Don't be misled by the illusion of bipartisanship conjured up in pictures
of President George W. Bush and Senate Democratic Leader Tom Daschle
hugging. It's more a clinch than a hug as Democrats play "rope-a-dope" on
the so-called stimulus package, wrestling with the president and trying to
wear him out fending off their class-warfare tactics and big-government
spending schemes. Five versions of a stimulus package are on Capitol Hill,
none of which has sufficient support to be enacted into law.
All of the proposals, including the president's, are premised on
stimulating aggregate demand, a discredited Keynesian economic theory that
presumes the economy can be kick-started by having the government and
consumers spend more money. Past experience and extensive economic research
refute both notions. Unfortunately, the administration's use of Keynesian
rhetoric makes it difficult to fend off congressional spending schemes and
has prevented Bush from supporting the best thing we could do to revive the
economy, cutting the capital gains tax rate.
The House-passed bill and the Senate Democratic proposal delimit the
range of the proposals. The House bill accelerates the income tax rate
reductions, modestly cuts the capital gains tax rate, temporarily
accelerates business depreciation, rebates $14 billion of payroll taxes to
low-income workers and repeals the corporate alternative minimum tax, while
rebating $25 billion in past AMT taxes to some of America's largest
corporations. The proposal favored by Senate Democrats also rebates $14
billion of the payroll taxes and makes modest temporary changes to business
depreciation, makes no additional tax rate reductions and increases federal
entitlement and pork-barrel spending dramatically.
Bush's stimulus proposal and a hybrid Senate proposal by Senators John
Breaux, D-La., and Olympia Snowe, R-Maine, move slightly toward the middle
from both ends of this range respectively. Bush would cut taxes a little
less than the House - although he would, unlike the House bill, accelerate
the reduction of all tax rates, including the top rate - and eschew cutting
the capital gains tax rate while spending a little more. Breaux and Snowe
would spend a lot more money and cut taxes a lot less. At the center,
"between" the other four proposals, is a proposal by Senate Republicans that
would cut taxes about the same as Bush and spend about as much money as
Breaux and Snowe.
None of the five stimulus proposals contains significant marginal tax
rate reductions and tax law reforms sufficient to increase long-run economic
growth appreciably, and all five contain provisions that distort future
investment and production decisions.
It is the marginal tax rate that determines how much of each additional
dollar earned must be paid to the tax man. Consequently, it is a change in
the marginal tax rate, not the average rate, that influences people's
decisions to alter their work effort or change their levels of saving and
investment since marginal tax rate reductions always apply to future
economic activity, i.e., the next dollar earned, produced, sold, saved or
invested. Tax credits and tax rebates are a reward for past behavior and
hence have no effect on the future. Moreover, if policymakers attempt to
shelter individuals from the adverse economic effects of high tax rates and
other economic policy errors (such as the Fed's monetary policy errors) by
raising entitlement spending, they will only succeed in worsening incentives
to work, save and invest in the future and thereby delay economic recovery
longer.
Out of this political mishmash are several tax rate reductions worth
enacting - the capital gains tax rate reduction, the proposed acceleration
of marginal income tax rate reductions, the acceleration in depreciation and
the AMT repeal - because they offer beneficial, albeit small, reforms to a
tax code Treasury Secretary Paul O'Neill has called "an abomination ...
unworthy of an advanced civilization." However, if the price for enacting
them is that they must be temporary and distort future decisions or that
they must be accompanied by discriminatory tax credits and rebates and large
increases in federal entitlement spending, then they aren't worth a nickel.
There is a congressional election coming within the year, and I can't
think of a better issue over which to wage the campaign. The best thing Bush
can do for the economy, therefore, is to stop haggling with members of
Congress over the stimulus package and give Congress a Dec. 15 deadline to
put on his desk for signature a tax rate reduction bill that meets this
simple test: It will improve the incentives for labor and capital to work,
save and invest in the future. The president should tell Congress he will
veto anything that fails to meet this test.
