Only real tax cuts stimulate the economy
Created on February 11, 2009
Economy Boosted by Permanent Reductions in Tax Rates
There are tax cuts and then there are tax cuts.
That's why conservatives are so concerned about the kind
President Barack Obama and Democrats in Congress continue to
emphasize in their economic "stimulus" plan.
"It's commendable that President Obama wants a sizable portion
of the stimulus package to contain tax cuts," observes
Rea S. Hederman Jr., assistant director of The Heritage
Foundation's Center for Data Analysis.
"However, the package should have tax cuts that are most likely
to boost the economy," Hederman says. "The tax cuts that are part
of the stimulus bills and supported by President Obama are a bad
What's at issue?
Any practical plan to prime the economy's pump, Heritage experts
assert, must emphasize permanent reductions in income tax rates for
individuals and businesses - not, as liberals advocate, one-time or
short-term tax rebates and credits combined with upward of $1
trillion in deficit spending.
Reduced income tax rates -- such as the 2003
tax cuts -- create incentives to work, innovate and
invest. The evidence of history and decades of research bear
Obama and most congressional Democrats err when they "rely on
increased consumer spending instead of boosting investment and
saving," Hederman explains. "Similar proposals that rely on the
same thinking failed to boost the economy, and it's unlikely
history will change course this time."
Liberals largely pin their hopes on a refundable, two-year tax
credit for low- and middle-class Americans that is equal to 6.2
percent of up to $8,100 of earnings. Translation: a credit of $500
per person per year, or $1,000 per couple -- only $10 more per
weekly paycheck over the two years.
There's really only one difference between these proposed "tax
cuts" and last year's ineffective tax rebates from President Bush
and Congress, Hederman
says: Rather than wait for a government check in the mail,
taxpayers would see a little less of their money withheld from
their paychecks for a couple of years. They wouldn't see it as a
permanent increase in income to save, spend or invest as they
Most taxpayers don't know that the "Make Work Pay" refundable
tax credit also would provide up to $500 in cash to low-income
adults who don't pay any income taxes. For the first time, the
government would hand out money -- $23 billion in the first year --
to able-bodied men and women who don't have dependent children.
But it gets
worse, as Heritage welfare expert Robert E. Rector discloses in a
new paper: The House and Senate "stimulus" bills would undo the
historic welfare reform of 1996 by heavily rewarding states that
increase the size of their welfare caseloads.
Beginning with more than $260 billion, the package would
-- if unchecked -- add nearly $800 billion in new means-tested
welfare spending over 10 years, Rector
"spendathon" amounts to $22,500 for every poor American and would
cost, on average, more than $10,000 for each family that pays
income tax, warns Rector, whose work provided the
foundation for the '96 reforms achieved by President Clinton and a
Most American workers, of course, make more than $8,100 a year.
So tax credits capped at that amount won't reward them for working
Reducing the marginal tax rate would, though, especially for
lower-income Americans. By also
reducing tax rates on business income, Heritage's analysis shows,
President Obama and Congress could curb the recession and spark
creation of 1.3 million new jobs by next year, with 4.8 million new
jobs by 2013.
Ken McIntyre is the Marilyn and Fred
Guardabassi Fellow in Media and Public Policy Studies at The