Common Tragedies

Thoughts on Environmental Economics

Inconsistent WSJ logic of the day

Posted by Rich Sweeney on May 17, 2009

From Martin Feldstein, last Thursday. First, he justifies the seemingly time-inconsistent notion that we shouldn’t cap carbon in 2012 because we’re in a recession now:

Even if the proposed tax increases are not scheduled to take effect until 2011, households will recognize the permanent reduction in their future incomes and will reduce current spending accordingly.

Ok, I’m not really sure how much I believe that a <1% increase in prices 4 years out influences current consumption, but its a pretty common economic assumption. Yet in the next paragraph, Feldstein seems to forget his own forward looking assumption:

Official budget calculations disguise the resulting fiscal drag by treating Mr. Obama’s proposal to cancel the 2011 income tax increases for taxpayers with incomes below $250,000 as if they are real tax cuts….But those are false tax cuts in which no one’s tax bill actually declines.

So apparently people immediately incorporate the impact of proposed future tax increases into current consumption decisions, but then fail to reevaluate their budgets when previously incorporated projected tax increases are removed. Got that?

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