The Heritage Foundation - Leadership for America

The House Budget Committee yesterday held a hearing, “Economic Recovery: Options and Challenges.” The headliner of the event, Federal Reserve Chairman Ben Bernanke, caused quite a stir with his near endorsement of a proposed second stimulus bill. However, others who spoke at the hearing, such as Rep. Paul Ryan (R-WI), and Bill Beach, director of Heritage’s Center for Data Analysis (CDA), raised important questions about the need for, and possible elements in a second stimulus bill.

Ranking member Ryan’s opening statement regarding another stimulus bill appropriately warned against hastily increasing government spending in a misplaced effort to stimulate the economy. He pointed out:

• A much higher level of government spending and increased deficits is going to sharply raise our future debt service costs.
• Although the long-run costs of the proposed stimulus are real, the long-run benefits are highly suspect. In fact, we have seen time and time again that these temporary fiscal spending packages at best provide one or two quarters of “pop” before the economy reverts back to its pre-stimulus trend. That is because they do nothing to change the main factors driving our long-term growth trajectory.
• If Congress is going to take action, it should focus on tax policies that can boost incentives to invest and create jobs. That is the growth dynamic that leads to a bigger economic pie. Short-term actions like more government spending do not grow the economic pie, they simply transfer funds from one part of the economy to another.

Ryan hit the nail on the head. As we noted in September, without major alterations, a second stimulus bill will fail.

Fortunately, there are alternatives to the current stimulus proposals. Heritage’s Beach, sketched out a few available options in his testimony:

• Make the 2001 and 2003 tax cuts permanent. “More jobs — by making the ‘01 and ‘03 tax reductions permanent and reducing the corporate profits tax by 1000 basis points, an annual average of 2.1 million more jobs would be created. Indeed, over the 10-year period for which these forecasts apply, 3.4 million more jobs would be created above baseline, current law baseline, in 2018.”
• Implement accelerated depreciation. Past experience tells us that accelerating the tax depreciation of capital equipment and buildings for one-year expensing of business purchases, that otherwise would be depreciated over a longer period, is a good way to stimulate the economy.
• Lower the corporate income tax rates. “There is now universal agreement our federal business taxes are far too high. The tax rate on corporate profits is the second highest in the world… Such a policy would enhance our competitive standing worldwide and significantly reduce the incentive for U.S. firms to relocate to lower tax countries.”
• Lower capital gains and dividend taxes. This will reduce tax barriers and attract additional investors.
• Lower the tax rates on small businesses. America’s 27.2 million small businesses create 60% - 80% of new jobs annually, but many face some of the highest tax rates. Helping small businesses with tax relief helps the workers they hire.

Expanding the federal government is not simulative. Although proposed government spending hikes may be well-intentioned, they will ultimately fail. Congress should follow Beach’s advice and include pro-growth tax policies in the second stimulus bill.