It goes without saying that the current U.S. recession is a serious economic condition that requires extraordinary actions. The Fed, via its new "tool box," the Treasury via tactical investments under the TARP, and the prospective, largest fiscal stimulus package in U.S. history all represent extraordinary measures.
But should the United States consider still another, extraordinary action? Namely, temporarily suspending the federal income tax?
Attacking the recession from both "sides"
Experienced investors know that one great divide in economics concerns those economists who emphasize supply side (top-down) factors and those who emphasize demand side (bottom-up) factors. Passing a federal income tax holiday would add supply-side stimulus to likely demand-side stimulus via a fiscal stimulus package in 2009.
However, economist Richard Felson told BloggingStocks Tuesday while a federal income tax holiday would be politically-attractive, particularly for U.S. Representatives and Senators up for re-election in 2010, he doesn't favor the approach.
"I'm sure taxpayers, particularly those in upper income groups, would love a suspension of tax collection for three or four months," Felson said. "But there's a danger that middle income taxpayers would save a great deal of their dollars, and like the earlier tax rebate, it ends up stimulating the economy very little. Who knows? Maybe in this environment rich Americans would end up saving a lot of it too, so I don't see it as a prudent stimulus option."
Economist David H. Wang agreed. "What we need, and what historical precedent has shown as effective, is massive fiscal stimulus at once, which creates the biggest GDP bang for the buck," Wang said. "In other words, one $500 billion fiscal stimulus generates more GDP gain than two $250 billion stimulus packages over six months."
The "aggregate" theory also applies to programs, Wang said. It's better to allocate $100 billion to modernize schools nationally, or $100 billion to rebuild roads and bridges, or allocate $100 billion for aid to revenue-challenged states, "than to sprinkle $1,200 and $1,500 tax cuts all over the place," he said.
Fiscal Policy / Economic Analysis: The "aggregate" fiscal stimulus option wins. If you're going to appropriate $500 billion in fiscal stimulus, you want it to move the GDP needle -- and that means allocating as much money at once, as possible. And if in six months it looks like the $500 billion wasn't enough, the answer should be? Hit the economy with another $500 billion stimulus package. Even better: one $1 trillion fiscal stimulus package -- an extraordinary action for a serious economic problem.
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Reader Comments (Page 1 of 1)
12-09-2008 @ 10:11PM
Lance said...
What is needed is a 20 % tax increase on upper 10 %incomes, and 5 % under 150 000. This should be done to pay down the Iraq war, as LBJ did after the Vietnam war.Immediate withdrawal from Iraq, Afghanistan should commence. Japanese industrial managers should be recruited to help reorganize our industries. Taxes should be levied on oil to pay for highway and bridge improvements. After 2yrs. we should raise enough taxes to go to a pay as you go tax policy, with no budget deficits, mandated by constitution.
12-10-2008 @ 7:47AM
lou said...
I don't believe we need a tax holiday. It will just get us in deeper debt. This nation is already in trouble. We need jobs! Jobs that all people, with all levels of education, regardless of race, sex or religion will be hired to do. With decent pay. Not minimum wage. Full time. These "stimulus" jobs could be taxed at a minimum, regardless of how much people earn. Infrastructure is greatly needed all over. Give people back their pride and a feeling of community and country. We don't need bonus checks. That is just nationalized socialism.
2-10-2009 @ 2:22PM
fornls said...
Joseph Lazzaro,
Your analysis is thought provoking. I still do not think that a big tax break will give a bang to the struggling economy.
Why do you think that only tax which will anyway be expected to be taken by government will bring the economy on track? Are you not missing an important point?
That is to say that it is the confidence that will bring the economy back on track. It is investor's confidence, consumer's confidence and the population in general. Just think about it. The unofficial recession since January had little effect, but the sudden fall in consumer confidence through September through to November of 2008 is what has caused the most trouble for this economy! Now if a big tax holiday, as you call it, is going to bring back consumer confidence and investor confidence in some way, then I believe, we will be facing a new dawn. But I find it hard to believe considering the damage done so far and still not complete as per many experts.
Find more of my work here:
http://www.gomestic.com/Personal-Finance/10-Basic-Tax-Terms-Everyone-Must-Know.59552
http://www.bizcovering.com/writers/fornls.1622
Thanks,
-fornls