“Permanent” v. “Temporary” Tax Changes

Paul Ryan is pressing hard for tax changes to be permanent rather than temporary (see a representative article here). From a traditional economic perspective he is probably right to do so if he wants policy to have maximum impact on the economy, regardless of your preferred performance metric. There exists no shortage of empirical research on this topic and I include a link here to a research note that seems typical (and more importantly is not paywalled).

Historically, when tax changes are announced as permanent (emphasis to be explained shortly) they tend to have a larger effect. I think most people are aware that the permanence of policy in most countries can be effectively measured with an egg timer. A different Congress or President can change the law and thus change the tax liabilities of citizens and corporations. This is what passes for “permanent” in policy circles, the announcement effect if you will.

As a side note, why wouldn’t you always list changes as permanent? It largely has to do with debt and deficit restrictions on policy makers and other rules enacted regarding impacts on the budget.

I wonder if the announcement effect still matters though. My concerns about this focuses now on the barrage of media coverage over every policy issue, minor and major. Tax reform is a major issue, and will be given extensive coverage, both positive and negative. The general design of a tax policy is to change the incentives, and therefore the behavior, of economic agents, households and corporations as examples. Even if announced as a permanent change, will these agents perceive the changes to be just that? Or does the nature of policy discussion, or lack of discussion, send a signal that the party in power enacts “permanent” changes with a lifespan of their ability to maintain some control of power in Washington. It also does not help that there are already signals of a willingness on the part of some Republicans to accept temporary changes. This will only add to the difficulties inherent in a major policy initiative such as tax reform.

Leave a Reply

Your email address will not be published. Required fields are marked *