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A Stimulus That Would Work

Tuesday, July 21, 2009

The first stimulus failed. Here is a plan to encourage the 90 percent of taxpayers who are still employed to re-energize the economy by putting their purchasing power to work.

In April of this year, we predicted in an article that the administration's recently passed, Keynesian-spending stimulus plan would fail to motivate the financially wounded and traumatized American consumer back into the marketplace. Today, payrolls are in their worst slump in 50 years, monthly job losses remain staggeringly high, the unemployment rate is pushing double digits and rising with little sign of improvement anytime soon, retail space is going begging, housing foreclosures continue to push to alarmingly low levels the home values that are the mainstay of the average American’s net worth, commercial office space vacancy rates are climbing, and a trillion dollars has been added to the money supply and national debt since last summer with no discernible improvement in the economy. To make matters worse, billions of dollars of stimulus money that has flowed into state, county, and local coffers is being used to maintain a wide range of existing programs that these jurisdictions cannot otherwise afford, delaying their day of reckoning. In other words, stimulus money is, at least in some cases, being used to plug bloated budgets at the state and local levels.

Notwithstanding the claim by Director of the National Economic Council Lawrence Summers that the administration's stimulus plan is on track to meet its two-year recovery goals, the current strategy has not worked and leaves the country vulnerable to growing unemployment that could overwhelm any glimmers of confidence which might otherwise spark a recovery. So far, this "hail Mary" budget-busting strategy has produced no real increase in lending, no new job creation, no improvement in the housing market and no discernable increase in investment by industry. And to make matters worse, the administration and Congress are planning massive tax increases to pay for healthcare reform and a cap-and-trade program to reduce (although without proof it will have the desired effect) global warming by the year 2050. This is a clear prescription for economic disaster.

There Is a Better Way

It seemed clear to us last spring, and it seems clearer now, that the losses in wealth sustained by the American consumer require strong and direct stimulus rather than the very costly, inefficient and indirect stimulus path the administration and the Congress have prescribed.

So far, this ‘hail Mary’ budget-busting strategy has produced no real increase in lending, no new job creation, no improvement in the housing market, and no discernible increase in investment by industry.

Specifically, our proposal is to provide a three-year declining tax credit to all taxpayers. With the tax credit, the Treasury would match 50 percent of the cost of any non-disposable, durable goods purchased in the United States up to $5,000 in year one, $2,500 in year two, and $1,500 in year three, at which point the proposed tax credit would expire. Under our plan, retailers would receive from the Internal Revenue Service a special form on which they would enter the dollar amount of qualifying purchases made by their customers. These forms would then be affixed to the taxpayer's tax return, qualifying the taxpayer for the proposed tax credit. The program could also be designed to avail the taxpayer of an immediate tax rebate for 50 percent of the purchase amount up to the taxpayer’s individual or joint limit. This plan would attract millions of consumers back into the marketplace to make needed purchases that are now being deferred, such as home purchases, appliances, furniture, clothing, and cars. The likelihood that retailers would compete for these stimulus dollars as well as the temporary nature of the proposed consumer tax credit should keep inflationary pressures in check and, most important, every dollar of cost to the Treasury would, by definition, have been previously plowed back into the economy.

The losses in wealth sustained by the American consumer require strong and direct stimulus rather than the very costly, inefficient, and indirect stimulus path the administration and the Congress have prescribed.

Consumers would be induced to re-enter the marketplace and businesses would begin investing in whatever additional capacity or manpower would be needed to meet the new demand for goods stimulated by the consumer tax credit.

We recognize that not every taxpayer incurs enough tax liability during any tax year to take full advantage of the proposed tax credit, but every taxpayer would be eager to participate to the extent of whatever they anticipate will be their tax liability (including payroll taxes). Unused credit could also be rolled over into the next year until the proposed credit expires in year three. Rebates and credits would be accounted for on each taxpayer’s annual Form 1040. In effect, our proposed consumer tax credit would tend to encourage the 90 percent of taxpayers who are still employed to re-energize the economy by putting their purchasing power to work.

We believe our proposal is a more efficient way to stimulate the economy than the budget-busting stimulus plan put into place last spring. Under our plan, no dollar is credited to the taxpayer unless the taxpayer has first put that dollar to work in the economy. Finally, our proposed consumer tax credit is about economic stimulus and only economic stimulus. It is not camouflage for pork, earmarks, or highly speculative new programs that may wind up costing the economy more than they contribute.

Stephen Porter is senior counsel at the Washington, D.C., law firm of Arnold & Porter, past chairman of the District of Columbia Chamber of Commerce, and a member of the National Council on the Arts.

Harold Gershowitz is the founder and CEO of New Century Information Services, which provides operations software for leading apparel retailers, and the award-winning author of Remember This Dream.

Stephen Fuller, Ph.D., is the Dwight Schar Faculty Chair at George Mason University and is director of the GMU Center for Regional Analysis.

Image by Darren Wamboldt/Bergman Group.

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