Journalizing

According to two economists writing in the WSJ (December 8, 2010), Thomas F. Cooley of NYU and Lee E. Ohanian of UCLA, "the Bush tax cuts never went far enough."

They argue that "temporary solutions" like the capital rate tax cut (from 35% in 2003 to 15%) do not help enough to bolster capital stock enough to have an effect.  People make decisions based on long-term trends, not aberrations.  Since "capital can easily escape taxation by going abroad,"so higher tax rates produce counter-productive effects.  Tax rates were not reduced to zero permanently, and thus a failure policy led to the current stagnated economy.

I see three problems in this argument.

1. Five years of relatively low rates on capital gains did flood markets, from 2003 until 2008 (really, continuing until the sunset of the Bush cuts in January).  However, the money pooled in finance (and housing, which became the same thing), not industry or service.  A good argument can be made that unless the finance industry comes under a strict and reactionary regulatory structure, money will continue to drain out of the the productive economy and into the shadow world of money chasing money.
2. Is the problem now a lack of capital, in which letting loose the animals spirits of untaxed capital investment the answer?  Paul Krugman says no; it's liquidity (trap).  Assuming he is correct (which I do), this means the authors would exacerbate the deficits at the federal and state level, further depriving resources for deferred maintenance on public works, public health and public education, without adding anything to replace the funds  Their argument is not, on the surface, 'starve the beast,' though the impact of their argument to further reduce tax rates would do just that.
3. They do recognize that setting capital gains taxes at a lower rate (though they settle for 20%, curiously higher than the current 15% rate) will cost.  Deficit-neutrality is possible "provided that  either reducing transfer payments by less than 2% of GDP or a national consumption tax of less than 3% were adopted." Put into numbers, with a $14,000,000,000,000 (trillion) economy, a 2% cut in social services amounts to a yearly drop of $250b, and a 3% consumption tax creates about $400b.  Both these ideas are regressive: socially, as services to the most needy could be the first cut; fiscally, as consumption taxes hit hardest on those with the least income.  In other words, cut the taxes of the wealthiest and make up for lost revenue of the salaries of the poorest.

Essays and arguments like these give credence to the ivory tower view of academics.  Our models have not bearing on the lives people experience.