Getting the right kind of stimulus
11/16/2001 12:00:00 AM - Bruce Bartlett
In the wake of Sept. 11, Congress and the White House seemed united on the need for economic stimulus. The economy was, in all likelihood, in recession on that date, with the added costs and fears resulting from terrorist attacks pushing it lower still. Yet, more than two months later, the so-called stimulus package remains mired in partisan wrangling, with little reason to believe that any real stimulus will be forthcoming.
A key problem is that liberals simply refuse to accept the idea that meaningful economic stimulus can only come from the private sector. It is private businesses, both large and small, that employ the vast majority of workers. These same businesses provide almost all the investment, as well -- plant, machinery, equipment, research and development, and the like. Together, they originate almost all of the gross domestic product, the combined total of all the goods and services produced in the United States.
Individuals also play a critical role. As entrepreneurs, they form the businesses. As innovators, they get the ideas for new products and processes. As inventors, they translate ideas into tangible goods and services. And as savers and investors, they provide the capital that the business sector needs to operate, and direct that capital through financial markets to where it has the greatest economic value and will earn the highest return.
Although anyone can participate in this process, the fact is that the preponderance of those who do are wealthy. Indeed, the main reason why they are wealthy is because they engaged in it. Contrary to popular belief, most wealthy people in America made it themselves through hard work, risk-taking and self-sacrifice, not inheritances.
Yet despite the fact that private businesses and well-to-do individuals are the basic sources of economic growth, the "stimulus" plans being debated in Congress do virtually nothing meaningful for either group. The centerpiece of both the Republican and Democrat plans is a tax "rebate" for those who pay no income taxes, along with a lot of new "pork barrel" spending and tax gimmicks for the favored few with political clout.
The idea of tax incentives for those who are the true sources of economic growth and progress seems to be off the table. Whenever anyone suggests the possibility of cutting the top income tax rate, the capital gains tax or other taxes on saving and investing, they are accused of being plutocrats who favor the rich over average Americans. Hardly anyone in politics seems to have the guts to come out and say that if we want to really help average Americans, we have to first help the businesses that employ the workers and pay the wages -- and those who save and invest and take risks to provide capital to those businesses. In short, the politics of class warfare trumps stimulus.
It is probably too late to enact a stimulus plan that will actually stimulate the economy. But it is still important that those who know better fight the good fight. The class warfare crowd should never be given a pass by those who know that the ultimate result of caving in to them will be to kill the golden goose.
One useful source of ammunition against the class warriors comes from the Congressional Budget Office. It has just published a new study, "Effective Federal Tax Rates, 1979-1997," which shows that the wealthy already shoulder more than their fair share of the federal tax burden. And contrary to popular belief, the tax burden on the productive class has been rising, not falling.
According to the CBO, those in the top 20 percent of the income distribution now pay 27.4 percent of their total income to the federal government, up from 23.7 percent in 1983. And those at the very top -- the top 1 percent of households -- have seen an increase in their effective tax rate from 26.8 percent to 32.7 percent. As a result, the share of total federal taxes paid by the top quintile has risen from 56.9 percent in 1983 to 65.4 percent in 2000. The share paid by the top 1 percent has risen from 13.9 percent to 23.1 percent.
Concomitantly, the tax rate on those with modest incomes has fallen almost continuously. Those in the bottom quintile now pay just 5.3 percent, versus 8.1 percent in 1983.
Fortunately for Congress, the Federal Trade Commission doesn't investigate its false advertising claims. It is free to call some legislation a "stimulus" bill even when it won't stimulate anything, because none of the benefits go to those who produce, save and invest. Unfortunately, it looks like that is what we are going to get.