- The Washington Times - Sunday, December 22, 2002

When it comes to economic matters, about the only issue on which Democrats and Republicans agree is the need for an economic stimulus package to be passed as one of the first orders of business of the 108th Congress. The economy is currently mired in what the Federal Reserve has characterized as a soft patch a condition in which above-modest economic growth (3.3 percent, measured on a third-quarter 2002 over third-quarter 2001 basis) has failed to prevent the unemployment rate from reaching its highest level in eight years. Aware of what a jobless recovery meant for the first President Bush, the White House has been so determined to enact a fiscal stimulus program that only the firing of its senior economic team earlier this month has prevented the president from officially unveiling his own package by now.
Not surprisingly, there is little bipartisan agreement about what measures should be included in the stimulus package. The White House plan reportedly would reduce taxes by $300 billion over 10 years. The plan is said to include an acceleration of the 1-percentage-point income-tax-rate reductions now scheduled to be implemented in 2004; a reduction in the taxation of stock dividends, which are currently taxed twice, first as part of corporate profits and then as personal income; and an increase in the first-year depreciation charge for capital investment by business.
In addition to demanding an extension of unemployment benefits a concession the president pre-emptively granted without exacting anything in return most Democrats seem enamored with establishing a "payroll-tax holiday." (Republican Sen. Pete Domenici is also an advocate.) The payroll-tax holiday would temporarily eliminate all or part of the 12.4-percent Social Security tax, which is currently applicable to the first $84,900 in wages and is evenly shared by workers and their employers. Democrats also favor a federal bailout of state governments, whose reckless spending during the boom years of the late 1990s has put pressure on their budgets during the economic slowdown.
Democratic Sen. Max Baucus of Montana, the soon-to-be ranking member of the Senate Finance Committee, has proposed a $75 billion block grant to state governments, which would effectively ratify their irresponsible spendthrift ways during the boom. On this point, the answer is easy: Nyet. Mr. Baucus is also proposing a $300 income-tax cut, which would be achieved by introducing a new tax rate of zero for the first $3,000 of taxable income. This is worth exploring as part of a deal with the White House.
Any decision regarding what to include in the stimulus package must come to terms with the fiscal-stimulus paradox: The segment of economic output in most need of stimulation business investment spending, which has declined for eight consecutive quarters is least susceptible to fiscal stimulus. On the other hand, the segment most susceptible to stimulation personal consumption has been the most resilient feature of the economy throughout the slowdown.
With interest rates already at or near historic lows, convincing businesses to invest in an environment of 25 percent to 30 percent excess capacity is a tall order, regardless of the incentive. At this stage of the fragile recovery, the worst foreseeable economic development doesn't even involve business investment. Rather, it would be a precipitous decline in consumer spending, which represents 70 percent of gross domestic product at the moment. The reason for the decline in consumption would be irrelevant whether it be the onset of consumer exhaustion in the face of mounting debts or the need for households to increase their savings to compensate for the huge hit to their retirement accounts. The fact is that a pronounced slowdown or decline in consumption would have a devastating impact upon an already-fragile economy.
So, the ideal stimulus package would buttress consumption. At the same time, it would provide incentives for workers, especially those who are the most productive, to increase their labor whenever possible. And it would do this without aggravating the long-term problem of the trillions and trillions of dollars in unfunded liabilities in the Social Security program.
Those requirements would nix the payroll-tax holiday. As it happens, the best way to both boost consumption and increase incentives would be to accelerate many features of the president's tax-relief program passed in 2001. First, the personal income-tax rates scheduled to be implemented in 2006 not just those rates scheduled for 2004, as the White House will apparently propose should become effective this Jan. 1. That would mean that the current rates of 10, 15, 25, 27, 30, 35 and 38.6 percent would become 10, 15, 25, 28, 33 and 35 percent. (Democrats should take note: President Bush's maximum tax rate of 35 percent is still 4 percentage points higher than the top rate of 31 percent his father ill-advisably accepted when breaking his no-new-taxes pledge in the middle of the 1990-91 recession.) Second, the $600-per-child tax credit, which is scheduled to increase to $700 (2005), $800 (2009) and $1,000 (2010), should be raised to at least $750 for 2003. Third, the indefensible marriage penalty, which requires tens of millions of married couples to pay about $1,500 more in annual income taxes than they would pay if they co-habitated, ought to be eliminated forthwith.
These bipartisan tax cuts made sense when 12 Democratic senators voted for them in 2001. With the economy mired in its soft patch, as Fed Chairman Alan Greenspan reiterated Thursday, accelerating their implementation makes even more sense today. They can pass the Republican-controlled House. Waiting for budget reconciliation, which requires only 51 votes in the Senate, may be too late. The White House should fight for a timely fiscal stimulus package that can be implemented before next summer's reconciliation process.

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