Editorials and Opinion Pieces

The Tax Cut We Need Now

BY: Grover Norquist, & Jeffrey Eisenach, special to the Washington Times
DATE: November 4, 2001
SECTION: PART B; COMMENTARY; FORUM; Pg. B5
LENGTH: 799 words

With bad economic news arriving daily, an economic stimulus package cannot be far behind. Liberal Democrats see the package as another opportunity to grow the government through more spending, but economists, congressional Republicans and the president all agree the way to kick-start the economy is to cut taxes. The question is: What tax cuts are needed now?

One part of the answer: A national sales tax holiday to kick off the Christmas shopping season. It's "fair," it's temporary, and most importantly, it will provide exactly the kind of immediate stimulus our shell-shocked economy needs now. The problem economic policymakers face today is nearly unprecedented. While the U.S. economy remains fundamentally sound, consumers, jacked in to "America at War" on their TV sets and worried about their jobs, are afraid to spend. Same-store sales are down between 10 percent and 20 percent at major U.S. retailers compared with a year ago. High-tech, which was in a virtual depression before September 11, is especially hard-hit, with companies like Gateway2000 and Sun Microsystems issuing repeated earnings warnings and layoff announcements. As CEA Chairman Glenn Hubbard put it, economic stimulus is needed "sooner rather than later."

There's no question tax cuts stimulate economic growth, and little disagreement among economists that permanent cuts in marginal tax rates generally have the biggest effects. Cutting marginal rates gives people incentives to work harder, invest more aggressively, create more wealth and hire more people.

That's why, in a perfect world, the best policy would be to accelerate President Bush's tax cuts, putting immediately into effect the lower rates currently scheduled to phase in over a decade. Add to that a repeal of the capital gains tax and some long-needed reforms in depreciation rules for business and you would have a supply-side package that would, without any question, have both a short-run and a long-run effect on economic growth.

But that package is not in the cards. Liberals are too hooked on class warfare to even consider marginal rate cuts, and the more they give the more they will demand in the way of bigger government as part of the bargain. Then there are the so-called "fiscal conservatives" in both parties. Still fixated on static projections of budget deficits 10 years from now - go figure - they are prepared to block any permanent tax cut large enough to give the economy the boost it needs. The political reality is that the $60 billion President Bush has asked for represents the upper limit on a tax cut package whose goal is to give a substantial boost to a $10 trillion economy.

Lost cause? Only if we stick to the ideas currently on the table. While some of these have merit and ought to be part of any package, including the modest depreciation reforms and slight acceleration of marginal rate cuts being proposed by the White House, they clearly aren't going to provide the sharp kick in the derriere the economy needs now.

One proposal now making the rounds on Capitol Hill and the White House will do the job. Eight states, including Florida, Pennsylvania, South Carolina and Texas, have implemented so-called "sales tax holidays." For a brief period, usually a week, states lift their sales taxes on some or all products. The results are truly dramatic, boosting retail sales by 50 percent or more - and sometimes as much as tenfold.

The proposal now being put forward, with especially strong support from computer manufacturers and high-tech retailers, is to take the sales tax holiday national to kick off the Christmas shopping season: Seven days without sales taxes, anywhere in the nation for any product, starting the day after Thanksgiving. Lost revenues to the states, in the neighborhood of $5 billion, would be reimbursed by the Federal government as part of the $60 billion stimulus package.

Because sales taxes are inherently regressive, a sales tax holiday should meet liberal concerns about "fairness." Because the cut is temporary, it should satisfy fiscal conservatives. And because it directly affects the prices people pay for things they need, it will change consumer incentives.

But the real impact of the sales tax holiday idea goes beyond economics and politics to the heart of the current matter: consumer psychology. What America's economy needs now is a good Christmas shopping spree, with long lines at cash registers and big piles around the tree.

Osama bin Laden would call it another example of our materialistic decadence. All the more reason, we think, for Americans to have a bountiful Holiday.

Mr. Eisenach is President of the Progress & Freedom Foundation.