I am truly a bit confused by this, but it didn’t really seem like a GQ, so I’m posting here:
On the same day that the Federal Reserve met and increased interest rates by 1/4 of one point, the President signed a bill to cut taxes by $70 billion, ostensibly to boost the economy. But the effect of an interest rate hike is to slow an economy that may be growing to fast and hence lead to inflation.
Wouldn’t it be simpler to leave taxes where they are and keep interest rates put?
This all depends on where the taxes are being cut. If taxes are cut such that it encourages investment in capital (R&D, machinery, cash reserves, local labor, a bunch of other stuff I can’t think of at the moment), then the tax cuts may have a more significant impact than a change in the interest rates.
You are correct with that last line I quoted above. Here is an analogy I learned in my Monetary Policy class: One should look at the instrument of the interest rate as a guided missle. It is mostly precise, but can lead to a lot of unintended collateral damage. Tax changes can be fine tuned like a sniper’s rifle. Congress can deliberately target certain behavior and tax it out of existence, or promote the same behavior into widespread proliferation.
I suspect that inevitably, this discussion will turn to the nature of the $70B tax cuts and how they target the rich. That should be a fine discussion.
First, a correction to my OP: The house passed the bill, but it was not signed yesterday. POTUS is expected to sign today.
Part of the tax cut is to extend for another two years the 15% rate on Capital Gains and Dividends. This is not exactly finely tuned, although the primary effect would seem to be to reward investment.
Another part amends the AMT to account for inflation. This would mainly have an effect on people with incomes about $160,000 and up, removing the threat of the Alternative Minimum Tax.
The tax plan also opens up Roth IRA rollovers to upper income earners.