Posted on 01/20/2008 5:08:24 AM PST by Kaslin
President Bush doesn’t like to admit he’s made mistakes. But if White House chatter about an economic stimulus package is true, the president is about to repeat a misstep made early in his first term.
I’m talking about the 2001 tax rebates -- government handouts that arrived in the mail. Individuals got $300 and married couples received $600 -- all in hopes of stimulating the economy.
With the economy slowing again, tax rebates are back on the table for the White House -- only this time dollar amounts could be doubled -- and then some. The Associated Press reports the administration is contemplating rebate checks of up to $800 for individuals and $1,600 for married couples.
Few Americans would turn down an offer to pad their wallets so thickly. But while $800 or $1,600 might be a nice sum of money in the short term, this approach won’t help grow the economy out of a recession. That’s the disappointing lesson from the 2001 rebates.
Here’s why the earlier rebates didn’t work. The federal government, already operating in the red, didn’t have any money to pay for the rebate checks. Instead, it borrowed billions in the spring and summer of 2001. Consumer spending responded with 7 percent growth in the fourth quarter, but investment spending decreased by 23 percent. By the beginning of 2002, the rebate “fizz” was over. Consumer spending retreated to 1.4 percent annualized growth in the first quarter of 2002, and the economy was stagnant for much of the year.
“The simple redistribution from investment to consumption did not create new wealth,” concluded Brian Riedl of The Heritage Foundation, “Tax rebates ... don’t stimulate the economy.”
Riedl favors an alternative: lower tax rates on income, capitals gains and dividends, similar to the plan Bush successfully persuaded Congress to enact in 2003. That stimulus package produced an immediate turnaround in the economy. Consider these four statistics:
• Gross domestic product grew at an annual rate of 1.7 percent in the six quarters before the 2003 tax cuts. For the six quarters following the tax cuts, the growth soared to an average 4.1 percent rate.
• Non-residential, fixed investment declined for 13 consecutive quarters before the 2003 tax cuts. It has expanded for 13 consecutive quarters since then.
• The S&P 500 dropped 18 percent in the six quarters before the 2003 tax cuts. It increased 32 percent over the next six quarters.
• The economy lost 267,000 jobs in the six quarters before the 2003 tax cuts. In the next six quarters, it added 307,000 jobs. More than 8.3 million jobs have been created since August 2003 -- the longest continuous run of job growth ever.
Of course, the political situation is far different today than it was in 2003. Then, the president had defied history by picking up seats for his party in the 2002 elections, strengthening the GOP’s control of Congress. Today he’s competing with presidential candidates and the Democratic Congress for airtime.
That’s no reason for Bush to compete with their policies, however. Sen. Barack Obama would give Americans rebate checks of $250 and congressional Democrats have offered a rebate plan that tops out at $500. Fiscal conservatives wonder what Bush hopes to gain by not only playing their game, but also raising the stakes.
“One-time rebates and temporary business tax breaks that the president and the Democrats seem to be coalescing around are the wrong approach,” said Club for Growth President Pat Toomey.
Added Rep. Jeb Hensarling, chairman of the Republican Study Committee: “[T]emporary consumer tax rebates should not be confused with economic stimulus. ... The last time our country faced recession, rebates were helpful to consumers but did little to turnaround the economy.”
There’s little debate that tax rebates can redistribute existing wealth. But if Bush and members of Congress are serious about staving off a recession, they need to come up with a new plan -- one that will grow the economy. Lower permanent tax rates are a good place to start.
“All this talk of “temporary” stimulus packages makes my blood boil. How about a PERMANENT stimulus package? Why not eliminate the Capital Gains tax entirely? How about cutting corporate taxes to the point where we are a tax haven for businesses worldwide and watch the dollars flow into the economy like never before.”
Because a permanent stimulus would not immediately and directly benefit the Democrats constituents. And by god it may wean people off of the nanny state as they make and get to keep their own money.
But the reality is that a much greater fraction of those still working have a 100% propensity to spend than those in retirement. And there are a lot more people working than retired. So putting money in the pockets of those still working generates more economic activity than putting money in the pockets of retirees.
Metesky: Our "Money" is long gone, we are borrowing this money to pay for this so called rebate.
kinda blows cause my non retirement $ is taxed and was gained during the “accuulation” phase and because of good stratgies is still acumulating...this market thing and housing crunch hasnt made any dif to me.
Don’t be so quick to judge. It’s not a matter of honesty. I simply forgot that accomplishment.
If the government really wants to stimulate the economy, they should cut ALL government spending across the board immediately. We owe over 9 trillion dollars. By spending less than what we are bringing in in taxes, we will see the dollar start to strengthen. This will make the dollars we have saved worth more.
...and a wheel barrel to haul it in.
If you think this blows you had better hope that Hucksterbee or any of the other "Fair" Taxer's doesn't ascend the thrown. For if they do you will suffer the inequity you describe above on steroids.
Imagine, you paid taxes on your income all the way through your accumulation phase just to have them switch to a tax on your consumption right in time for your retirement. I suspect this double fleecing of the baby boomers (which is where the money is) is what is driving the sudden epiphany in Washington that the current income tax system may be broken. But take heart, the crooks in DC are way too vested in selling favors in the tax code to make any significant change.
I have even worse news, but in the interest of brevity I will put it in a separate post.
Well, as a show of protest, when ya’ll get your checks, just sign them on the back and send them over to L98Fiero.
I suspect the crooks in DC will ultimately "Save Social Security" by extending the FICA tax to pension payments and IRA withdrawals (Roth and Traditional).
They will then claim that "every dime of your promised SS has been paid." And after all they only claimed that Roth IRA withdrawals would be free of income taxes. They never said anything about them being exempt from an extension of the FICA tax.
If this sounds like the tyrants in Washington would be giving you a SS check with one hand and taking it away through the tax code with the other. Just remember they only promised to give you a Social Security check. They never said anything about letting you keep it.
Yes, it makes the addict feel better for a short while, but it worsens his condition in the long run.
Keynes famously said about this, "In the long run we're all dead." Keynes was a bachelor. This is fine if you don't mind screwing your children and the next generation.
"Bartender, I'll have another stimulus pakij. Put it on my kid's tab."
"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."
~~Ludwig von Mises
Ludwig is right of course. And you are seeing the liquidation of the malinvestment right now. Just as we saw the liquidation of the malinvestment in early 2000 from the internut bubble.
The huge right-downs you are seeing in the financial sector represent liquidation of the debt instruments created during the bubble. This is a largely deflationary health restoring process. The excess housing stock also needs to be worked off. This will take time.
And go back and look at the sifting process in the tech sector earlier in the decade. The investments that were economic survived. Those that weren't are gone along with all the capital invested in them.
All this is inevitable and for the good. But it doesn't mean that we are destined for a depression or even a recession. Keep a sharp eye but don't get caught up in the panic.
Great idea! And vote ... Rep ... um ... Dem ... uhhh ... and vote Lib ... hmmmmm ....
Better just spend it ... QUICKLY -- while you still can! (just kidding)
They’ll just make up for the rebate by increasing taxes in other areas, it’s all just a shell game.
This is “bribing us with our own money.”
I would say that is a good start. However, we need to scrap the current progressive tax system we have.
I wouldn't think that would be likely. You've already paid the tax. SS and Medicare withholding are calculated before IRA and 401K deductions.
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