Want a real stimulus? Try permanent tax cuts

Posted: Wednesday, July 14, 2010

They're getting desperate in Obamaland. There's no other word for it. The recent jobless report was terrible - 125,000 payroll jobs gone.

For Democrats, the portents for the November election are increasingly gloomy, even dire. The respected political analyst Charlie Cook predicts a "Hurricane GOP."

So last week, President Obama spent some time talking up job creation. Among other things, he visited a Kansas City maker of electric delivery vehicles. In the coming days, he's expected to emphasize exports.

Sorry, but this is what his predecessor would call "small ball." The Kansas City outfit visited by Obama was Smith Electric Vehicles, which got a $32 million federal grant. The impact will be minuscule: no more than 50 jobs.

And I'll start believing Obama truly cares about exports when he starts spending real political capital toward that end. To win congressional approval of market-opening trade pacts with Panama, Colombia and South Korea, Obama will have to twist the arms of union leaders. Don't hold your breath.

To turn things around politically, Obama and the Dems need to show solid improvement in the economy well before the election. But time is running out.

Last month, the number of expiring census jobs swamped a relatively low number of new private-sector hires. Since last year, the economy has been recovering slowly, but most people don't see it in their daily lives. They don't feel it in improved job security.

Meanwhile, leading Democrats remain stuck in a rut. They say the proper remedy for what ails the economy is more of the medicine that's had only a tepid effect at best. In other words, they're still addicted to spending.

But the huge deficits piling up have only added to the mounting economic uncertainty that impedes job-creation. Our massive national debt implies large future tax increases. Sure enough, the Obama administration has been hinting about the need for a European-style value-added tax.

The Dems may try to ram through a VAT in the coming months or after the election, in a lame-duck session - perhaps along with a cap-and-trade bill. Of course, that would only worsen the economy by forcing everyone to pay more for energy, and it would do nothing about global "climate change."

The health care legislation passed in March includes up to 20 new taxes or tax increases, some of which will become effective Jan. 1. Another major source of uncertainty is the fate of the Bush tax cuts, slated to vanish at year's end. So far, Congress has punted on the issue.

If Congress does nothing, those lower rates will expire. Every income-tax bracket will rise. The 10 percent rate will jump to 15 percent. The top rate will increase from 35 percent to 39.6 percent. The capital gains tax will go from 15 to 20 percent, further penalizing anyone with the initiative and drive to undertake the risk of creating jobs.

Democrats may clamor for more spending, but if it's real stimulus you want, how about tax cuts?

Don't take my word for it. In research authored before she took the job as an Obama economic adviser, Christina Romer and her husband concluded that tax cuts are a much more potent tonic than direct spending.

Tax cuts, the Romers concluded, produce a multiplier of three, meaning a dollar of lowered taxes boosts gross domestic product by $3 - roughly twice the economic payoff many economists assume for government spending.

Harvard's N. Gregory Mankiw has a piece in the current issue of National Affairs magazine summarizing the Romers' research, along with several other studies that came to similar conclusions: Tax cuts are a much more powerful stimulant than direct government spending.

It may be too late for the Democrats to salvage this election cycle, but if I were a party strategist and I wanted to head off a collapse, I'd resort to a time-honored tactic. I'd steal my adversary's ideas. I'd start formulating a program of lower taxes that were broad-based and permanent.

• E. Thomas McClanahan is a member of the Kansas City Star editorial board. Readers may e-mail him at mcclanahan@kcstar.com.



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