To Revive the Economy Make the Tax Cuts Permanent

Amazingly just hours after President George W. Bush’s State of the Union address in which he called on Congress to send rebate checks to taxpayers as part of his economic stimulus plan the Democrat-controlled House of Representatives passed the bill.

Seven years ago it took the Republican-controlled House a week to pass the 2001 economic stimulus package. It took the Senate which was split 50-50 between the two parties almost two and a half months to agree to the rebates and tax cuts.

To be fair while this economic stimulus bill and the 2001 legislation both contained rebates and tax cuts the 2001 tax cuts were much larger and extended over a ten-year period. Consequently there was much more opposition from Democrats and liberal Republicans. But the Senate passed the 2001 tax cuts 58-33 with the support of only 46 Republicans and 12 Democrats. Two Republicans joined 31 Democrats in voting against the bill seven Senators were absent and two voted present which is the equivalent of sidestepping the bill.

Why does that little bit of tax cut history matter? Simply because a great deal of the argument in 2001 centered around the age old liberal argument that tax cuts are a drain on federal revenues and do not stimulate the economy. Moreover many of the same people who were in the House and Senate in 2001 and voted against that tax cut bill are now in favor of the 2008 version precisely because this bill is not much of a tax cut but predominantly a rebate that they are hoping will stimulate the economy and keep us out of a recession. It may be a vain hope.

While the tax rebates will be helpful they will not be enough by themselves because such short-term consumption is not likely to increase production or economic expansion. According to the Heritage Foundation while the 2001 tax rebates did increase consumer spending by 7 percent for that year investment dropped 23 percent the economy only grew by 1.6 percent and remained stagnant through much of 2002.

Obviously the 9/11 terrorist attacks had a major impact on the economy. In turn this makes an assessment of the impact of the 2001 tax rebates more difficult. But the fact remains rebates alone will not be enough to revive the economy.

In contrast The Jobs and Growth Tax Relief Reconciliation Act of 2003 had a major effect on our economy. The 2003 legislation cut marginal tax rates for all taxpayers. The top income tax rate was lowered from 39.5 percent to 35 percent and the bottom rate was cut from 15 percent to 10 percent while also raising exemptions that resulted in millions of lower-income families having no federal income tax liability at all.

Most significantly for the economy were the cuts in the capital gains rate the creation of a 15 percent flat tax on dividends and expansion of the depreciation credit for small businesses. These cuts were specifically designed to increase incentives for individuals to work save and invest and for businesses to expand and create jobs.

According to the Heritage Foundation in the six quarters prior to the 2003 tax cuts the gross domestic product (GDP) grew at only 1.7 percent. In the six quarters afterwards the GDP grew at 4.1 percent. In the six quarters prior to the 2003 tax cuts the S&P 500 dropped 18 percent and the economy lost 267000 jobs; in the six quarters after the tax cuts the S&P 500 increased by 32 percent and 307000 jobs were added to the economy. An additional 5.3 million jobs were added over the next 13 quarters.

The current economic stimulus bill does contain some tax cuts for businesses which should encourage more business investment which should help the economy in the long term but not necessarily this year. With the 2003 capital gains and dividends tax cuts set to expire at the end of 2009 the best thing Congress could do is make the cuts permanent and thus eliminate a substantial amount of the uncertainty which discourages business investment and expansion.

Instead of only looking back to the tax rebates in the 2001 economic stimulus bill which were little if any help to the economy Congress should make all the 2001 and 2003 tax cuts permanent. As stated above most of the tax cuts in both bills are set to expire next year and all of the cuts will be gone by the end of 2010. Moreover Congress could bring billions of dollars of capital into the economy by eliminating the unfair and immoral Death Tax which will be zero in 2010 but go back to a one million dollar exemption and a 55 percent tax on everything over one million dollars in 2011.

Giving the people their money back is a good idea. Cutting taxes as opposed to one-time rebates does much more to encourage economic growth because tax cuts make it more profitable for people to work and invest. Making the 2001 and 2003 tax cuts permanent and eliminating the Death Tax will alleviate the uncertainty that shrouds our economy and discourages businesses and individuals from investing.

If Congress really wants to revive the economy they will make the Bush tax cuts permanent.