NCPA - National Center for Policy Analysis

Tax Cuts That Could Stimulate The Economy

April 4, 2001

The economy's problem is not falling income and consumption, but falling investment, says Bruce Bartlett. In the fourth quarter of last year, real GDP grew just 1 percent. But consumption was up 2.8 percent.

The major factor causing the slowdown was a sharp drop of 4.1 percent in gross domestic investment. By contrast, in the second quarter of 2000, investment rose at a 21.7 percent annual rate. Going from plus 21.7 to minus 4.1 in the space of three quarters is a remarkable turnaround that largely explains the overall economic slowdown.

Thus, although a tax rebate is becoming an increasingly popular idea, there is no evidence supporting it. And as a 1992 study by the Congressional Research Service explains, rebates just don't work.

  • Even if Congress works at breakneck speed, money from a rebate will not begin to flow until the economy is well past the worst of the downturn.
  • And a permanent tax cut is more of a stimulus, even in the short run, than a rebate. "In the first year, a rebate probably has no more than half the stimulative effect of a permanent tax reduction of comparable magnitude," says the CRS.

Investment could be stimulated by resurrecting the Investment Tax Credit (which allowed firms to reduce their tax burden by investment in plant and equipment), first instituted by John F. Kennedy in 1962 and repealed in 1986. It would be better to shorten depreciation, the write-off firms get for the wearing-out of their equipment. But for a short-run stimulus, the ITC would be easier and faster to implement.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, April 4, 2001.


Browse more articles on Tax and Spending Issues