Posted by
Dave Smith on Wednesday, December 03, 2008 2:20:35 AM
As he chooses his cabinet and prepares to take office, President-elect Obama and several of his advisers have discussed yet another so-called "economic stimulus" package, to be prepared in the interregnum and ready to sign when he takes office. While declining to engage in discussion of the details of such a stimulus, numbers in the range of $500-700 billion have been floated, with the usual government demand-side ideas: "infrastructure" and "public works" projects, bailouts for domestic automakers, tax credits for "alternative energy", and so on. What's new was once old: most of the ideas are variations of programs initiated by Presidents Hoover and Roosevelt to combat the Great Depression.
The main problem with such public spending projects is simple: they've never been shown to turn around the economy. Hoover and FDR found that out the hard way, as the Great Depression was still in full swing 10 years and billions of dollars after it started, with nary a dent in unemployment and little economic growth to show for it. The key to this is also fairly simple: when the government funds a project, it is merely moving dollars (forcibly) from one party to another; nothing is created, no new value is created. Obviously, sometimes roads and other public infrastructure is a good thing: the interstate highway system has, in many respects, been a boon to trade and commerce. But where highways and other investments have been successful in promoting economic activity, they were built in response to (or perhaps in advance of) an economic need, not as make-work for workers on the government paycheck.
When the government starts funding public works for their own sake, it simply gives politicians the chance to buy off votes back home, or to provide goodies for favored industries. Consider an extreme example: what if, to spur employment, the government spent billions of taxpayers funds to hire workers to build wagon wheels? At the end of the project, yes, people would have been employed, and yes, there would be a product to show for their endeavors. But of what economic value would billions of wagon wheels be in 2008? Meanwhile, money that could have been put to more efficient, effective use was taken from taxpayers and spent on worthless items. Likewise, a $250 million bridge to an island of 50 people would put people to work, but at little or no economic growth benefit. Politicians have an incentive to choose spending projects that promote their own re-election, not that provide the best long-term solutions.
So if massive public spending isn't the key, what is the best "stimulus" the government could undertake to "jolt" the economy into recovery? How about, instead of the government deciding where the best investments are, instead of spending more money in a (vain) attempt to stimulate the economy, it took less of a role. There's a simple rule in economics: if you want more of something, subsidize it; if you want less of something, tax it. So instead of trying to find the best alternatives to subsidize activity, the government could tax economic activity less, letting businesses and individuals keep more of their own money to spend as they see fit, on investments or consumption that fits their own needs.
Based on this central premise, the first step would be to slash (or better yet, end) the capital gains tax. An individual or business that wants to invest does so knowing that if it makes a profit, even a profit that doesn't keep up with inflation, he will be taxed on that gain. Thus, there's a disincentive for an individual or company to invest in new capital -- to build or renovate a house or office building, or maybe to invest in new equipment, or even to buy stock in a company or provide venture capital. Unleashing the capital investment market would pump cash into the economy, cash that would tend to flow towards ventures that are doing a good job of providing goods and services people want to buy; it would reward success, not failure (as is the case with the government bailouts).
A next step would be to slash (or better yet, end) the corporate income tax. Instead of sending money to the government to be spread around by corrupt politicians, businesses would have more money to invest in capital improvements, more workers, higher wages and benefits, innovation, new computers, or perhaps even just more dividends for stockholders (putting more money back in the hands of potential consumers and investors). Better still, the lower tax rate would make America a more competitive place to move businesses currently located in other countries with higher tax rates, or to start a new business; this would create even more jobs. Rather than rewarding only those businesses favored by the government, an across-the-board cut in the corporate tax rate would mean that ALL businesses would benefit -- and thus all workers and investors would likewise benefit.
A final step would be to cut the personal income tax rates -- all of them. The best case would be to implement a flat tax system that removes complexity in favor of fairness and simplicity; however a 50% decrease in each tax rate (reducing the lowest rate from 10% to 5% and the highest rate from 35% to 17.5%) would be a great start. The result would again be more money in the hands of consumers and investors, producing an instant demand-side effect as people saw more money in their next paycheck. In addition, however, there would be a supply-side effect: rather than a one-time rebate check, a cut in tax rates would be a gift that keeps on giving, giving more incentives for people to save (providing nest eggs for retirement as well as providing more cash into the banking system) and invest. Knowing their tax bill would be cut in half, people would know their purchasing power had increased over the long-term, lessening the worry over making big-ticket purchases like houses are automobiles.
Each one of these steps would be expensive; yet the government has already spent over a trillion dollars in "stimulus" and is talking about $500-700 billion more -- at least. Experience has shown that cuts in the capital gains, corporate, and personal income tax rates tend to provide economic growth that actually results in a net increase in government revenue; certainly the countries that have implemented a flat tax have seen that happen. Obviously, a complete dissolution of the capital gains or corporate tax would not provide an increase in revenue collected by those rates; however, the money would still filter through the system in economic growth, higher personal incomes, and more investment.
President-elect Obama has said that all ideas are on the table, that he wants to be bold, and that he wants to do whatever works. He could have a unique ability to get such a plan passed, a "Nixon goes to China"-type ability -- Republicans and other free market capitalists would support such a plan on principle, and Democrats and other leftists would go along with their newly-elected hero. The resulting economic growth could cement his place in American history as a bold leader who fired the jolt heard 'round the world.