NCPA - National Center for Policy Analysis


January 28, 2009

This week the House will be voting on a two-year, $825 billion economic stimulus package.  This is on top of vast sums already being spent in the financial bailout packages.  The program is immense.  Will it work, asks Stephen J. Entin, president and executive director of the Institute for Research on the Economics of Taxation?

The idea is to jump-start "aggregate demand," according to traditional Keynesian precepts.  Milton Friedman, on the other hand, taught us that government spending and tax handouts do not stimulate demand, because every dollar doled out by government must be first taken in by taxes, borrowing or other spending cuts.  The net effect on aggregate demand is zero, says Entin.

We need a permanent improvement in the production climate, says Entin.  What would help?

  • A lower corporate tax rate, as well as a permanent extension of the 2008 expensing provisions and the 2003 dividend and capital gains and top marginal income tax rates.
  • On the regulatory side, lifting the burdensome auto fuel economy standards and alternative fuel requirements would help, as would an elimination of restrictions on oil drilling.

Taxes and regulations raise the bar for investment to be profitable after-tax, and they fall especially hard on capital-intensive industries such as manufacturing and resource extraction, says Entin:

  • We have the second-highest corporate tax rate in the developed world (after Japan); a lower rate would make us a more attractive location for business.
  • Similarly, the excess of the U.S. corporate tax rate over the foreign rate is imposed on repatriated earnings -- keeping foreign-source earnings abroad exactly when domestic credit is hard to get.

To spur investment in 2004, Congress declared a partial tax holiday on repatriated earnings -- now would seem an opportune time to do so again, says Entin.

Source: Stephen J. Entin, "Corporate Tax Cuts Should Be Part of the Stimulus; The reductions currently in the House bill would do very little for economic growth," Wall Street Journal, January 27, 2009.

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