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Commentary

Stimulus, Shmimulus


     
 Print 

“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 February to an economic stimulus package, supposedly to help avert a looming recession.

Nowhere but in Washington would returning hard-earned money to people from whom it was taken in the first place be a “gift.”

With a two-year price tag estimated at $168 billion, the package provides rebates of up to $600 for individual taxpayers and $1,200 for couples, 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 over $150,000, the “richest” Americans get nothing.

To add insult to injury, the government spent $42 million to notify taxpayers—even those exceeding the thresholds—to expect the rebates. Now that the checks are in the mail, don’t bank on them energizing an economy that has grown by an anemic 0.6% in each of the past two quarters.

To be sure, $168 billion—about $152 billion of which will be injected into the economy during 2008—sounds like a lot. But that amount is trivial compared to the $3.1 trillion federal budget President Bush submitted to Congress for next fiscal year—and is a mere drop in the nearly $15 trillion U.S. gross domestic product bucket.

Past experience with tax rebate initiatives, most recently 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 credit card debt. Banking your rebate check contributes to growth indirectly, by adding to financial institutions’ loanable funds. But no economic activity is stimulated by lowering credit card balances. The economy gets a boost if rebates are spent on new goods and services, not when they pay for purchases already made.

The late Nobel Laureate Milton Friedman’s “permanent-income hypothesis” explains why tax rebates are unlikely to trigger substantial increases in consumption spending. Because individuals rationally budget based on their expected long-run disposable incomes, temporary swings in earnings have little impact on spending plans. Consumers realize that those ups and downs tend to average out over time: one year’s transitory increases in income are offset by transitory decreases the next. Changes in disposable personal income, including those caused by tax policy, produce sustained changes in consumption spending only if they last.

Because the government has no means of its own, whatever economic benefits the plan ultimately generates will be fleeting. The $168 billion needed for the rebates can come from just three sources: taxing, borrowing, or printing money. Raising taxes is simply not an option, politically, in the run-up to an election. The rebates thus will be funded 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 upon maturity; the latter intensifies the inflationary pressures already evident in the economy. Both will impose heavier burdens on the private sector and will augur slower economic growth.

Indeed, the expectation of higher future tax bills arguably is a factor in today’s sluggish economy. Opposition to extending Bush’s tax cuts, expiring in 2010, has been a major theme of the presidential campaign, with the two Democratic Party candidates talking about raising the 15% capital gains tax rate, even now among the world’s highest, to as much as 28%.

Consumer confidence, the main driver of U.S. economic growth, is undermined by the prospect of a major and possibly permanent reduction in after-tax disposable incomes two years hence. Although returning money to taxpayers’ pockets is always better than allowing Washington to squander it, budgeting for higher future taxes by spending less now is apt to swamp whatever modest stimulus this year’s politically inspired rebates might produce.


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.


  From 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?






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