A Tax Cut That Hurts

As the daily pounding of bad economic news suggests, the need to pass an economic stimulus package is urgent. Consumer confidence is at a seven-year low. Not since the Carter administration has the U.S. suffered such a large one-month job loss: 415,000 jobs. Perhaps most sobering, the economy has shrunk from July to September for the first time since 1993. President Bush may not be using the word “recession,” but growing numbers of economists say it certainly looks like one.

Bush demanded last week that Congress “get to work and get something done,” but what gets passed into law should not do more harm than good.

A stimulus bill is halfway through Congress. A proposal by Senate GOP leaders would remove some of the worst corporate welfare from the House-passed version, but there is still plenty not to like.

At the heart of the Senate bill, which is being championed by Sen. Charles Grassley (R-Iowa), is quicker reductions in income tax rates than were passed in the first round of the Bush tax cuts. Republicans can see that with the vanishing Social Security surplus, it’s now or never. If they wait, the additional cuts scheduled for three or five years hence may be deferred. So they’re seizing on the stimulus package as the vehicle to lock them in place.

Specifically, the Senate bill would speed up rate cuts in every tax bracket, in contrast to the House plan, which only affected one of the higher brackets. The cost would be $121.5 billion over five years, and 55% of the benefits would still go to the wealthiest 1% of taxpayers.

Given that the richer folks are less likely to spend their tax cuts, there is not much immediate economic stimulus to the plan. Indeed, most studies show that the last round of tax cuts was mostly saved by jittery taxpayers, not spent.

At the same time, the Grassley measure continues Republican resistance to aiding the unemployed. An alternate stimulus bill proposed by Sen. Max Baucus (D-Mont.) would pay up to 50% of health benefits for unemployed workers. The White House strongly opposes it. Similarly, the White House is against making unemployment benefits more generous for workers who have been out of a job for more than 26 weeks.

Yet when it comes to stimulating the economy, there is no better way than to put money in the hands of low-income people who will actually spend it. The only point of agreement between Democrats and Republicans at this point is to give $14 billion in tax rebates to low-wage workers who didn’t qualify for the first one.

It won’t do any good to disburse tens of billions of dollars unless they will flow into circulation. The accelerated tax rate cuts, by chopping revenue without providing economic adrenalin, would injure, not heal, the economy.