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How Tax Relief Can Stimulate Economic Growth

February 10, 2009

Congress is debating an economic stimulus package that would substantially increase federal spending, but may not speed recovery from the current recession. The Congressional Budget Office estimates that less than 40 percent of the proposed infrastructure spending in the stimulus bill will be spent within two years. Tax cuts, by contrast, can have an immediate effect, says Allison Hughey, a research assistant at the National Center for Policy Analysis.

A recent study by Christina D. Romer, one of President Obama’s top economic advisers, found that a dollar of tax cuts raises gross domestic product (GDP) by about $3, more than twice the effect of a dollar increase in government spending. Therefore, Congress should consider some better, bolder tax-cutting ideas to speed economic recovery, says Hughey.

Cut Payroll Tax Rates:

  • For about the cost of the $825 billion House version of the stimulus bill, payroll taxes for Social Security could be cut in half, says former Federal Reserve Board member Lawrence B. Lindsey.
  • A 3 percentage-point reduction in payroll taxes would increase workers’ take home pay an average of $1,500.
  • Reducing the employer’s tax share by 3 percentage points would increase businesses’ cash flow an average of $1,500 per worker.
  • This tax cut would reduce unemployment by lowering labor costs.

Cut Corporate Tax Rates:

  • Cutting taxes on future profits is much more likely to spur new investment.
  • Congressional Republicans propose a step in the right direction: reducing the corporate income tax rate from 35 percent to 25 percent — the average rate in the European Union.
  • This would encourage businesses to hire additional workers, accelerate investment and make American companies more competitive internationally.

Cut Capital Gains Tax Rates:

  • Republicans have also proposed reducing the capital gains tax levied on the increased value of an asset, such as stock or real estate, when it is sold.
  • The current 15 percent rate is scheduled to rise to 20 percent as the Bush tax cuts expire.
  • Making the lower rate permanent would be helpful.
  • Past capital gains tax cuts have yielded an immediate increase in government revenue.

Source: Allison Hughey, “How Tax Relief Can Stimulate Economic Growth,” National Center for Policy Analysis, Brief Analysis No. , February 10, 2009.

Republicans are not against stimulus, the Republican Party is against doing things which do not work.

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4 Comments leave one →
  1. Karl Marx permalink
    February 11, 2009 2:54 pm

    The GOP is a bunch of greedy corporate types who don’t care who gets hammered by the sins of big business.

  2. jason330 permalink
    February 11, 2009 3:19 pm

    I would add that they must have been in a coma for the past 8 years, or they would have seen every item on that list fail and fail again to promote growth.

  3. February 13, 2009 10:29 am

    Historically, raising taxes in a falling economy deepens a downturn. Are you saying that this time would be different? We should extend the Bush tax cuts until 2011 ends. We cannot afford to raise taxes just as we start to climb out of the trough.

    I hate to spoil the party, but can you find any economist who doesn’t claim to be a socialist who would blame the tax cuts for our economic slump? The tax cuts kept the economy rolling in spite of a number of difficulties. The mistake we made was not addressing energy, the housing and credit bubbles, mark to market rules, and our manufacturing base before the collapse.

  4. April 15, 2009 6:45 am

    I follow your posts for a long time and must tell you that your posts always prove to be of a high value and quality for readers.

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