- The Washington Times - Monday, December 10, 2001

Last month, a unique alignment of the stars came together in national tax policy. A bipartisan group of four leading

senators proposed a tax relief bill that was then endorsed by Art Laffer as likely to be quite effective in jumpstarting the economy.

This is the tax policy equivalent of a triple eclipse. So what is Congress waiting for?

The proposal is for a 10-day sales tax holiday nationwide, preferably during the holiday season. The bill was introduced by Sens. Patty Murray, Washington Democrat, Rick Santorum, Pennsylvania Republican, Joe Lieberman, Connecticut Democrat, and Olympia Snowe, Maine Republican. It was followed by a companion, bipartisan House bill sponsored by 43 representatives including Lindsey Graham, South Carolina Republican, and Rod Blagojevich, Illinois Democrat.

State and local sales taxes across the country run from 4 percent to 9.75 percent The bill provides that the federal government would reimburse state and local governments for the revenues lost due to the holiday. This would consequently be a federally financed tax cut.

Some equivalent tax relief would have to be devised for the four relatively small states that do not have sales taxes, Delaware, Montana, New Hampshire and Oregon, as well as Alaska, which has only local sales taxes. Perhaps the federal income tax rate on wages earned during the holiday period could be reduced so each worker in those states got the same average tax relief as in other states.

As Mr Laffer pointed out, a sales tax cut should have the same ultimate economic effect as an income tax cut. That is because people work and produce ultimately to be able to consume goods and services.

A sales tax reduces the ability of workers to consume just as much as an income tax of equivalent magnitude. For example, a 6 percent income tax rate reduces after tax income by 6 percent. But a 6.4 percent across-the-board gross sales tax increases the cost of everything the worker buys by 6.4 percent. In either case, the worker would get the same reward in terms of the goods and services he could buy for the same amount of work.

Consequently, a sales tax cut would increase the reward for work, savings, investment and entrepreneurship. All these productive economic activities should increase as a result. As Mr. Laffer says, "A sales tax holiday is supply-side economics at its best."

Moreover, the sales tax holiday would have beneficial economic effects well outside of the period of temporary tax relief. The holiday amounts to an effective tax cut on all the income that workers are able to spend during the sales tax holiday period. In theory, if workers could squeeze all their spending for the year within a two-week sales tax holiday (they can use credit cards as well as savings), that limited holiday would be the equivalent of a roughly 6 percent cut on taxes on their incomes for the year.

In addition, as sales soar during the tax holiday period, businesses would need to expand output afterward to replace the sold production. This is particularly so if the holiday has the desired effect of jarring lose consumer spending on a long-term basis, as consumers become comfortable again spending their money after the September 11 attack.

Clearly, such a stimulus is sorely needed now. Consumer spending fell in September by the largest margin in 14 years. It has not snapped back since then. With consumer spending accounting for two-thirds of the economy, this decline is snowballing into a bigger and bigger problem.

Besides the general economic benefits, the tax holiday would also be a great boon for state and local government budgets now under great pressure from the declining economy. For they would surely gain increased revenue under the proposal.

Consumers would buy more than they would have during the tax holiday period. The federal reimbursement for the forgone tax revenue would be for this higher volume of sales, leaving state and local governments with more than their sales tax would have generated otherwise. Moreover, the general effect of the holiday in stimulating the economy would also produce more revenue for state and local governments, through the taxes assessed on the increased wages, employment, sales, profits, etc.

But time is running late on a tax holiday for the holiday season. Eliminating sales taxes for the last 10 days before Christmas might be particularly interesting, stimulating consumers to go an extra mile on holiday spending.

If Congress misses the holiday season altogether, the tax holiday would still be quite effective in January. Consumers would return to post-holiday spending faster, and higher economic growth for the year would be on its way.

But whatever the exact time frame, Congress should grant the nation an economically inspiring holiday gift before it goes home for the holidays.

Peter Ferrara is an associate professor at the George Mason University School of Law, and formerly served as Chief Economist for Americans for Tax Reform.

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