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From the President's Desk...

No Stimulus Bill May Be Better Than Having One

A Declining U.S. Economy
Deficit Spending
Partisan Politics
Robust Tax Cuts Will Stimulate the Economy
References

The House of Representatives on December 20, 2001, passed an economic stimulus package that would provide $214 billion of tax relief and unemployment compensation over a five-year period.  However, refusing to allow a vote in the Senate on the bill was Senate Majority Leader Tom Daschle (Democrat-South Dakota) who controls the floor agenda.  According to the Majority leader the measure contained too much tax relief and not enough permanent aid for unemployed workers who require health insurance. (1)  The issue will be taken up again when Congress returns after their month-long holiday.

The House bill, which allows the unemployed to pay up to 60 percent of the premiums of any health care plan, would provide $13 billion of tax credits over two years.  In comparison, Senator Daschle wants the federal government to pay a 75 percent subsidy for health insurance for many employees who qualify after losing their jobs.  The employer would receive the money.  Also, democrats want to expand coverage under Medicaid, for laid-off workers who did not have employer-provided health insurance.

For those laid-off, the House bill provides 13 additional weeks of unemployment benefits.  For low-income workers who did not qualify for refund checks earlier this year, it would also give rebates of up to $600.  The current 27 percent income-tax rate would be cut to 25 percent effective January 1, four years earlier than planned.

In addition, the corporate minimum tax would be eased and businesses would be allowed to write off 30 percent annually of the cost of new investment for the next three years by the measure. (2)

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A Declining U.S. Economy

Unfortunately, declining even greater than previously estimated by the government was the United States (U.S.) economy that turned in its weakest performance in ten years.  In the third quarter, it declined at an annual rate of 1.3 percent.

Consumers were frugal, companies sharply reduced investment, and businesses slashed excess stocks of unsold goods according to the revised reading of the gross national product (GNP) released by the Commerce Department on December 21, 2001.  In the July-September quarter, all these factors contributed to the dismal showing.

The current quarter will be even weaker, with the economy shrinking at least 1.5 percent according to some analysts.

In March, ending the largest expansion in U.S. history and starting the first downturn in ten years, the nation entered a recession according to a recent statement from the National Bureau of Economic Research.

The Federal Reserve has reduced interest rates 11 times in 2001 to prevent the economy from plummeting deeper into recession.  This has resulted in the lowest point for the borrowing costs of consumers and businesses since November 1965.

A sharp decline in capital spending has also resulted in much of the economy’s decline.  At a rate of 8.5 percent in the third quarter following an even steeper 14.6 percent plunge in the second quarter, the December 21, 2001 GNP report demonstrated that business investment in new plants and equipment had fallen.

Growing at a one percent rate in the third quarter the weakest showing since the first quarter of 1993 was consumer spending compared to the 2.5 percent growth rate posted in the second quarter.  This was the biggest of all economic activity.  Consumer activity accounts for about two thirds of the economy.

The December 21, 2001 report also revealed that after-tax profits of U.S. corporations fell at a rate of 6.8 percent.  Profits declined at a 1.7 percent rate in the second quarter. These third quarter rates reflect the impact of the terrorists attack on America. (3)

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Deficit Spending

The Treasury Department reported on December 20, 2001, that the government posted a deficit of $54.3 billion in November, making the second straight month of red ink in the 2002 budget year.

Increased spending and an economy that fell into recession in March resulted in the deficit according to several analysts.

Government revenues totaled $121.2 billion, while government spending was $175.5 for November.  In October, the start of the 2002 budget year the government had a budget deficit of $9.4 billion.  (4)

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Partisan Politics

Unfortunately, the Senate led by Senator Daschle turned the economic stimulus bill into a battle over tax and health policy when they could have taken relatively simple measures to provide a temporary boost to the economy.  The Senate had to act quickly to adopt a robust economic recovery plan to have an effect on the current economy.  Unfortunately, they failed to do this.  As a result, the failure of this stimulus package most likely will make next year’s recovery less robust and will keep the unemployment rate high for a longer period of time. 

Critically important to the success of the stimulus package is accelerating tax relief.  To stimulate investment and economic growth at minimum the bulk of President’s original package should have been left in place.  Unfortunately, the President compromised by accepting additional expansion of unemployment benefits and health care payments.  The package must not contain a great deal of new spending as it currently does.  The economy will be stimulated by the private sector not by more government spending.  Historical evidence proves this to be correct. 

Little if any effect on the economy would result from Senator Daschles’ idea of a stimulus plan that he has insisted must be part of any package.  The investment incentives in his alternative plan would result in little stimulus effect and most likely would result in a negative effect.

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Robust Tax Cuts Will Stimulate the Economy

A genuine stimulus package is needed, not a pseudo one that encourages more big government spending.  If the current trend continues, more Americans across the nation will continue to be laid-off, adding to the increase in the number of unemployed.

To help reverse the current economic downturn, a reduction in the marginal tax rate for individual taxpayers would provide a needed boost to the economy.   Lower tax rates would need to take effect immediately as well as all other rates being reduced.  Economic growth will be impeded as the incentive to be productive is stigmatized by the high top tax rate.   The top income tax rate should be reduced from 40 percent to 34 percent.

Tragically, under the guise of fighting terrorism, special interest and pork barrel projects continue to increase.  Such actions divert from the private productive sectors of the economy’s important resources.    One way to control big government spending is to reduce the tax burden on working Americans.  Since the rate of inflation has been below two percent, it makes no sense for spending to grow by seven or eight percent.  Furthermore, deductions, credits, and exemptions provide large tax savings to some taxpayers when tax rates are high.   For example, because about 70 percent of all taxpayers claim the standard deduction, they receive no benefit.  All income should be taxed at one low rate and only once resulting in a simpler and fairer tax code.  Special-interest tax breaks, which are more beneficial when rates are high, cause political pressure to add new preferences to the code as well as economic distortion.  Thus, to reduce their value, marginal tax rates must be reduced.

Immediate reduction in the capital gains tax of 15 percent toward its eventual phasing out would increase revenues, spur capital investment and increase stock values. (5)    Lower growth and productivity and the capital stock is reduced by highly effective capital gains rates.  Investors are discouraged from selling their assets, reducing economic efficiency by putting too much capital at the expense of newer opportunities in older investments since capital gains taxes encourage a “lock-in” effect.  Since the value of a capital asset is simply the discounted future earnings expected to flow from it, taxing the increase in capital value is a double tax.  Through the corporate and personal income tax capital gains are already taxed more than once.  Furthermore, a third layer of taxation can be found in appreciating stocks or real estates.  When stocks are sold, taxpayers cannot deduct losses.  Even when losses outweigh gains, the taxpayer can owe taxes.

Also, instead of allowing the death tax to expire in 2011 only to bring it back in 2012, it should be repealed immediately. (6) Evidence already suggests that no net federal revenue is yielded as a result of estate planning to avoid the tax. (7)

The unfair corporate Alternative Minimum Tax  (AMT) should be repealed.  Rebates on past AMT payments should be avoided because there is no evidence rebates will cause corporations to invest.  On the other hand, the rebates would be used to pay down debt or increase dividends given to share holder.  On future productive economic activity like work, saving and investment, economists favor tax reductions as a means to stimulate economic growth.  For new investments, increases in depreciations would provide meaningful stimulus. (8)

The U.S. economy may rebound enough that an economic stimulus may not be necessary suggested President Bush on December 21, 2001. (9)  To resume negotiations on the plan, he ruled out calling Congress back early from its month long break.

The President told reporters in the Oval Office, “We’ll have time when [lawmakers] come back to take a look-see at the state of the economy.” (10)

The President said, “We’ll see,” when asked if a stimulus would still be needed. (11)

He added, “We’re continuing to get mixed signals.  Hopefully the economy will be good.” (12)

Some economists believe that during the first three months of next year, the economy will recover on its own prior to any fiscal stimulus package having an impact on the economy.  It is estimated by many economists that only half a percentage point would be added to economic growth and a modest 300,000 jobs would result from the current stimulus package that has passed the House.  Failure of the Senate to pass an economic stimulus package should not cause the current recession to be longer in duration or increase the depth of the slowdown.  However, it is most likely to make next year’s recovery less robust and keep the unemployment rate higher for a longer time period.  Furthermore, the depth of the slowdown would have been lessened and the duration shortened by a rapidly enacted stimulus package.

If a stimulus package arises next year that is different from the President’s original plan, he should not compromise and should veto the measure.   A fiscal stimulus plan passed next year is unlikely to effect actual spending or tax receipts until the economy has started to recover on its own.  Only when the economy is expanding will its full effect be felt.

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References

1     Dave Boyer, “Daschle defiant on stimulus,” The Washington Times, December 21, 2001

2         Dave Boyer and Bill Sammon, “Daschle blocks stimulus vote,” The Washington Times, December 20, 2001

3        Jeannine Aversa, “Economy Weakest in a Decade,” The Associated Press, December 21, 2001

4        Jeannine Aversa, “Government Posts Deficit in November,” The Associated Press, December 20, 2001

5        Bruce Bartlett, “Principled Arguments Against Capital Gains Taxes, National Center for Policy Analysis, August 15, 2001

6        Ibid

7         Ibid

8        Bruce Bartlett, “Tax Rebates Won’t Stimulate the Economy,” The Wall Street Journal, November 1, 2001

9          “Bush Says Unclear Whether Stimulus Will Be Needed,” Reuters, December 21, 2001

10       Ibid

11       Ibid

12       Ibid

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