How Many Temporary Tax Provisions in Stimulus Will Become Permanent?

February 4, 2009

So the United States Senate has added to the massive stimulus bill a $15,000 tax credit for home purchases and for car buyers, two breaks: a deduction for the sales tax on car purchases and a deduction for car interest paid.

Of course all of these are tied up in a stimulus bill where principles are basically thrown out the window. (Politicians will justify just about any spending or tax break under the guise of “stimulating the economy.”)

But what happens when the economy recovers? Will these ridiculous items be removed from the tax code? Of course not as a status quo bias will then exists with special interests arguing how it would hurt their industries to remove them. They will be left there, only to be financed eventually by higher marginal tax rates, which will hurt the long-run economic growth of this country.

As Milton Friedman famously once said, “Nothing is so permanent as a temporary government program.” Unfortunately, the same is true for special tax preferences.

Maybe Keynes’s famous quip of paying people to dig up ditches and others to fill them back is the better alternative even though it adds nothing to long-term wealth. The alternative of having scores of new government programs and new tax preferences that that are difficult to remove and the lower long-run economic growth that ensues may be worse.

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