Where is the leadership?

Well, we have a new "stimulus package," signed into law today by President Bush, who called it "a booster shot for our economy."

Washington leaders in the White House and in Congress have decided that they needed to do something, and the sooner the better, so they rushed legislation through that would give at least $300 and up to $600 to people who file returns in 2007 (even if that person doesn't make enough to actually pay any taxes), as well as $300 for dependent children.

The government payments (which of course find their ultimate original source in taxes collected from taxpayers) will phase out for filers beginning at an annual income of $75,000 for those filing single or head of household. By the time he reaches an annual income of $87,000 a filer who is single or head of household and has no children will get no government payment.

In other words, the stimulus package is basically a transfer of money from those who pay the vast majority of the federal taxes to those who make less.

Instead of this charade, which adds nothing to the GDP (simply shuffles dollars from one taxpayer to another), real leadership would have taken the opportunity to stand up and argue for making the current tax rate reductions permanent and to lower the corporate income tax rates as well, which would have had an immediate and lasting impact on the growth of the GDP, as we have argued here and here.

The uselessness of the measures in the so-called stimulus plan are demonstrated in this article published today by Art Laffer in the Wall Street Journal. In fact, he argues that they will be worse than useless, by virtue of the fact that they take from one group and give to another, thus more than making up for any positive effects in the damage that they inflict.

These facts and people who can explain them are available to our elected government politicians.

But, in the absence of leadership from our elected representatives, the tax rate uncertainty continues to drag on and on. We have stressed several times that this continued uncertainty remains a major factor in the unstable condition of the financial markets (see here and here).

The market will rapidly and painfully price in the effect of the tax rates lapsing when it becomes clear that they will not be renewed at their current levels. Or, the market (and the economy) will quickly respond positively if the tax rate cuts are made permanent, or improved by the lowering of corporate tax rates as well. But in the face of market turbulence and howls to "do something" no leader arose to call for action that would really have an impact beyond shuffling dollars from one taxpayer to another in a shell game.

Leadership is not a popularity contest. In this situation, the elected politicians on both sides of the aisle chose to throw a sop to the masses instead of tackling a less popular but infinitely more effective course of action.


Post a Comment