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Temporary Tax Rebates Do Not Stimulate Economic Growth
Posted By Curtis Dubay On June 15, 2009 @ 5:08 pm In Economics | Comments Disabled
The Congressional Budget Office (CBO) recently released a paper: Did the 2008 Tax Rebates Stimulate Short-term Growth? 
The paper is a comprehensive summary of the best recent literature on the topic. CBO sorts the literature into three categories:
The CBO paper is a good summary about the effects temporary tax rebates have on consumption, and what does it conclude about this?
The CBO paper is a useful review of the relationship between temporary tax rebates and consumption, but the paper is ultimately misnamed. None of the literature in the three categories connects a rise in consumption to a resulting increase in economic growth, nor does the CBO paper explain the linkage between increased consumption and increased output.
For the title to be accurate, readers must assume that increased consumption inherently increases total demand and growth. However, by increasing consumption, tax rebates can only alter the composition of demand, not the level of demand. And without altering the incentives to produce, tax rebates cannot affect the level of production.
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. 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.
For this reason, a better title for the CBO study is: Did the 2008 Tax Rebates Stimulate Short-term Consumption Increases?
Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org
URL to article: http://blog.heritage.org/2009/06/15/temporary-tax-rebates-do-not-stimulate-economic-growth/
URLs in this post:
 Did the 2008 Tax Rebates Stimulate Short-term Growth?: http://www.cbo.gov/ftpdocs/96xx/doc9617/06-10-2008Stimulus.pdf
 For tax cuts to stimulate economic growth, they must permanently improve the incentives to produce by reducing effective marginal tax rates:: http://www.heritage.org/Research/Taxes/wm2152.cfm
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