Former Speaker of the House Newt Gingrich is touting a plan to stimulate the economy with a tax holiday, but at least one expert says such a temporary shot in the arm will not work.
Gingrich is backing Texas Republican Rep. Louie Gohmert's notion that the volume of money being thrown around by the U.S. Treasury, Congress and the Federal Reserve is so massive that it would be put to better use financing a tax holiday for every working American.
In a report in Human Events, Gingrich argues, "For the $350 billion second bailout installment, Treasury Secretary Henry Paulson is going to request, every American taxpayer could have a two-month tax holiday from both income tax and the Social Security-Medicare (FICA) tax.
"Under Gohmert’s idea, you don’t have to buy a car. If you need the money for your mortgage, a child’s college tuition or maybe even to save for a rainy day you can do it."
But Stuart M. Butler, vice president for Domestic and Economic Policy Studies at The Heritage Foundation, thinks the pair is all wet.
A Real Recovery
"Long-term tax rate reductions - as opposed to short-term jolts - are needed because the important economic decisions that will trigger a real recovery depend on more investment in new factories and new equipment," says Butler.
"Americans are more likely to make these investments when they believe that there will be a long-term improvement in the after-tax returns to investing, working, and taking economic risks. Such improvement requires long-term marginal rate reductions, not a temporary shot-in-the-arm," the expert adds.
Gingrich maintains that the Pelosi-Paulson plan takes the taxpayers’ money and puts it under the government's thumb so that "predatory politicians and micromanaging bureaucrats" have more and more control over the American economy - while Congressman Gohmert's plan puts the money back into the pockets of the American people and allows them to choose.
But Butler isn’t buying the program, conceding only that letting Americans keep their money rather than sending it to Washington means it is more likely to be used wisely.
But that said, Butler spells out a grim economic calculus.
"Keynesian fiscal strategies do not work," the expert argues. "Trying to stimulate economic recovery and growth with new government spending has a long and dismal record in Europe as well as the United States. The simple fact is that every dollar used for such spending comes from the private economy, meaning resources that would be spent or invested in one place are spent somewhere else.
"Potential economic activity in one place is shifted to another, typically with less efficiency. Moreover, the simplistic assumption that putting dollars in people's hands means they will rush to the store, purchase goods, and consequently create jobs just does not hold up," Butler concludes.
But Ginrich believes in the plan so much he wants to take it even further - based on House Speaker Nancy Pelosi's proposal for an additional $700 billion as a stimulus package.
"That would pay for an additional four months of a tax holiday," exclaims Gingrich. "Thus, if you combined the Pelosi and Paulson proposals, you could create a tax holiday through June."
A Real Long Tax Holiday
That would mean no working American would pay a penny in income tax or a penny in FICA tax for the first six months of the year and no business would pay a penny in matching FICA tax for the first six months of the year, maintains Gingrich.
"As a pro-small business, pro-jobs creation, pro-market stimulation measure, imagine the power of that much extra money in the hands of the American workers and the American entrepreneur," enthuses Gingrich.
"Imagine how many more people could afford to keep their homes, how many people could pay down some of their debt, how many will be able to rebuild some of their retirement funds, how many people might find the extra resources to start a new business or expand their existing business," the former Speaker says.
But Butler isn't buying in, emphasizing that permanent, predictable, and pervasive reductions in marginal rates - unlike the temporary tax holiday - would change the future picture and, because of this, would have immediate effects on family and investor decisions.
Butler goes further and recommends some specific steps for a "truly stimulative (sic) tax strategy": Further extend or make permanent the tax rate reductions of 2001 and 2003, which are set to expire in 2010, including a repeal of the death tax. Reduce the corporate tax rate to 25 percent or lower for at least 10 years, and preferably permanently. Not only would this reduction improve the after-tax return on investment, but it would also make American exporters more competitive with foreign firms, which generally enjoy lower corporate rates than U.S. firms. Further reduce marginal income tax rates for at least five years, which would improve anticipated future after-tax family income. Extend so-called "bonus appreciation" for at least two more years. This allows a business to deduct 50 percent of the cost of equipment in the year of purchase and so reduces the effective cost of the equipment. Currently this policy is set to expire this year.
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