WHY PERMANENT TAX CUTS ARE THE BEST STIMULUS
November 26, 2008
The incoming Obama administration and congressional Democrats are considering a second fiscal stimulus package, estimated at more than $500 billion, to follow the Economic Stimulus Act of 2008. As they do, much can be learned by examining the first, says John Taylor, a senior fellow at the Hoover Institution.
The major part of the first stimulus package was the $115 billion, temporary rebate payment program targeted to individuals and families that phased out as income rose. Most of the rebate checks were mailed or directly deposited during May, June and July. The argument for these temporary payments was that they would increase consumption, stimulate demand and get the economic growing again. Yet, they did absolutely nothing.
So what are the implications for a second stimulus early next year, asks Taylor:
- The most obvious lesson learned is that temporary is not a principle to follow if you want to get the economy moving again; rather, we should be looking for permanent fiscal changes that turn the economy around in a lasting way.
- It is better to seek an across-the-board approach where both employers and employees benefit.
- Moreover, while timeliness is an admirable attribute, it is only one property of good fiscal policy; more important, is that policy should be clear and understandable -- predictable -- so that individuals and firms know what to expect.
Many good fiscal packages are consistent with these principles, says Taylor. But what can Congress and the incoming Obama administration do to give the economy a real boost? Below are a few fairly bipartisan measures worth considering:
- Keep all income-tax rates were they are now, effectively making current tax rates permanent.
- Enact a worker's tax credit equal to 6.2 percent of wages up to $8,000, and make it permanent.
- Construct a government spending plan that meets long-term objectives, puts the economy on a path to budget balance and is expedited to the degree possible without causing waste and inefficiency.
Source: John B. Taylor, "Why Permanent Tax Cuts Are the Best Stimulus," Wall Street Journal, November 25, 2008.
Browse more articles on Tax and Spending Issues