One of the best ways to bolster a slowing economy

February 6, 2008

Free Market Foundation

New incentives, not fiscal stimulus, are the best way to bolster a slowing economy, says Bob McTeer, distinguished fellow at the National Center for Policy Analysis.

Fiscal measures to stimulate the economy should be resisted for several reasons, says McTeer:

First, is timing; by the time it is formulated, passed by Congress and implemented, the fiscal measure may be the opposite of what is then needed.

In addition, fiscal policy doesn’t work without the appropriate accompanying monetary policy; but if monetary policy is appropriate meaning more aggressive then it is probably sufficient without a fiscal component.

Fiscal ease, or an increased budget deficit, without appropriate monetary expansion puts upward pressure on interest rates and crowds out private-sector borrowing and spending.

Instead, lowering tax rates on capital is about as close to a free lunch as it gets. The lower rates, by stimulating more activity, almost always generate more tax revenue, says McTeer.

Congress should significantly reduce the corporate income tax which is currently internationally non-competitive and eliminate the death tax, which dilutes and distorts incentives of small businesses to maximise output and employment.

Tax credits for new investment, or the expensing of investment rather than depreciating it, should also be considered.

For the longer run, fundamental tax reform is needed either a low flat income tax or a tax on consumption rather than income.

In sum, the most important and most effective fiscal measures for now and for the future would be to remove the threat of higher marginal tax rates on both labour and capital that would result from the expiration of the Bush tax-rate cuts, says McTeer. Those reductions should be made permanent as soon as possible, and even augmented, especially the taxes on capital gains and dividends.

Source: Bob McTeer, New incentives, not fiscal stimulus, are the best way to bolster a slowing economy, San Diego Union-Tribune, January 20, 2008.

For text: http://www.signonsandiego.com/uniontrib/20080120/news_mz1e20recess.html

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

FMF Policy Bulletin/ 29 January 2008