- The Washington Times - Wednesday, October 24, 2001

In an effort to "do something" about the slowing economy, the House Ways and Means Committee has put forth some powerful and worthwhile tax relief proposals that no doubt would give businesses and individuals a shot in the arm. But, by restricting much of the tax relief to the short run and increasing spending on unemployment insurance the proposal creates the real possibility that any immediate economic rush will be followed by a serious economic hangover.

At their core, most of the tax provisions in the stimulus bill are good policy. For example, elimination of the Corporate Alternative Minimum Tax would remove one of the most complicated and economically depressing elements of the tax code. Acceleration of the marginal rate reduction passed earlier this year would provide an immediate economic stimulus and lead to sustainable economic growth. Elimination of the five-year holding period for individual capital gains would allow capital to flow to its most productive use, thereby increasing output and wages.

Congressional leaders also have done a good job to date at not giving into the false notion that the stimulus package should be small. Pundits and armchair economists are already crying that the bill is too large and that coupled with the individual tax relief passed earlier this year will lead to budget deficits, higher interest rates and slower economic growth. No part of this criticism is accurate.

The bill under consideration is relatively small by any historical comparison. The provisions taken together amount to just 0.1 percent of average GDP over the next 10 years. By contrast, the individual tax relief passed earlier this year was roughly 0.8 percent of GDP over 10 years.

Together, these are only a quarter the size of the Reagan tax relief passed in 1981, which represented 3.4 percent of GDP.

Estimates by the nonpartisan Congressional Budget Office and the bipartisan, bicameral budget committees hold that even after passage of the stimulus package and the emergency funds appropriated since Sept. 11, budget surpluses will still total $471 billion over the next five years.

Claims that additional tax relief will lead to budget deficits are overstated.

So, the core components of the proposal are sound. But, some of the surrounding aspects of the package are troublesome and require additional scrutiny to avoid causing harm.

The bill being considered in the House this week includes roughly $12 billion in additional funds for unemployment assistance. This figure will likely increase as Senate Democrats craft their own version of the bill.

By increasing unemployment benefits either through extension of the payout period or an increase in benefit amounts, lawmakers will make layoffs and job cuts "cheaper" for employers and employees to bear. As is always the case, the lower the cost, the more you get. That is as true for unemployment as it is for anything else.

This subsidization of unemployment may be exacerbated by the temporary nature of the majority of business tax relief contained in the bill. Knowing that tax relief is temporary, many businesses will look to address short-term needs rather than fund long-term investments with their tax relief. Currently, one need many companies face is downsizing their labor force after years of above average economic growth, "exuberant" equity prices, and unwavering consumer confidence. An immediate infusion of cash from temporary tax relief gives companies in this position the money they need to fund severance packages and other costs associated with layoffs.

Limiting the bulk of the tax relief to only the next couple of years has additional consequences. Knowing the tax cuts are only temporary, individuals and businesses will not change their long-range plans. For example, businesses will respond not by increasing investment but by changing the timing of that investment. Plans will be accelerated, not expanded. The only way to fundamentally change investment plans is to make tax relief permanent.

One other result of the temporary nature of the stimulus package as it currently exists is that it would actually increase taxes by $56 billion between 2006 and 2010. In other words, what is ostensibly a tax relief bill actually increases taxes in as many years over the next decade as it decreases taxes.

So, while there is some good policy in the stimulus package under consideration, the bottom line is that lawmakers are creating a situation that may lead to increased unemployment in the short run and few benefits in the long run.

With a few minor changes, Congress and the president can get the immediate stimulus they crave without fear of an economic hangover in later years. The way to do that is to avoid subsidizing unemployment and to make the tax relief permanent.

John S. Barry is director of research and chief economist at the Tax Foundation.

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