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Not All Tax Cuts Are Created Equal

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For over a year, the federal government has been trying to stimulate the economy using the same Bush/Obama Borrow and Bailout approach. Specifically policymakers have:

  1. Increased total federal spending by 11 percent to nearly $3 trillion;
  2. Enacted $333 billion in “emergency” spending;
  3. Enacted $105 billion in tax rebates; and
  4. Pushed the 2009 budget deficit to a record $1.2 trillion in the name of “stimulus.”

Now congressional leaders want to keep digging by adding another $825 billion in deficit spending and targeted temporary tax cuts. We have no reason to believe Congress’ next, and bigger, round of  deficit spending will be any more effective than the first. What’s more, the temporary and narrowly targeted tax cuts in the bill are designed to redistribute wealth, not create it.

There is an alternative: permanent tax reducations such as the ones Congress passed in 2003. Tax cuts like those have a proven track record of encouraging economic growth. Just look at the attached chart tracking five major economic indicators in the six quarters before and after President Bush signed the tax reductions into law. The cuts got results because they were designed to increase market incentives to work, save, and invest, thus creating jobs and increasing economic growth. In the seven quarters that followed, by the way, 5 million jobs were created.

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