As many as 130 million Americans have or will receive checks from the Treasury Department as part of the Economic Stimulus Act of 2008. Congress, along with the president, believes this small bit of relief for middle to lower income wage earners will put the spring back in the step of a sluggish economy.
They couldn't be more wrong.
Polls indicate 54 percent of recipients intend to pay off credit card debt while 24 percent will save the money for a rainy day. That leaves just 17 percent (about $19 billion) who will actually spend the money right away. This type of stimulus is like adding a bucket of water to the Pacific Ocean, expecting a rise in sea level. It won't even make a dent.
Even if every person/family spent the entire $112 billion in the next few weeks, it would do little to improve or resolve the underlying problems that have brought about present conditions. The continued tight credit markets coupled with plummeting home values are the main culprits for our current weakness. Conditions will not improve without serious targeted actions.
As in the past, the number one way to stimulate the economy is with the two most feared words to any liberal Democrat – tax cuts. Why? Because they work!
America has the second highest corporate tax rate in the world. Those rates have encouraged massive offshore movement of major corporations seeking more favorable tax treatment. America must be more welcoming to productive enterprises with an eye toward more job creation; or millions more jobs will be lost over time – not just because these companies are seeking cheaper labor but also more reasonable taxation.
The Economic Stimulus Act of 2008 provides $44.8 billion in real tax relief with many helpful options for both large and small business. Enhanced small business expensing along with bonus depreciation at 50 percent encourages business owners to purchase equipment and certain property under Code sec. 179 to strengthen their businesses. This will spur spending from thousands of American businesses and, in turn, create new jobs.
In one of my companies, we will now update our phone system, a significant investment that has a tax advantage. It will provide my staff the ability to improve customer service and thus grow our business, which will require more workers to complete the tasks associated with increased business. The workers will pay taxes, spend money in our local community and ultimately provide real "stimulus" to the economy. The vendor who provides the system will hire installers, programmers and delivery people, etc., and the cycle will repeat with that increase of business.
Another problem plaguing the economy is the subprime mess that has made borrowing money for homes very difficult. In December, Congress passed the Mortgage Forgiveness Debt Relief Act of 2007. It allows taxpayers to exclude from gross income in 2007 forgiveness of certain indebtedness, which was used to purchase a principal residence. The law also raises maximum loan amounts from lenders like Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) to 175 percent of the limits prior to the new legislation. It also increases loan amounts on Federal Housing Administration loans. All these steps will aid a recovery in the housing market. This will allow homeowners who can actually afford their homes to keep them while providing tax breaks in the event they can no longer maintain the payments.
Many current homeowners should be renters. When most people travel, they don't buy a home, they rent a hotel room. They do so because renting a room is the financially responsible decision given their resources. Too many people in America bought homes with little to zero down and have never made a payment yet want to save "their" home. Saving them would be foolish. Lenders need to reassess the current mortgages they carry, work with qualified buyers and weed out the mortgages that should have never been made in the first place. The sooner we get through this process, the sooner the market can start to recover.
Nothing could send a stronger signal to markets that require confidence than to immediately make permanent the Bush tax cuts so instrumental in our recovery after the attacks of 9/11. This would allow a shaken market to be certain of what the future holds for the number one enemy of any investment – taxes. Investors would once again invest with confidence knowing their future tax liability is certain.
One only needs to look back to the 1980s to see the positive impact significant tax cuts provide for an ailing economy. Ronald Reagan cut taxes dramatically after Jimmy Carter left office. We watched the GDP double, the stock market triple, interests drop and inflation virtually disappear. The stage was then set for one of the strongest periods of peace time growth in our nation's history. While debt levels increased we were well on the way to reducing those levels until a Democratic Congress went on a spending spree that has not stopped since. Even during the eight years of George Bush, spending has been off the charts. We must stop spending money we do not have. Even with increased revenues to the Treasury, spending has always outpaced income.
Simply put, real substantive tax relief works in very long lasting and productive ways. Especially when accompanied by strong fiscal restraints on spending. Once the tax cuts for businesses are passed, we should cut taxes on a permanent basis to all middle and lower income Americans. This will allow individuals to keep more of their own money, which can be used to purchase items, reduce debt or save money for an emergency.
Think of the foolishness and the cost involved in processing your tax return, then processing your rebate and sending them back the money you sent them. Imagine the millions that could have been saved if the government just let you keep your money in the first place. Permanent tax relief for each American will have a powerful impact on the economy with no additional processing costs.
So as millions of Americans get a little of their own money sent back to them in a token gesture from their elected leaders in D.C., keep in mind, it is an election year. These checks represent little more than political pandering just before we head to the polls in November. The checks will do nothing to stimulate the economy or ease the burden of $4+ gasoline and lower home values.
The real stimulus will come from lower taxes.
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