Friday, January 18, 2008

Bush Makes the Best of a Bad Situation

President Bush has made the best of a bad situation by applying his so-called tax rebate proposal within the income-tax code, rather than positioning it as new federal spending, like Sen. Hillary Clinton’s $100 billion spending package. He’s going to oppose that. He’s right to oppose that. It’s essential to oppose that.

As I understand it, they’re going to waive the 10 percent bracket which goes up to $15,650. Everybody passes through that bracket. I’m sure upper-end taxpayers will not get any of this relief. Lower-end and middle-end taxpayers will.

In doing so, there will be a very tiny incentive effect, although it’ll only last a year. As I said, the president is making the best of a bad political situation. He had to do “something.” And this is the least harmful thing he can do. It can be classed as income-tax relief, even though there’s no permanent incentive effect.

The better part of the stimulus plan is the inclusion of a business tax cut that will probably be a 50 percent cash-expensing bonus for the depreciation of new equipment, plants, or structures. This is very good. It worked between 2002-07. It recently expired, so it’s a good time to renew it. The Democratic Congress may fight him over this, but the president is willing to join that battle. Good for him.

Senator Arlen Specter has a related bill that would permit full expensing for new investments put into place during the tax years 2008-09. Sen. John McCain has just released an even-better plan that would permanently slash the corporate tax rate from 35 percent to 25 percent. It also would allow both the expensing of equipment and technology investments, and would establish a permanent research-and-development tax credit. By lowering the cost of capital and raising the investment return, this would really be a booster-rocket for economic growth, jobs, and real worker wages.

Supply-side guru Jack Kemp helped pilot this proposal through the McCain camp, and the senator announced it yesterday. Now we’ll see if Democrats are willing to provide some tax incentives for business and accept President Bush’s offer. While Bush did not include a permanent feature for his capital-gains and dividends tax cut as part of his short-run plan, he did make it clear that he intends to pursue this later on.

Incidentally, Fed chair Ben Bernanke suggested yesterday that making dividend tax cuts permanent would provide near-term stimulus by boosting markets. That’s an important golden nugget in his otherwise lackluster presentation. (Hat-tip to Strategas political analyst Dan Clifton for this. I also saw it in the Real Time Economics blog of the Wall Street Journal.)

While none of these short-term fixes are going to expand the economy’s long-run potential to grow, at least President Bush attempted to stay on the supply-side of tax policy in the current Washington panic over the economic slowdown and stock market plunge.

Unfortunately, stocks are falling yet again today. I still don’t know why Bernanke didn’t cut the fed funds rate 50 basis points this week in advance of the January 30 meeting.