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246 IRET Congressional Advisory 1 (2008)

handle is hein.taxfoundation/iretcgadv0243 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote growth and efficient operation of the market economy. October 30, 2008 Advisory No. 246 NEW TAX AND SPENDING PROPOSALS SINCE THE MARKET MELTDOWN With financial markets continuing to plunge since Washington's passage of the financial bailout package, Senator Obama and Senator McCain have each proposed additional tax and economic policy changes that were not included in their original programs. Members of Congress have been working on similar ideas. These policies would be temporary responses to the expected economic downturn associated with the banking panic. The proposals might be considered if Congress returns after the election to pass a second stimulus package. If not, they could be offered in the next Congress. The two parties are also offering other stimulus proposals, many on the spending side of the budget. Some of the proposals would help people cope with the downturn, but most would not limit the downturn itself. Some would make the downturn worse. Some of the proposals make tax policy sense, and would be good permanent additions to the tax code. Most would not. Only one, a proposed cut in the corporate tax rate by Representative John Boehner (also in the original McCain package), would spur growth quickly. The proposals do not include other attractive and effective options for growth and damage control, such as extending 50% expensing and continuing the 15% caps on the tax rate on dividends and capital gains, or expanding saving incentives to help innocent savers recover from the crash in their financial assets. An ideal tax policy would move the tax code from an income base, which contains biases against saving and investment relative to consumption uses of income, toward a neutral or consumed income base, under which saving and consumption face the same tax burdens. We evaluate the tax proposals accordingly. Much of Congress and the media continue to labor under old-fashioned Keynesian ideas about economic stimulus and the benefits of government spending and transfer payments. Contrary to that view, neither tax cuts nor government spending work by increasing demand in the economy. These policies have to be paid for either by raising other taxes, cutting other spending, or increasing federal borrowing, which crowds out more private activity. The initial demand effect of these policies is nil. Government efforts to promote growth work only when they increase incentives to work, save, and invest in the private sector, or rein in regulations that are impediments to production. Higher production generates higher incomes that in turn generate higher demand. Supply first, demand second. No output, no income. Presidential candidates' new tax proposals Both Senators would temporarily exempt unemployment compensation from tax. Senator McCain would limit that benefit to people earning less than $100,000. A second stimulus package may further increase or extend the duration of unemployment compensation. Perversely, increases in unemployment compensation reduce employment. The higher payments allow people to wait longer before returning to work after a lay-off. Similarly, k3~ A * ~ ee~ e ~ee

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