With the stock market’s big drop, Washington wisdom now dictates that policymakers need to do “something” to give the economy a boost. President Bush came out yesterday with outlines of a package that would rely heavily on rebates to taxpayers, the idea being that people would then go out and spend these rebates and reverse sluggish sales.
On National Review Online, Larry Kudlow gives this idea a luke-warm endorsement, at least compared to other proposals floating out there:
President Bush has made the best of a bad situation by applying his so-called tax rebate proposal within the income-tax code, rather than positioning it as new federal spending, like Sen. Hillary Clinton’s $100 billion spending package. He’s going to oppose that. He’s right to oppose that. It’s essential to oppose that.
As I understand it, they’re going to waive the 10 percent bracket which goes up to $15,650. Everybody passes through that bracket. I’m sure upper-end taxpayers will not get any of this relief. Lower-end and middle-end taxpayers will.
In doing so, there will be a very tiny incentive effect, although it’ll only last a year. As I said, the president is making the best of a bad political situation. He had to do “something.” And this is the least harmful thing he can do. It can be classed as income-tax relief, even though there’s no permanent incentive effect.
et while I’m all for the government putting money back in the hands of the people, it seems like rebates are about as bad a way as you could do that. Bruce Bartlett makes this case in The Wall Street Journal, arguing that a rebate will do little to boost savings and is really just a political gesture:
In short, there is virtually no empirical evidence that tax rebates are an effective response to economic slowdowns. The increased personal saving doesn’t help the economy because the federal budget deficit, which can be thought of as negative saving, offsets all of it in the aggregate. The main benefit of a tax rebate would seem to be political — giving politicians a way of appearing to be doing something about the nation’s economic problems that is superficially plausible.
This economic souring seems like a reason for policymakers to refocus on getting the fundamentals right and change some of the big things that we know are a drag on the economy. Obviously policymakers aren’t going to be able to quickly scrap the tax code in favor of a simpler, flatter plan (though that would be ideal), but if essentially everyone recognizes that corporate taxes and taxes on savings are too high, why not go ahead and lower those? A cut in income tax rates would encourage productivity and increase income, not just temporarily like a rebate, but over the long term so people might feel more comfortable to increase consumption.
The debate about a stimulus shouldn’t just be a Washington give away, but a chance to actually improve our economy’s foundation.