By Sterling Burnett
Dallas, TX – Two major ideas have gained popularity over the past few weeks among groups who don't want to see President Bush's tax cut plan become law. One is for an immediate one-time rebate of a portion of this year's taxes. The other is to require a trigger to set in motion any tax rate cut. A quick look at history shows both ideas could be harmful.
Let's look at the rebate. Many congressional Democrats, after spending the presidential campaign swearing that the economy was in great shape and that Bush's tax cut was too large, now want to cut every Tom, Dick and Harriet Taxpayer a check for $300. The money needs to be put in consumers' pockets as soon as possible, they argue, to reverse what is now undeniably an economic slowdown.
We tried a tax rebate before. Congress gave taxpayers a 10% refund on their 1974 taxes right in the middle of the deepest recession in post-war history. That added up to about eight billion dollars in disposable income, equaling about 60 billion today. Most people either saved it or used it to pay off debt - both good uses of refunded taxes, but neither stimulating the economy like conspicuous American consumption.
Why do rebates fail? Nobel Prize-winning economist Milton Friedman explains that taxpayers consume based on what they perceive to be permanent income. So, within reason, no matter how large the fluctuation in disposable income, taxpayers won't change spending habits.
Then there's the trigger. The idea is that enacted tax cuts would only become operative if some economic target (like a predetermined level of tax collections) is achieved. For example, if tax collections exceeded a certain level, that would trigger the tax cut. The problem with a trigger is that it transforms an otherwise permanent rate reduction into a temporary one. And we wind up reacquainted with Mr. Friedman and Economics 101.
Once the trigger is pulled, what actually happens? Would Congress repeal a tax cut in the current year? Can you imagine asking people to give back money when the government has a large surplus, just not quite large enough? How late in the year can the trigger cancel next year's tax cut? What if the tax cut is cancelled in December, but the economy surges in April? Do we get a retroactive tax cut? If you've ever paid taxes, you know the answer is that an economic trigger will lead only to political confusion.
The most important argument against the trigger, however, is the impact it would have on spending decisions made by the average American consumer. Suppose a woman plans to use her tax cut to pay tuition to obtain the degree she needs to get a better job. It's September; tuition is due, but congressional spending is close to pulling the trigger. Will she get her tax return, or won't she? Likewise, the trigger can adversely affect decisions on big-ticket items, like cars, washing machines and houses - will spending trigger the tax cut or won?t it?
All of this anxiety serves to depress consumption rather than stimulate it. So President Bush should reject any rebate that is not directly tied to long term tax cut rates. He should also avoid economic triggers - they only tell taxpayers, "We're passing this tax cut now, but don't count on it."
Sterling Burnett is Senior Policy Analyst at the National Center for Policy Analysis, a non partisan think tank in Dallas.