Setting foot on the trail blazed by the Chamber of Commerce, the Heritage Foundation and the Club for Growth, the Republican Study Committee (RSC) released its economic stimulus plan today. Dubbed The Economic Recovery and Middle-Class Tax Relief Act of 2009, the plan includes:
– Making the 15 percent capital gains tax rate permanent.
– Cutting the top corporate tax rate from 35 percent to 25 percent.
– A 5 percent across the board income tax cut for individuals.
– Indexing the capital gains tax for inflation.
The RSC also proposes “a 1 percent reduction in discretionary spending in the fiscal 2009 budget,” proudly touting the fact that “this legislation does not contain one penny of new spending, and rejects the idea that massive new government spending will lead to an economic recovery.”
As stimulus outlines go, this is spectacularly bad. It couples the ineffective tax cuts of previous proposals with a completely destructive spending reduction that would only exacerbate the economic crisis.
As Paul Krugman noted, “with both consumer spending and business investment plunging, a huge gap is opening up between what the U.S. economy can produce and what it’s able to sell.” The whole point of a stimulus package is to fill this gap by boosting demand and consumer spending, which will get dollars to flow through the economy again. This is accomplished through targeted tax cuts to low- and middle-income families, infrastructure investment, and by providing aid to state governments.
As Matthew Yglesias wrote, “Not only is this barrel full of tax cuts proposed by the [RSC] pretty bad stimulus, but to even call a package of permanent tax cuts an ‘alternative stimulus’ is a serious abuse of the term”:
The idea of a stimulus measure is that you increase the budget deficit over the short-term to try to get the economy back to something like a full employment of available resources. But a permanent increase in the deficit extends, by definition, into non-recessionary periods in which such deficits operate as a drag on growth.
Indeed, permanently cutting taxes for the wealthy and corporations — who are less apt to immediately spend any tax break they receive — while forcing the federal government, in Neo-Hoover fashion, to cut its budget is a counterintuitive response that is not really a stimulus at all. What the economy needs is a boost, not a permanent break for businesses and the rich.