Bush's "Stimulus" Package Seems Off-Track

Matt Lewis | January 18, 2008 8:53 AM

It's too early to know the exact details, but from what I can gather, President Bush's immediate call for a stimulus plan is politically sagacious move -- but will do little to help America in the short-term or the long-term -- and might actually prolong a recession.

Based on what I'm hearing, Bush's two principles are rebate checks of $800 or $1,600 per couple -- plus elimination of the 10 percent tax bracket for a year. He would also do some expensing for business (if they buy equipment this year, they could expense 50 percent right off the bat -- up to a certain amount).

All of this is essentially Keynesian economics which calls for more federal spending to "stimulate" the economy. Have we learned nothing since the Reagan Revolution?

Also interesting is the bi-partisan nature of this. We've been living through deficits for the last several years, so why are the Democrats now supporting this? Because they stand to gain politically, too, of course! (For more info on this point, I highly recommend checking out Bill Thomas' op-ed in the WSJ.)

Clearly, the President must act immediately to avoid a recession. But capital gains taxes and corporate tax rates should be the focus of any stimulus package.

Corporations don't pay taxes -- they merely pass on expenses to consumers. So by cutting the corporate tax, there would be a short-term, positive impact on the economy.

In addition, cutting the corporate income tax -- and the capital gains tax -- would provide a ton of money for people to begin creating jobs, building factories, etc.. 401 K's would also bounce back by the end of the year, and that would be good news for many of us.

And because people who create businesses today are concerned about long-term economics, a long-term solution (as Rudy has proposed) is also a short-term Band-Aid.

From a supply-sider standpoint, none of Bush's proposed fixes (as I understand them, currently) will change incentives. Instead of simply doing a transfer of money from the government to citizens, we ought to lower marginal rates -- so people are actually encouraged to build new factories, businesses, and create new jobs. This doesn't do that. This simply takes money from the government and gives it to people.

Carter proposed a rebate. George W. Bush did the same thing in 2001 -- but also offered bold tax cuts. What he's proposing today, unfortunately, does not include the same long-term fixes.