Stimulate with tax cuts, not giveaways

The United States of America is deep in recession. Our new President, Barack Obama, intends to spend $800 billion or more on a “fiscal stimulus package” intended to jumpstart the economy. As part of this package, Obama talks of injecting $300 billion in government funds into the economy, direct to consumers in the form of tax rebates, in a belief that by sending taxpayers a check, it will increase consumer spending and stimulate aggregate demand, thus spurring a recovery. Yet a review of the effectiveness of such policies reveals the folly of tax rebates as fiscal stimulus. According to economist Martin Feldstein, CEO of the National Bureau of Economic Research, when tax rebates went out as economic stimulus last spring, only around 16% of the checks were actually spent, with nearly five times that amount going into savings. Most of the rebates were used to pay off loans, not to buy new products and services, and the stimulus package utterly failed to preclude the recession.

Furthermore, by the time the checks would be in the mail, the economy will likely be improving, as happened in the 1970s. If implemented now, the benefits of a stimulus package based in tax rebates—a small burst in increased consumer demand—are minimal at best and will not outweigh the substantial costs.

While the value of the dollar has lately gained in strength, it still has the potential to continue its recent decline. As its value goes down, creditor concerns over their holdings of U.S. bonds will rise, resulting in the likely increase in interest as creditors rethink their holdings. By spending $300 billion on a stimulus package that will likely have minimal effect, the U.S. government is essentially assuming even more debt, which has already increased 86% nominally in the last eight years, at greater national risk.

We must therefore institute wide-ranging, permanent, pro-growth tax cuts, starting with making the Bush tax cuts permanent and expanding them. Beginning in 2010, the Bush rate reductions on income, capital gains and the estate tax will start to dissipate. With the dire need for capital injections into the market, allowing the 15% capital gains rate to return to the 20% rate would discourage investment in the economy. Instead, the capital gains tax should be cut in half to 7.5% so as to incentivize greater investment.

Former House Speaker Newt Gingrich has proposed that the 25% income tax rate be reduced to 15%, thereby “establish[ing] a flat-rate tax of 15% for close to 90% of workers.” Such targeted tax cuts would give the economy the boost it needs to create jobs and increase consumer demand and investment. We must then cut back the corporate tax rate from 35%, the second-highest in the world, to 25%, the average in Europe. This would expand incentives for businesses to create jobs in America and lessen the enticement to outsource.

If the Bush tax cuts expire, taxpayers will reduce spending before the expirations take effect, stunting the benefits of the rebates further. Alternatively, the knowledge that tax rates will be cut and individuals will be permitted to keep more of their income will give a sense of comfort to the beneficiaries. By cutting marginal tax rates now, the short-term effect will be a rise in consumer confidence, resulting in a boost in consumer spending.

The long-term relief that came in the form of broad-based tax cuts in 2003 resulted in the largest single-quarter GDP growth in 20 years, 7.2%, and the creation of 8 million new jobs through 2007. The aforementioned cuts would especially aid America economically in the long term, opening the door to greater and more sustained long-run economic growth as we come out of the recession.

History shows that the net benefit of tax rebate stimulus packages is minimal, and he who does not learn from history is doomed to repeat it. A fiscal stimulus of tax rate cuts, not tax rebates, would stimulate an economic recovery by putting more money in people’s pockets long-term and increasing demand in the short-term.

Jimmy Sengenberger is a political science student at Regis University in Denver, a 2008 honors graduate of nearby Grandview High School, a national organizer for the Liberty Day movement, online radio host, and a columnist for the Villager suburban weekly. He is also College Liaison for, working through the Backbone Americans group on Facebook.</em