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Commentary

A Failure to Stimulate


     
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It’s an election year, so it should be no surprise that politicians are in the market for votes. “Passed in record time” as a “gift to the middle class and those who aspire to it,” according to House Speaker Nancy Pelosi (D-CA), Congress gave final approval in early February to an economic stimulus package that supposedly will help avert a looming U.S. recession.

In no place but Washington would anyone think that putting hard-earned money back in the pockets from which it was taken in the first place is giving taxpayers a gift.

With a price tag estimated at $168 billion over two years, the bill, which President Bush has said he will sign into law, provides rebates of up to $600 for individual taxpayers and up to $1,200 for couples filing jointly, with additional payments of $300 per child. Gradually phased out for individuals with 2007 adjusted gross incomes of more than $75,000 and for couples with incomes over $150,000, the “richest” taxpayers get nothing.

The Democrats initially wanted considerably more. Senate Majority Leader Harry Reid pushed hard to include in the package more generous home-heating subsidies for low-income families, an extension of federal unemployment benefits, and tax credits for public utilities using alternative energy sources to generate power. Tax incentives for the coal industry and an expanded food stamp program also were in the proposal first put on the table by House Democrats. But after losing in the Senate by a single vote, the Democrats agreed to withdraw their much bigger package, in return for Republican support for payments to some 20 million social security recipients and 250,000 disabled veterans, who would not have qualified for tax rebates because they do not earn income.

To be sure, $168 billion, about $152 billion of which will be injected into the economy this year, sounds like a lot of money. But that sum is trivial in comparison to the $3.1 trillion federal budget President Bush has just submitted to Congress—and is a mere drop in the nearly $15 trillion U.S. gross domestic product bucket.

Experience with tax rebate initiatives in the past—the most recent being the $400 returned to individuals ($800 to couples) soon after 9/11—suggests that most of the money either will be saved or used to pay down existing credit-card debt. Neither stimulates any economic activity. The economy gets a boost if the rebates are spent, not if they are banked or used to pay for purchases already made.

The late Nobel laureate Milton Friedman could have explained why tax rebates are unlikely to boost consumption spending. Individuals rationally budget purchases of goods and services on the basis of their expected long-run or permanent incomes. Temporary fluctuations in disposable incomes have little impact on spending plans, because consumers realize that those ups and downs tend to average out over time, with transitory increases one year offset by transitory decreases the next. Changes in personal income, including those caused by tax policy, produce sustained changes in consumption spending only if they are lasting.

Only one provision of the stimulus package could possibly have the hoped-for effect. Allowing businesses accelerated depreciation schedules for new investments in plant and equipment, and doubling from $125,000 to $250,000 the amount of qualified property they can write off immediately will promote capital spending. Because capital investments by definition are undertaken with an eye on the long run, providing incentives for companies to expand or upgrade existing production capacity will energize economic activity.

Even so, there is another reason that any economic benefits ultimately generated by the stimulus plan will be fleeting at best. The federal government has no means of its own, so the $168 billion needed to finance the package can come from just three sources: taxing, borrowing, or printing money. For obvious political reasons, raising taxes is not an option during the run-up to an election. The economic stimulus plan thus will be paid for through a combination of new deficit spending and currency creation. The former implies higher future taxes to pay interest to bondholders and to retire the debt when it matures; the latter adds to the inflationary pressures already evident in the economy. Both impose a heavier burden on the private sector, and auger slower rates of economic growth in the years to come.

If our elected representatives truly were interested in jumpstarting a sluggish economy, they would have acted to reduce uncertainty about future tax bills by cutting marginal income tax rates now and forevermore. Predictably, they chose political grandstanding instead.


William F. Shughart II is a Research Director and Senior Fellow at The Independent Institute, J. Fish Smith Professor in Public Choice in the Jon M. Huntsman School of Business at Utah State University, and editor of the Independent Institute book, Taxing Choice: The Predatory Politics of Fiscal Discrimination.

Taxing ChoiceFrom William F. Shughart II
TAXING CHOICE: The Predatory Politics of Fiscal Discrimination
So-called “sin taxes”—the taxing of certain products, like alcohol and tobacco, that are deemed to be “politically incorrect”—have long been a favorite way for politicians to fund programs benefiting special interest groups. But this concept has been applied to such “sinful” products as soft drinks, margarine, telephone calls, airline tickets, and even fishing gear. What is the true record of this selective, often punitive, approach to taxation? Learn More »»






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