the President's Desk...
Stimulus Bill May Be Better Than Having One
Declining U.S. Economy
Robust Tax Cuts Will Stimulate the Economy
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.
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.
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.
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)
to the Top
Declining U.S. Economy
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.
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.
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.
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.
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.
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)
to the Top
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.
spending and an economy that fell into recession in March resulted in
the deficit according to several analysts.
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)
to the Top
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.
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
to the Top
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.
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
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.
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.
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)
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)
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.
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)
President said, “We’ll see,” when asked if a stimulus would still be
He added, “We’re continuing
to get mixed signals. Hopefully
the economy will be good.” (12)
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
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.
to the Top
Boyer, “Daschle defiant on stimulus,” The Washington Times, December
Boyer and Bill Sammon, “Daschle blocks stimulus vote,” The Washington
Times, December 20, 2001
Aversa, “Economy Weakest in a Decade,” The Associated Press, December
Aversa, “Government Posts Deficit in November,” The Associated Press,
December 20, 2001
Bartlett, “Principled Arguments Against Capital Gains Taxes, National
Center for Policy Analysis, August 15, 2001
Bartlett, “Tax Rebates Won’t Stimulate the Economy,” The Wall Street
Journal, November 1, 2001
“Bush Says Unclear Whether
Stimulus Will Be Needed,” Reuters, December 21, 2001
to the Top
to the American Voice Institute of Public Policy Home Page