More Stimulus Spending
and Tax Increases are Policy Mistakes
By John Hendrickson
Obama has recently announced his next economic plan in order to not only attempt
to get the economy growing again, but also reduce the 9.1 percent unemployment
rate. President Obama’s new proposal is titled the American Jobs Act, which is a
continuation of the Administration’s Keynesian-style stimulus spending. The
American Jobs Act is a “$447 billion package of spending initiatives and tax
cuts to boost economic growth.”
The $447 billion stimulus proposal is a continuation of the $850 billion
stimulus that was passed by Congress in 2009. The proposal also calls for the
creation of an infrastructure investment bank to spur spending on infrastructure
projects, continuation of unemployment benefits, employee and employer payroll
tax cuts, and more federal support to state and local governments.
In addition to the
American Jobs Act the Administration has proposed a deficit reduction plan that
“uses entitlement cuts, tax increases, and war savings to reduce the federal
deficit by more than $3 trillion over the next ten years.”
The deficit reduction plan proposes “$1.5 trillion in tax increases, primarily
on the wealthy, through a combination of letting the Bush-era tax cuts expire,
closing loopholes, and limiting the amount that high earners can deduct.”
The President’s tax increase plan is named after the businessman Warren Buffett,
who has been advocating more tax increases on the wealthy. The plan also calls
for “$580 billion in adjustments to health and entitlement programs, including
$248 billion to Medicare and $72 billion to Medicaid,” while also “saving $1.1
trillion” from reducing the nation’s military involvement in Iraq and
Both the American
Jobs Act and the deficit reduction plan will not resolve high unemployment nor
will it lead to economic growth. Michael Tanner, a Senior Fellow at the Cato
Institute recently wrote:
plan barely makes a pretense of reducing spending. The Obama administration
claims that its proposal would reduce future budget deficits by roughly $4.4
trillion. But that includes $1.1 trillion in savings from troop draw-downs in
Afghanistan and Iraq that were already going to occur. This is an old trick by
which the President gets to ‘save’ money that was never going to be spent. The
President also reaches back to include $1.2 trillion in savings from the
debt-ceiling deal that was signed into law last month. And, he includes $430
billion in savings from lower interest payments as a result of the reduced debt.
Tanner also argues
that the plan fails to seriously address entitlement reform and the “actual cuts
total less than $580 billion over the next ten years.”
The plan fails to address the spending issue which is driving the $14 trillion,
and rising, national debt as well as the continuation of trillion dollar
deficits that the federal government has been running over the last few years.
The deficit for this year alone is expected to be at least $1.5 trillion. In
addition, calling for tax increases during a weak economic recovery only adds to
the uncertainty that is hanging like an albatross over the economy. The
uncertainty is caused by the massive increase in spending, regulation, and the
Patient Protection and Affordable Care Act, along with the possibility of
significant tax increases.
“With an economy on
the front end of another recession, President Obama’s tax attack on the folks
who are most likely to succeed, invest, start new businesses, and create jobs is
nothing short of staggering,” wrote economist Larry Kudlow.
A recent report by the Tax Foundation argued that:
The American Jobs
Act is intended to be an ambitious proposal to spur new hiring and generate
economic growth. But the economic research suggests that its core tax incentives
will have little, if any, impact on either job creation or improved GDP growth.
Moreover, whatever meager benefits come from these temporary provisions will be
swamped by the long-term impact of the permanent tax increases that are nearly
twice the size of the tax cuts.
The rationale for
the same tax and spend policies of the Administration is rooted in their
devotion to Keynesian-demand style economics, which were also utilized in the
1930s by President Franklin D. Roosevelt. Some liberals and progressives also
argue that the American Jobs Act is not large enough, but rather President Obama
should offer a bolder economic plan such as calling for a new Works Progress
Administration or Civilian Conservation Corps.
The President’s tax plan or the “Buffett Rule” of implementing a tax increase on
the wealthy was also a policy that President Roosevelt called for during the
Great Depression, but as the historical record demonstrates stimulus spending,
regulation, and tax increases did not solve the unemployment problem or the
control of the U.S. House of Representatives it is unlikely that the American
Jobs Act or the tax increases will be passed through Congress, but policymakers
must consider an economic plan that will create economic growth. A pro-growth
economic plan should consist of both spending cuts and tax cuts, but also a
major reform of regulations is needed, including the repeal of both the Patient
Protection and Affordable Care Act and the Dodd-Frank financial reform
regulations. Policymakers must also consider true tax reform, which means
reducing tax rates across-the-board and considering implementing a flat tax or a
national sales tax plan to replace the current tax code that is not only too
complicated, but also hinders economic growth.
In the 20th
century Presidents Warren G. Harding, Calvin Coolidge, and Ronald Reagan all
faced serious economic problems and all three administrations focused on
pro-growth solutions, especially Harding and Coolidge when it came to cutting
government spending. Policymakers should study and learn from the policies of
these administrations and the periods of economic growth that occurred because
of their devotion to a philosophy of limited-government. “That Obama would again
try to promote stimulus makes clear that his big-government ideology,
progressivism, is intellectually broke,” wrote Jim Powell, a historian and
Senior Fellow at the Cato Institute.
John R. Hendrickson
is a Research Analyst at Public Interest Institute.
The views expressed
herein are those of the author and not necessarily those of Public Interest
Institute or Tax Education Foundation. They are brought to you in the interest
of a better-informed citizenry.
David S. Logan, Academic Research Suggests that the American Jobs Act
Will Produce Few Jobs, Tax Foundation Fiscal Fact, No. 283, Tax
Foundation, Washington, D.C., September 19, 2011, <http://taxfoundation.org/news/show/27632.html>
accessed on September 20, 2011.