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251 IRET Congressional Advisory 1 (2009)

handle is hein.taxfoundation/iretcgadv0248 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. February 4, 2009 Advisory No. 251 DEMINT JOBS PLAN Senator Jim DeMint (R-SC) is offering a substitute tax package for the stimulus bill. The DeMint plan would generate about 2.5 million new jobs on a permanent basis. The improvement in the economy would start quickly and grow over time. It would do more than return us to full employment in the short run. It would expand labor force participation, hours worked, and the stock of plant and equipment on a permanent basis, and leave the economy larger than otherwise. The added employment and income would not only benefit the country, they would eventually generate additional tax revenue, which, along with one modest revenue raiser in the package, would offset the revenue cost of the proposal to the federal budget. This is in sharp contrast to the massive outlays and tax rebates being proposed in the stimulus package, which would generate no permanent economic gains and would cost not only their immediate outlays, but would add to the government's debt and associated interest payments forever after. We estimate that, compared to the tax rates in effect in 2009, the DeMint plan would boost business sector output by 2.2%, raise total GDP by about 1.8%, create nearly 400,000 full-time equivalent jobs, and raise wages by about 1.8%. (A full-time equivalent job assumes a 40 hour week. Some of these jobs would be divided among part time workers, so the employment count would be higher.) The effects would be far more dramatic compared to the post-2010 baseline, which assumes expiration of the 2001 and 2003 tax rate reductions, lowering investment, employment, and wages. Under DeMint, compared to the post-2010 baseline, business sector output would be 8.7% higher, total GDP about 7% higher, there would be 2.5 million more permanent full-time equivalent jobs, and wages would be about 6.3% higher. The economy under the DeMint plan would generate slightly more federal revenue than at present due to the added output and income. By contrast, under the depressed baseline economy, annual federal revenue would be reduced by more than $220 billion in spite of expiration of the pre- 2001 tax reductions.1 In Stimulus or Bust?, IRET Congressional Advisory No. 249, we criticized the stimulus package as passed by the House and introduced to the Senate for not pushing any of the growth buttons in the tax code. It would not lower marginal tax rates on individuals to encourage added work, hiring and investment by small businesses. It would not reduce the corporate tax rate or extend the Bush tax rates on dividends and capital gains to lower the cost of capital for corporate investment. It does have a modest but temporary restoration of the bonus expensing for equipment, but only for one year, which would not induce a permanent increase in productive capacity or employment. In short, it would give people little or no reason to offer more labor or capital to the production process, without which there can be no added output or income. The spending elements of the plan would have to be paid for either through taxing or borrowing, and would not add to GDP. They are largely a waste. The stimulus package, as currently structured, would saddle future budgets and taxpayers with $35 billion to $40 billion a year in additional interest, and the taxes raised to pay that interest would do considerable collateral economic damage, perhaps another $60 billion annually in lost GDP. Even if the package performed as advertised to shorten the downturn by three to six months (a real stretch of the e~em S I ee~ a ~gg

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