Wednesday, November 3, 2010

The Case Against The Fiscal Stimulus

Many of us have heard a lot in the news lately about the fiscal stimulus package passed by the House.
The attached article, by Jeffery Miron in the Harvard Journal of Law & Public Policy,  is the most succinct, easy to understand article I have read concerning the failure of this piece of legislation. It describes in layman's terms the merits of  a Keynesian model that fell short because of misdirected political considerations. The irony is that if the legislations' intent was solely for economic stimulus and was directed toward more productive areas of the economy, it would have garnered considerable support from the Republicans, more than likely would have created economic stimulus, and the results of the recent election may have been far different.
Opportunities lost!!!


lemonodo said...

Apparently people have varying takes on the stimulus and I would hesitate to say measures in article cited would have been possible to enact. For example, it appears eliminating corporate income tax would benefit the extremely wealthy much more so than preserve US jobs and it appears payroll tax cuts would defund extremely popular lifeline, not-means-tested entitlement programs. Finally, it appears another point of view would be flawed from the the point of view of the distinguished journal author, leading one to conclude there is no simple answer on the stimulus, but supporting the possibilities that on one hand it didn't work very well, but on the other, the country is in better shape than if nothing had been done by way of tax cuts and jobs.

Doc Spad said...

The problem with the package that was passed... was that it disproportionately funneled huge sums of dollars into programs that supported union workers and unions directly. This was political payback...not stimulas. As far as the corporate income tax is concerned...your supposition that the "wealthy" are the beneficiaries of this is incorrect. What is does do is makes US companies in a global market more competitive. Considering that the US has the highest tax on it's corporations than ANY country makes it difficult for US companies to compete on an equal footing with foreign home and abroad.
Placing dollars in the hands of the people that made the money has always been the most efficient,cheapest, and efficient way to stimulate the economy. It also has the added benefit of having the same dollar being earned , as they are spent over and over, thuis created MORE taxable income in the overall economy...resulting in far greater tax revenues in the long run.

Anonymous said...

Doc, the statement that the US has the highest tax on corporations is a tad misleading don't you think?

How effective marginal corporate tax rates in the United States compare with other countries’ rates depends on the type of corporate investment being made and the way in which it is financed. Corpo- rate investments are financed by either shareholders or lenders (which include corporate bondholders). Com- pared with the average effective marginal corporate tax rates for shareholder-financed investment in machin- ery among all other OECD countries, the United States’ rate is slightly higher; compared with the aver- age among other G7 countries, the United States’ rate is about the same. Compared with the average rate for shareholder-financed investment in industrial struc- tures among all other OECD countries, the United States’ rate is significantly higher; however, the United States’ rate is close to the average among other G7 countries. In contrast to rates for shareholder-financed investment, the United States’ effective marginal cor- porate tax rate for lender-financed investment in ma-
The G7 industrialized countries are Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.
chinery is low by comparison with the average for other OECD countries and for other G7 countries. From an international perspective, although the United States’ effective marginal corporate rates for shareholder-financed investments are higher than the average, such rates for investments financed by a com- bination of shareholders and lenders may be lower than the average if a sufficient fraction of the marginal investment is financed by lenders.
B The history of corporate tax rates between 1982 and 2003 suggests that countries do not change their corporate tax rates independent of one an- other. After large reductions in statutory corporate tax rates by Ireland, the United Kingdom, and the United States in the mid-1980s, other OECD countries also cut their rates, perhaps out of concern that they would lose investments or part of their tax base—for exam- ple, when corporations moved their operations to a lower-tax country. Hence, the corporate tax rates that the United States establishes may affect the choices that other countries make about rates. Thus, how the United States’ corporate tax rate ranks in relation to the rates in other countries is not determined by U.S. policy choices alone.


Doc Spad said...

Your comment is valid, however...
if you look a little further (more recent analysis from the CBO, Federal Reserve, and Treasury...we are near the top of corporate tax levels), and beyond the G-7 you will see that the US with the other members of the G-7 do have the highest taxation rates and the greatest degree of economic stagnation.
Consider the following:
based on calculation by PricewaterhouseCoopers LLP at beginning of 2010, G-7 will be eclipsed in size by the world's biggest Emerging market (E-7) within two decades, led by China. In year of 2000, the G-7's GDP was twice as large as E-7 and in year of 2010 the gap will have shrunk to 35 percent. The combined GDP of E-7 (China, India, Brazil, Russia, Mexico, Indonesia, and Turkey will match the G-7 in around 2019 and will be around 30 percent higher by 2030 than G-7
These countries have effective marginal rates at a fraction of the US and other G-7 countries and are the fastest and most productive economies in the world..the US has to compete with these guys