NCPA - National Center for Policy Analysis

PERMANENT TAX CUTS: THE BEST STIMULUS

June 11, 2009

When it comes to stimulating the economy, what works?  Much can be learned by examining a previous attempt, the Economic Stimulus Act of 2008, says John B. Taylor, a senior fellow at the Hoover Institution.

For example:

  • The major part of the 2008 stimulus packaging was the $115 billion temporary rebate program, targeted at individuals and families that phased out as income rose.
  • The argument for these temporary rebate payments was that they would increase consumption, stimulate aggregate demand, and thereby get the economy growing again.
  • Yet, the rebate did little or nothing to stimulate consumption, overall aggregate demand or the economy.

Such temporary increases in income will not lead to significant increases in consumption.  If increases are longer term, however, as in the case of a permanent tax cut, then consumption is increased by a significant amount, explains Taylor.

So what could Congress and the Obama administration do to give the economy a real boost?  The following fairly bipartisan measures are worth considering, says Taylor:

  • Pass a law keeping all income-tax rates where they are now, effectively making current tax rates permanent; this would be a significant stimulus to the economy because tax-rate increases are now expected on a majority of small business, capital gains, and dividend income.
  • Enact a worker's tax credit equal to 6.2 percent of wages up to $8,000 as the president proposed during the campaign, and make it permanent.
  • Recognize explicitly that the "automatic stabilizers" are likely to be as large as 2.5 percent of gross domestic product (GDP) this fiscal year, that they will help stabilize the economy and that they should be viewed as part of the overall fiscal package even if they do not require legislation.
  • Construct a government spending plan that meets long-term objectives, puts the economy on a path to budget balance and is expedited as much as possible without waste and inefficiency.

Source: John B. Taylor, "Permanent Tax Cuts: The Best Stimulus," Hoover Digest (Hoover Institution), No. 2, 2009

For text:

http://www.hoover.org/publications/digest/42823067.html

 

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