The voices of Tax Policy Center's researchers and staff
The leaders of both the House and Senate are exploring options for an economic stimulus plan they would unveil if the economy continues to weaken in 2008, TaxVox has learned.
The talks, still in their early stages, could trigger a major election-year battle over fiscal policy. While neither party has settled on a plan, congressional Republicans are likely to propose new tax breaks as well an extension of the 2001 Bush tax cuts. Democrats are looking at a mix of tax cuts and other measures that they'd attach to targeted relief for those hardest hit by the mortgage mess.
Some Democrats are reluctant to go down the stimulus road. They fear they will be forced into a position where they will either have to accept big GOP tax cuts as the price of passing a measure, or be blamed for failing to act in the face of a stagnant economy. For now, one Democratic strategist told me, "This is a defensive exercise. We need to have something ready when Republicans start beating the drum for new tax cuts."
House Speaker Nancy Pelosi has given Financial Services Committee Chairman Barney Frank (D-Mass.) the lead role in designing a plan. So far, at least, Ways & Means Committee Chairman Charlie Rangel (D-N.Y.) has expressed more interest in pursuing his broad-based tax reform plan than in a pushing tax stimulus.
In the Senate, aides to Majority Leader Harry Reid (D-Nev) have begun shopping for ideas among Democratic activists. Like Rangel, Finance Committee Chairman Max Baucus (D-Mont.) also prefers far-reaching tax and health reform to short-term stimulus.
However, influential Democrats such as former Treasury Secretary Larry Summers are worried about the U.S. falling into recession. Summers has called for temporary tax cuts of up to $75 billion, along with extension of unemployment insurance, expansion of food stamps, and relief for subprime mortgage borrowers.
If Congress heads down the stimulus road, it must be very careful. First, it should provide help while the nation still needs it, rather than pouring money into an already-expanding economy. Too often, stimulus isn't passed until after the economy rebounds.
Second, lawmakers must properly target the relief and not just toss tax breaks around like baubles at a Mardi Gras parade. For instance, if they want increase business investment to boost a slow economy, temporary tax incentives work far better than permanent ones.
Third, policymakers can't ignore long-term budget consequences of their actions. Even if stimulus is necessary, permanent tax cuts or new spending may do little more than add to the nation's debt without helping in the short-run. For instance, it is hard to see how cutting taxes in 2011—which would be the result of extending the 2001 tax cuts—would improve today's economy. But it is easy to see how it would increase deficits.
By jumping into the stimulus battle, Congress will be playing a perilous game, both economically and politically. It needs to be very careful.
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