- The Washington Times - Tuesday, December 31, 2002

The case for an effective, robust short-term stimulus package becomes more clear by the day. The dismal holiday retail season that many economists feared appears to have come to fruition. One authoritative forecast estimated that same-store sales during the November-to-December period will register a paltry increase of 1.5 percent over last year, the weakest gain in more than 30 years.
In the midst of a collapse in business investment spending, the surprising resilience of consumer spending throughout last year's recession and during the current "soft patch" has kept the U.S. economy from experiencing a much more serious slowdown. Moreover, America's seemingly insatiable appetite for imported consumer goods has provided strong demand for the exports of the even-slower-growing economies of Japan and Western Europe. In such a fragile domestic and international economic environment, now would be a terrible time for America's over-indebted, confidence-lacking consumers to restrain their spending.
With short-term interest rates already at their lowest levels in more than 40 years, there is little room for monetary policy to operate. If the economy is to receive much-needed stimulus in the short run, it will have to be from fiscal policy, which operates through changes in taxes and government spending. A bipartisan consensus is developing on the need to extend federally funded unemployment benefits. In addition, the build-up in national defense and the need to increase homeland security will provide significant stimulus on the spending side. Therefore, for reasons noted above, tax reductions that bolster consumer spending represent the best policy in today's economic climate.
Press reports indicate the White House intends to incorporate a significant reduction in taxes on stock dividends in the stimulus package it is fashioning. The argument for reducing dividend taxation relates to the fact that it represents double taxation. The case for reducing or eliminating the double taxation of dividends is sound. But it is not a policy action that belongs in a stimulus package targeted at consumers. Rather, it should be addressed as part of a broad-based tax-reform agenda.
There is also talk about expanding business-investment tax incentives. With excess capacity approaching 25 percent, however, the case is weak, especially when current "short-term" incentives extend for three years. If bolstering short-term investment is the goal, the incentives should apply only in the short term. To that end, limiting them to the 12 months following enactment would be appropriate.
As it happens, many of the items in President Bush's 10-year, $1.35 trillion tax-relief program, which Congress passed in 2001, represent solid policy actions that have the added benefit of bolstering consumer spending. The problem is that these tax cuts are phased in over time. The solution is to accelerate their implementation. These items include the across-the-board reductions in personal income-tax rates; the expansion of the current $600 child tax credit to $1,000; and the reduction of the marriage penalty. Introducing a temporary new tax rate of zero for the first $3,000 (for singles) and $6,000 (for married couples) of now-taxable income and making it refundable ought to appeal to Democrats and singles who do not benefit from the child tax credit.
Many Democrats will play the class-warfare card regardless of what the White House includes in its stimulus package. Therefore, President Bush should ignore the reported recommendations of his political advisers to exclude the accelerated reduction of the top income-tax rate from the package. This cut will not only increase consumption; it will also provide incentives for many of the economy's most productive workers to increase their labor supply. And that's a win-win proposition for both Democrats and Republicans who want the economy to rebound.

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