NCPA Tax Expert, Bartlett, Says Only Permanent Rate Reduction Will Stimulate Sluggish Economy
WASHINGTON, D.C. (March 26, 2001) — This weekend Senator Joe Lieberman (D-CT) and the Democrats began to promote a new idea to provide an immediate tax refund of approximately $60 billion, or about $300 per American worker. Yet according to Bruce Bartlett, senior fellow with the National Center for Policy Analysis (NCPA), a small tax rebate would only serve to provide tax rate cut opponents with political cover, while doing virtually nothing to help stimulate the economy.
The Democrats' argument is that money needs to be put into consumers' pockets as soon as possible to reverse the economic slowdown. Therefore, they say, some sort of rebate that will inject cash into the economy quickly is better than the slowly phased-in tax rate reductions proposed by the president.
"The problem is that we did exactly what the Democrats are proposing 26 years ago and it had no impact on the economy," said Bartlett.
Bartlett pointed to the Tax Reduction Act of 1975, in which then-President Ford and Congress faced a choice similar to the one today. In the midst of the deepest recession in postwar history, taxpayers received a 10 percent "refund" on their 1974 taxes, with a minimum of $100 and a maximum of $200. This added about $8 billion to disposable income – close to the $60 billion being proposed in today's dollars.
"The problem is that most people didn't immediately go out and spend the money, as predicted, and thus there really was very little economic stimulus," said Bartlett. In fact, what people tended to do with their windfall was either save it or use it to pay down personal debt, which is the same thing."
Bartlett said the rebate's failure to provide an economic stimulus could be tied to the theory called the "permanent income hypothesis." The theory states that consumption doesn't automatically go up and down with disposable income. People tend to spend according to what they believe their permanent income is – something only a permanent rate reduction can affect.
"A tax rebate now is just as bad an idea as it was in 1975," concluded Bartlett. "It will not stimulate the consumption and will not boost growth, because it doesn't affect workers permanent income. Only permanent rate reductions will do the trick. In that respect, any kind of trigger mechanism on the rate cut would be counterproductive, as it would transform any supposedly permanent tax cut into a temporary one."