Thursday, February 12, 2009

Keep It Simple, Stupid

President Obama, responding recently to GOP criticism that the stimulus had turned into a spending plan, replied, "That's the point. Seriously, that's the point." As Power Line's Paul Mirengoff notes:
Just a few weeks ago, in his inauguation speech, Obama said that his touchstone for governmental action is how well it will work. Now the touchstone is whether it constitutes spending.
Even if the spending expands welfare, further discouraging employment.

So listen to Jeffrey Miron, a senior lecturer in economics at Harvard, who proposes a simpler stimulus plan in Reason magazine:
One policy change, however, can stimulate both the economy in the short-run and enhance efficiency in the long-run: repeal of the corporate income tax, which collects up to 35% of the difference between revenues and costs of incorporated businesses.

From the efficiency perspective, the corporate income tax has never been sensible policy. Economic theory holds that an efficient tax system should not tax capital income, since this distorts the incentives to save and invest. Even if the tax base includes capital income, corporate income taxation is overkill. All income earned by corporations accrues to households as dividends or capital gains, and this income is then taxed by the personal income tax system.

Proponents argue that the corporate income tax makes sense because high-income taxpayers own corporations at a disproportionate rate. This desire to redistribute income can still be achieved using the personal tax system. That approach is better targeted than taxing corporate income, since many low and moderate income households own corporations via their pensions and 401(k)s. The true burden of corporation taxation falls not just on stockholders, but on employees through lower wages and on consumers through higher prices. Thus corporate taxation hits taxpayers across the income spectrum.

Corporate income taxation has other negatives. It requires a complicated set of rules and regulations, over and above the personal income tax system, generating compliance costs. Special interests ensure that corporate tax systems favor specific industries or activities, further distorting private investment decisions. Along those lines, corporation taxation reduces financial transparency, making it harder for investors to monitor corporate behavior.

So repeal of the corporate income tax is good policy independent of the state of the economy and would provide short-run stimulus.

Repeal means higher stock prices and improved cash flow. Corporations would respond to this change by investing in plant and equipment, and by hiring additional workers. These investments would be more productive than the ones funded by stimulus projects, since corporations respond to market forces, not to political influence. Since corporations could more easily invest out of retained earnings, repeal would also circumvent many banks' reluctance to lend.

The budgetary impact of a corporate income tax repeal—roughly $300-350 billion per year—might seem daunting, but this amount falls well short of the Obama fiscal package. The long-run impact will be less than what is implied by current revenues, since repeal will expand economic activity and therefore increase other kinds of tax revenue.

The stimulus impact of a corporate income tax repeal is likely to be substantial. Recent estimates by Christina Romer, the head of Obama's Council of Economic Advisers, suggest that tax cuts have a multiplier of three, meaning that repeal would increase GDP by roughly $1 trillion. By comparison, the administration's assumption that the government spending multiplier is about 1.5 suggests that the $500 billion in the Obama stimulus package would increase GDP by about $750 billion.
See also Mitt Romney on CNN.

(via Don Surber, Right Wing News, The Corner)


Assistant Village Idiot said...

They don't want to solve the problem that way. Even if it would work (which I believe it would) an economy's not supposed to work that way. It would undermine so many other pet doctrines.

Carl said...

Yup. "He won," so we have years of liberal pet doctrines to try before the policy shifts to trying what's worked before.

OBloodyHell said...

> before the policy shifts to trying what's worked before.

You mean when the next administration comes in? Nawwww....