Posted on 01/17/2009 6:11:29 PM PST by SeekAndFind
The economy has been in recession for over a year, and it’s likely to continue contracting through the first half of 2009 -- and possibly beyond. Clearly, policymakers need to pursue stimulus policies that work.
The centerpiece of an effective stimulus policy should involve two elements:
1. Extend the 2001 and 2003 tax reductions for as long as possible -- certainly through at least 2013 -- to prevent a tax increase. Better yet, make the reductions permanent.
2. Reduce tax rates on individuals, small businesses and corporations through 2013 by lowering the top rates by 10 percentage points and reducing rates by similar amounts for other taxpayers.
Our analysis, using a mainstream model of the U.S. economy, shows that these policies (relative to current law) would:
* Soften the recession in 2009 and speed the economic recovery through 2010 and beyond.
* Increase employment by a half million jobs in 2009 and by a million jobs in 2010, and create 3.6 million jobs from 2009 through 2012.
* Reduce federal tax receipts over five years by roughly $670 billion.
By contrast, the types of tax proposals mentioned as part of the Obama stimulus would have almost no effect on the economy -- and the proposed increase in spending would have no effect on it whatsoever.
Much of official Washington is focused on a big stimulus plan based predominantly on increased spending. Whatever the merits of this spending on other policy grounds, it would not stimulate the economy in the near term. The American economy doesn’t rise and fall with the level of aggregate demand or deficit spending.
Further, government can’t simply pump up total demand through deficit spending. The deficit for the next two years is already projected to exceed $2 trillion. If deficit spending were an effective stimulus, the economy should already be poised to take off.
Yet the economy is contracting despite these unprecedented deficits. Why? Because government spending in excess of tax revenues will be financed by borrowing from the private sector. That deprives the private sector of a like amount of purchasing power. Government spending goes up, private spending goes down -- changing the composition of demand but not the total. Worse, the amount of federal debt that must be issued to finance the projected deficits, plus the stimulus, may be enough to drive up interest rates significantly, thereby de-stimulating the economy.
Focusing on total demand in the economy is like focusing on the sound of one hand clapping. The other hand is supply, and that’s where the economic action really is.
There are normal processes that launch a recovery and drive an economy. These involve individuals and businesses responding to opportunities and incentives. When they respond, these individuals and businesses produce more goods and services, which increases production, demand and income. An effective stimulus policy recognizes these economic processes and seeks to accelerate them.
Lower marginal tax rates stimulate the economy because they create incentives for individuals and businesses to work, invest, take risks and seize opportunities.
Step One: Extend the 2001 and 2003 Tax Cuts at Least through 2013
The economy faces a massive tax hike in 2011 when the tax relief enacted in 2001 and 2003 expires. President-elect Obama has suggested he would prevent most of this tax hike but not the increase in top marginal tax rates, the increase in the dividend and capital gains tax rates, and the return of the death tax -- the most important tax relief. Even a Keynesian should acknowledge it’s difficult for the economy to gain its footing when it faces the threat of a punitive tax hike.
There will be time enough to debate the progressivity of tax policy when the economy recovers fully. The focus now must be on speeding the recovery itself, and extending current policy in its entirety is the first step. It is, however, a policy of avoiding harm, and so it is only a necessary first step.
Step Two: Reduce Marginal Tax Rates for Individuals and Businesses
We should reduce the top tax rates on individuals, small businesses and corporations by 10 percentage points through 2013, and reduce other income tax rates by similar amounts.
President-elect Obama and Congress may want to consider additional tax elements, such as expanding bonus depreciation for small businesses. But these additional elements cannot match rate reductions as sound and effective tax policy.
Economic recovery is achieved by the economy itself, but Washington can accelerate that process. The best way to do that is to improve the incentives that drive economic activity -- and that means reducing tax rates on work, saving, investment, risk taking and entrepreneurial activity.
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J. D. Foster, Ph.D., is Norman B. Ture Senior Fellow in the Economics of Fiscal Policy in the Roe Institute for Economic Policy Studies at The Heritage Foundation (heritage.org). William W. Beach is director of Heritage�s Center for Data Analysis.
Easy summary of what will and won’t work:
1) Does the Obamaloon want to do it?
Won’t work.
QED
We raise the minimum wage and unemployment sky rockets......
Tax reduction works.
And that is the point...
We can do what The One wants - trillions of dollars in "public works projects" and bailout money - and we will still have a recession. Or we can just cut taxes across the board, swallow $700 billion in revenue shortfall, but then be out of this recession far quicker - with the power of the free markets and without our system not even further into the socialist sewer.
But which do you think The One prefers...
On taxes: change to a flat 9% tax on all personal earned incomes with no deductions, no exemptions. Remove all business taxes.
Get out of the way.
The best to do is to buy nothing on credit-—drive the credit-mongers out of business.
Is that a flat 9% TOTAL, or would you add to that the 15.3% Self Employment tax (or the 7.65% if you are a regular employee)?
SS tax is the biggest scam going - and should be abolished. I use to think that allowing us to invest part of it was a good idea. WRONG. Allowing the government to extort it from tax paying citizens (with an ever growing portion of the pie) is not only wrong, it is evil.
And now that my work classifies me as "Self Employed"... I have an even bigger axe to grind.
I am actually now in favor of eliminating ALL income taxes period.
As Steve Forbes observes, the U.S. is enacting a “stimulus” program of gargantuan peacetime proportions to rejuvenate our recessed economy. We are not alone in this. Japan, China, Europe and numerous other nations are doing the same—not yet as big as our program but based on the idea that governments can rekindle growth.
It’s all mostly wasted effort.
Governments are indeed critical to economic growth—but not in the manner we see unfolding here. While times and circumstances change, principles of economic growth do not. The basic ones have stood the test of time:
—The rule of law, especially property rights.
—Money that is stable in value, which the dollar manifestly has not been.
—Low tax rates.
—Ease of starting a new business.
—Minimal barriers to doing business, whether overseas (low or no trade barriers) or domestic (no internal cartels or onerous licensing procedures).
Reducing all tax rates creates an incentive for people to work harder and longer because they keep more fruits of their labor.
Handing out “free” money to failed enterprises only prolongs their agony and encourages more of the bad behavior that led to the failure in the first place. The walking wounded should be shot dead so the survivors can get on with their lives and prosper.
This is not rocket science, just human nature.
Its about "fairness".
They intent to bankrupt the country and pronouce that capitalism didn’t work...
SocSec is another question. I am for privatizing that. Ideally the government would not be in the business of “insurance” at all but, given the sacredness of SocSec-as-it-is I would aim at one thing at a time. Rationalizing SocSec would not have nearly the effect on the economy that a flat low income tax would, though. I paid the full SS tax for a decade and it is a bummer. With that the highest total income tax is 55+% or so. That is way out of line for a nation built on free market principles.
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