The Republicans are right.
The economic stimulus plan which easily passed the House without a single Republican vote Jan. 28 proposes to revamp the economy by funneling money into infrastructural projects and providing tax credits to low and middle-income workers. Although improvements in infrastructure would create jobs a Congressional Budget Office (CBO) study shows that by next fall the economy would only receive $26 billion of the $274 billion proposed for infrastructure spending.
The budgeted infrastructure elements will create work for a segment of the population and projects that rebuild infrastructure will most likely stimulate the economy. Moreover infrastructural projects are an appropriate way to stimulate the economy because they benefit the American people. The plan requires a big chunk of money – more than $800 billion – that the federal government does not have and that the American people will have to eventually pay off. At least when the debt is paid America will have improved highways and new bridges to show for it.
The tax credit segment of the plan does not show as much promise. Providing a $500 tax credit for individuals who make less than $75000 per year will not do much to stimulate the economy. Such a measure however will cost a substantial amount – more than $140 billion.
Lowering taxes is the most effective way to revive our faltering economy. The stimulus plan on the Senate table is based on the supposition that the American government can handle money better than the American people.
Why give tax credits to people who virtually pay little income taxes? These credits will just tack on to the national debt which will not be paid off until the economy improves substantially. This sort of federal deficit spending will not get our economy up and running again. Lowering corporate income taxes however would encourage people to invest in companies and to start new companies. Similarly lower capital-gains taxes will encourage investments.
Companies can only prosper when people are willing to invest. According to Economists Alberto Alesina of Harvard and Luigi Zingales of the University of Chicago “a temporary elimination of the capital-gains tax for all the investments begun during 2009” would be the best way to encourage people to take such economic risks. They suggest that the federal government should eliminate capital-gains taxes for at least two years.
The Heritage Foundation published a stimulus plan more promising than the one passed. Its main thesis is that tax cuts stimulate the economy not government spending. The Heritage Foundation states that a stimulus plan should keep the 2001 and 2003 tax cuts in place and lower the taxes on top income-earning individuals small businesses and corporations by 10 percentage points. It also includes similar reductions for lower income-earners. The researchers who compiled this report believe these tax cuts should remain in place for the next four years in order to sufficiently revamp our economy.
After studying our nation’s economic model with respect to U.S. law these researchers found that such a plan would allow the economy to recover quicker create half a million jobs in 2009 and 4.8 million jobs by 2012.
Recent history also suggests that tax cuts lead to economic stimulation. Like Obama in 1981 Ronald Reagan inherited an economically troubled nation. During his presidency Reagan fostered economic growth through his “supply-side” economic policy. During the period between 1983 and 1990 real GDP grew by 35.7 percent employment grew by 19.9 million jobs and the Dow Jones Industrial average annual growth rate was 14.5 percent. Moreover during Reagan’s presidency total federal revenue nearly doubled from about $517 billion in 1980 to more than $1 trillion in 1990.
Obama’s tax plan rests on the theory that government-control benefits the economy but a thriving economy will come from a lower-taxed hard-working populace looking to invest.