The president's tax deal is probably a smart compromise for his office, his party, and the economy -- at least judged against most of the alternatives. But it's highly questionable as a matter of long-term policy because, well, it's not a long term policy. It's a two-year deal that doubles the number of temporary tax provisions in the law.
Tax experts often say that dependability is the best policy. Consumers and (especially) businesses want to know what tax rates are going to look like years down the line so they can make decisions about big ticket items: buying a house, opening a factory, staffing an office, and so on. Long term investors, they say, prefer tax law written in ink.
In the president's tax deal, just about every major tax rate is written in pencil. In two years, Congress will have to come together again to discuss new tax laws for personal income, personal investment, Social Security, and corporate income. Will that uncertainty freeze business? WSJ presents both sides:
Economic research has shown businesses tend to be more reluctant to invest when they perceive high levels of uncertainty about various things, including over taxes. The pressure on policy makers to narrow the budget deficit, not merely simplify the tax system, further muddies the waters now, says Massachusetts Institute of Technology tax economist James Poterba, who finds "the crystal ball...particularly unclear at the moment."
Some call the worries exaggerated. "I truly do believe the concerns expressed over tax uncertainty are truly overblown," says Martin Sullivan, an economist with Tax Analysts, a nonprofit tax publisher, who sees today's situation as quite manageable compared with the profound business uncertainty companies faced during the financial crisis.
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