordingly - out of curiosity: when have you ever done that? I don't know a single person that has ever done anything remotely like it, rather the opposite is the case.)

I did it this year, when I took the extra money I have every month for discretionary spending and put it straight into my Roth IRA.
[/quote]

Did you actually think to yourself: Hey, I might need this money to pay future taxes, so I'm going to save it? And if so, did you actually believe you would need all that money in the future to pay taxes, or only part of it? Perhaps the real reason is that the economic situation is uncertain and you don't know how the job situation - or in general, your ability to get income - is going to be a few years down the line? (Edit: Or maybe you're just one of those people who have a certain fixed typical spending budget, and if they earn more, they just save that or potentially donate to charity? I myself am in that category)

Obviously, this is a He said She said kind of thing, but do think about it. Yes, I do find it hard to believe you that potential future tax hikes are the reason for your saving. Then again, perhaps you really are one of those mythical Ricardian creatures. Nice to finally meet one ;)

That doesn't change the fact that empirical data very clearly tells us that Ricardian creatures are an endangered species, and the way the real economy moves is very decidedly contrary to what Ricardian equivalence predicts.

Savings rates are the highest they've been in decades. People and businesses alike are unsure of what the future holds, so they are hanging onto their cash in case of more hard times.
[/quote]

Sure. But if you think that that's because of tax rates, you are deluding yourself. I mean, tax rates are generally at an historical low. The economy has been doing much better some decades ago at times with much higher tax rates - which is not to say that raising tax rates right now is going to help the economy, it's just to point out that tax rates are a red herring.

The POTUSA, whoever it may be, really needs to work to create a clear, concise guideline of what he intends to do and just stick to it.[/quote]

In this, I am in absolute agreement with you - except that I would say that what the guideline is matters significantly. If the guideline is "slash government spending", then the economy will suffer. In any case, Obama's handling of this entire affair is very groan-inducing (though I shudder to think how much worse it could get if one of the openly "slash-everything" crowd were to become US president). Then again, what am I talking about - our (European) politicians are really playing at the same level.

[quote name='way2lazy2care' timestamp='1314025526' post='4852332']
[quote name='Alpha_ProgDes' timestamp='1314025192' post='4852325']
So you're in favor of letting the Bush tax cut expire on Jan 1 as well?

I'm in favor of rewriting the entire tax code as soon as possible. Was that not clear from my previous post?
[/quote]

This is an ironic sentiment for someone who frequents an internet forum full of programmers. One of the most important lessons in programming is that it's usually a bad idea to rewrite things from scratch. What makes you believe that this lesson does not apply to the tax code as well?
[/quote]

Why is that? Taking something that is poorly built and difficult to maintain and trying to reach a goal by applying hacks and short term fixes may take almost as long as rebuilding it. Except instead of a clean, well built, maintainable system, you have something even more poorly built and even more difficult to maintain and support. What makes you believe this does not apply to the tax code as well?

On a somewhat different note:

Also, knowing that the spending we are doing is unsustainable is not helpful either, because long term tax rates MUST be raised or we will run out of cash or devalue our currency.
[/quote]
I assume that by "we" you mean the US federal government. There are two things about that sentence:
1. The statement itself is incorrect (at best, I would say that it is extremely misleading and shows a flawed understanding of how the economy operates).
2. While the statement itself is incorrect, the fact that people believe it can have an effect on their behaviour and thus on the economy.

Basically, to claim categorically that the spending is unsustainable and that tax rates must be raised is to misunderstand what fiscal sustainability means for a monetarily sovereign government. Bill Mitchell has provided background reading on the topic - it's a bit lengthy, but I think it is worth it: #1, #2, #3

Why is that? Taking something that is poorly built and difficult to maintain and trying to reach a goal by applying hacks and short term fixes may take almost as long as rebuilding it. Except instead of a clean, well built, maintainable system, you have something even more poorly built and even more difficult to maintain and support. What makes you believe this does not apply to the tax code as well?

One problem that springs to mind immediately is: How do you test your new tax code during development before you deploy it in the real world? Software can be tested on a development / testing system. There is no such thing for the tax code.

(Not to mention the obvious political problem of how to get such a "change the entire world" bill passed without it being changed into something terrible while it goes through the legislative process.)

As a counterpoint, when Ronald Reagan redid the tax code he made all of his changes to production

[quote name='ChurchSkiz' timestamp='1314117768' post='4852851']
[quote name='Prefect' timestamp='1314109672' post='4852787']
Congratulations, you've bought the Ricardian equivalence propaganda hook, line and sinker. (Short summary: Ricardian equivalence is the theory that private actors anticipate future tax changes and adjust their savings accordingly - out of curiosity: when have you ever done that? I don't know a single person that has ever done anything remotely like it, rather the opposite is the case.)

I did it this year, when I took the extra money I have every month for discretionary spending and put it straight into my Roth IRA.
[/quote]

Did you actually think to yourself: Hey, I might need this money to pay future taxes, so I'm going to save it? And if so, did you actually believe you would need all that money in the future to pay taxes, or only part of it? Perhaps the real reason is that the economic situation is uncertain and you don't know how the job situation - or in general, your ability to get income - is going to be a few years down the line? (Edit: Or maybe you're just one of those people who have a certain fixed typical spending budget, and if they earn more, they just save that or potentially donate to charity? I myself am in that category)
[/quote]

A Roth IRA is an IRA that allows money to be withdrawn tax-free at retirement. I am hedging that taxes will increase by the time I go to retire. If I was thinking I would need more money to survive the economic climate I would have kept it liquid (ie a savings account or CD or something). Admittedly, I am saving more too for fear of the general economic environment, but yes, taxes do play a part in financial planning for many people. And yes, a change in taxes does have an effect on consumer spending habits, especially if you're on a fixed income.

[quote name='elondon' timestamp='1314125877' post='4852894']
Why is that? Taking something that is poorly built and difficult to maintain and trying to reach a goal by applying hacks and short term fixes may take almost as long as rebuilding it. Except instead of a clean, well built, maintainable system, you have something even more poorly built and even more difficult to maintain and support. What makes you believe this does not apply to the tax code as well?

One problem that springs to mind immediately is: How do you test your new tax code during development before you deploy it in the real world? Software can be tested on a development / testing system. There is no such thing for the tax code.

(Not to mention the obvious political problem of how to get such a "change the entire world" bill passed without it being changed into something terrible while it goes through the legislative process.)
[/quote]


The point is: continue to hack what doesn't work or build what does work. I don't think the concept of testing applies here. There is no such thing for any legislation. If it was that easy, we would simply not pass into law any legislation that had failed unit tests. There is plenty of miserably failing legislation in the past and present, plenty of money wasting, etc... obviously we didn't test well enough. I don't know if we should re-design the entire tax code, I'm no tax expert - but in general I would rather see something rebuilt the correct way then continuously patch a bad system. That was really my only point.

I agree, it would probably never happen. Political problems always seem to get in the way of progress.

Sorry, but I'm writing this from work and I have to take some extra steps to do so. So the formatting of this will be awful, and I might make any number of clerical mistakes, and I probably won't be able to address these points as fully or clearly as I would like. Nevertheless, here is my response to Churchskiz above:

Obama needs to make definitive statements:

Obama has made it clear what he wants. Equally clear is that he isn't going to get it. Obama overwhelmingly favors additional stimulus paid for by borrowing and taxes on high-income individuals (not corporations, and not people with a high marginal propensity to consume), but it's a legislative non-starter. Absent that, he's in favor of anything that will inject demand into the economy. Forcing any such action to be coupled with cuts in government spending adds no net dollars to the economy, and so isn't stimulative. So what would businesses be concerned about? They know what he wants, and that realistically nothing (or almost nothing) will happen.

The main problem is something other than demand:

The idea that companies will increase production and employment even without demand isn't supported by much. Why would they make products that they can't sell? It's true that if companies did so, the cycle could eventually increase demand enough for the companies to be able to justify increasing production further, but they'd take a hit in the immediate term and continue to into the indefinite future. That's a very risky move for a business to make, and not one with much of a payoff if successful.

The idea that businesses won't invest right now due to fear, of the President or the possible future global economic situation in general, is demonstrably false. Have a look at this: http://delong.typepad.com/sdj/2011/06/collapse-of-the-chicago-school-gary-becker-edition.html

Non-residential business investment rate is very high for the trendline shown from the last 20 years, though not objectively high. What's more, that investment started going up soon after the current President took office. The investment just isn't enough. It suggests slack demand vastly more than general economic terror.

So the ideas that companies are: a.) suffering from a lack of confidence and so won't invest, b.) need more money on hand to be induced to invest, and c.) will use that extra money to hire and produce don't seem to match our current situation, and so lead to poor policy prescriptions.

Idea a just isn't borne out by corporate behavior. Idea b seems irrelevant given the state of a, though you can argue that with extra cash on hand they might hire more, but the already-record holdings are moving out at a trickle (and that's a generous description). And c is not supported historically (see the 2004 corporate tax holiday).

o if companies already have record cash and are barely investing in dollar terms and hiring and compensation rates, but very highly investing relative to the unemployment rate, I find the arguments that they are neither confident nor well capitalized enough uncompelling. Soft demand, however, does describe those activities, and the policy to address that is quite different.

Demand doesn't even have to be domestic:

Demand doesn't have to be domestic, but it has to exist. Global demand is soft generally. Additionally, the dollar isn't weak enough against currencies of trading partners (like the Eurozone) to pump up domestic manufacturing much, and weakening the dollar to do so would wreak havoc on their economies, which would reverberate back to our shores via volatile international markets.

Scared of deficits, S&P downgrade:

People may be scared about the short and medium term stability of US finances, but those fears aren't well grounded. We have continuing access to cash at extremely low rates, and there really aren't indications that that will dry up, nor that people expect the US won't be able to keep on going. The S&P downgrade was largely a response to politics, not economics, in which a dogged and influential portion of the legislature was 100% willing to allow the US to default due to choice, not inevitability. Some were even saying that that would be a great thing to do. It had nothing at all to do with short term deficits, may have been somewhat related to medium term deficit fears, and definitely long term deficit concerns.

People save now in fear of future taxes:

What you did with your discretionary spending money is something that not everyone has access to, first of all. People who don't have Roth IRAs lock in a current tax rate for the future. And even if they could, the volatility of the markets might well make the bank seem like a safer option for people who are concerned about future liquidity.

Second, stimulus measures can easily be targeted at people who have a high marginal propensity to consume--that's people that don't have disposable income, or much of it. That group has exploded in size thanks to long term unemployment and the collapse in real estate prices.

It's true that savings rates are higher than they have been, but that's tempered by the fact that savings rates have been abysmal, even negative. And even then, because there's no reason to think that increased government spending will continue at its recent pace forever (the idea now is to prod demand, and even that spending is unlikely to happen to much of a degree), there's no reason that people would pull the Full Ricardo and throw enough money into savings/Roth IRAs to offset the government spending. Besides, even if rates stayed flat, a recovering economy would increase revenue and reduce automatic deficit spending, like unemployment insurance.

And again, there's every reason to think that people are saving for reasons other than concern over potential future tax burdens, like years of not having done so at all, mounting debt, and fear about future economic conditions (non-tax conditions). While that might be a factor, I think that it's far from being a driving factor for a lot of people, and even if that concern were removed there still wouldn't be a lot of cash flipped over to consumption. There are serious critiques of Ricardian equivalence, but even if there weren't there are other factors at play that are far more serious.

Anyways, none of this has much to do with the President. It isn't his job to set tax rates, or make promises about taxes, or anything like that. That's up to Congress. Plus, the tax rates are pretty stable and have been for some time.

Overall:

The idea that stimulus now = taxes later is the heart of Keynesian economics. In a serious trap where the private sector is unable to stimulate demand, and monetary policy is similarly positioned, there is no one else to do it but the government. Failure to do so produces a prolonged period of weak demand, which degrades the situation further until a very, very low basement is reached. The British experience, as noted above by Prefect, shows that austerity is anything but a panacea, however much confidence it does or does not generate, and however much influece a lack of confidence does or does not have on current affairs.

It's true that running deficits is expensive, and must be paid down in the future. But rates are low, so borrowing can be turned around relatively easily in better times. And while taxes will almost certainly have to go up in the future no matter what is done about deficits now (given the debt load incurred over the last decade), the operative question becomes which is worse: taxes against deficits at some point in the future in exchange for growth now, or a prolonged liquidity trap which forfeits massive revenues and leaves a huge amount of capacity unutilized, in exchange for "confidence" like we had in the Great Depression?