Don't Believe The "Taxmageddon" Hype

A blog about business and economics.
May 18 2012 3:44 PM

Don't Believe The "Taxmageddon" Hype

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Conventional wisdom in DC is that not only would the full expiration of the Bush tax cuts make people grumpy as they find themselves needing to pay more taxes, it would also provide the macroeconomy a job-killing dose of fiscal drag. The chart above from Goldman Sachs illustrates the idea clearly.

I don't buy it.

The problem is that this chart ignores what I think we're now going to call the Sumner Critique. In other words, it assumes that the Federal Reserve is somehow going to fail to react to any of this. You can probably construct a scenario in which the Fed is indeed caught unawares, or is paralyzed by conflicting signals, or is confused by errors in the data, or any number of other things. But Ben Bernanke knows all about the scheduled expiration of these tax cuts. He's discussed it several times in public. Maybe he and his colleagues won't do anything to offset this drag on demand, but if they don't as best I can tell that's on them. This is the very essence of a predictable demand shock, and the policymakers ultimately responsible for stabilizing demand are the ones who work at the Fed.

 

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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