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122 IRET Congressional Advisory 1 (2001)

handle is hein.taxfoundation/iretcgadv0119 and id is 1 raw text is: November 30, 2001 No. 122 STIMULUS OR SILLINESS? The stimulus package is rapidly becoming cosmetic rather than substantive. New and nearly useless provisions are being suggested based on These constructive features are being short- changed and watered down in favor of provisions that would give consumers money to spend to pump up demand. Two new ideas are a brief state and local sales tax holiday (reimbursed by federal revenues) and a one month payroll tax holiday. Both are advertised as ways to put money into consumers' pockets fast, and are offered in lieu of giving $300 to $600 dollar rebates to people who did not pay income tax and were not eligible for the first round of rebates last summer. That analysis is flawed. The sales tax holiday would do no measurable good. The payroll tax holiday would do a bit of good, but not by expanding consumption. These plans, and the rebate scheme they would replace, and indeed any theories that were discredited in the 1960s and 1970s, and useful provisions are being scaled back to pay for them. The best that can be said for the bill at this point is that the economy may have recovered before the bill is passed. The best tax table are 30 proposals on the percent expensing and repeal of the corporate AMT, followed by acceleration of all the pending marginal rate cutts (not Just the bottom rates). kind of tax cut, would not give people more money to spend. (They don't work by giving businesses money to spend either. It is not necessary to refund old AMT credits immediately; just allow them to be claimed over time.) The federal revenue used for these The best tax proposals on _ the table are 30 percent expensing and prospective repeal of the corporate AMT, followed by acceleration of all the pending marginal rate cuts (not just the bottom rates). The _schemes might otherwise be used to repay more federal debt, which means it would go back to the bondholders, who would spend it themselves or lend it to others to spend. Alternatively, it might be investment incentives would work by making it easier, after taxes, for a prospective investment to earn enough to cover its own costs, thus enabling businesses to create and employ more plant, equipment, and buildings. The personal tax rate cuts would Tax provisions that are piurported to work by giving individuals or businesses money to spend would do nothing of the sort. used for more federal spending, or a larger tax cut of a more pro-growth kind. This federal budget constraint dictates that there be the same initial demand either way. (The only way federal policy can boost spending without first encouraging production is encourage additional work, hiring, saving and investment by raising after-tax returns to workers and entrepreneurs. by increasing the money supply, but that is monetary policy, and is independent of federal tax and spending changes.) Institute for Research on the Economics of Taxation IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 * Fax 202-463-6199 0 Internet www. ret.org

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