Stimulating Tax Policy

One vexing problem with the state of politics today is the lack of concern for the long-term.  Politicians find themselves more concerned with the short-term to get them past the next election, instead of looking at the long-term for the benefit of the next generation.  Our current economic situation in Missouri and across our great Nation is no exception.

It is troubling when high level staff members begin salivating over an economic crisis to make political gain and fret over the possibility of losing such an opportunity to promote an agenda that is anathema to our uniquely American experience.

The federal government, under administrations from both major political parties has embraced a form economics which, in simple terms, says that governments should spend money that they don’t have and that this spending is the pavement on the road to prosperity.  This brand of Keynesian economics is named after John Maynard Keynes whose economic theory assisted President Franklin D. Roosevelt to prolong what we now know as the Great Depression of the 1930’s.

The federal government has also promoted the Broken Window fallacy as part of its economic policy by promoting what is seen versus what is unseen.  As French economist Frederic Bastiat explained, "There is only one difference between a bad economist and a good one:  The bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen."

Keynesian economics combined with the Broken Window fallacy may reap a short-term benefit to some, but it will fail to achieve long-term prosperity for a Nation.

Missouri is expected to receive up to $4 billion from the federal government through the American Recovery and Investment Act of 2009.  Of that $4 billion, approximately $1.2 billion is available without too many strings.  Missouri state government, compared to other states, is weathering this economic downturn.  We don’t need this money to stay afloat and Missouri has met the “maintenance of effort” requirements of the federal act allowing us flexibility in the use of that money.

We now have three basic choices:  return the money to Washington, spend it on pet projects, or return the money to the people of Missouri in the form of a rebate.

There are advocates for each of these alternatives.  Returning the money isn’t an option, because it will be directed to other states and still get spent by Washington saving us nothing.

Spending the money on pet projects will do little, if anything, to create jobs.  Government doesn’t create jobs, people do and we should not lose sight of that.  Unfortunately, many politicians believe otherwise.  Most of these pet projects are capital improvement projects which benefit only one industry and then only marginally.  Government “make work” projects are temporary and will not achieve the fabled “multiplier effect” sought after by the Keynesian.

On the other hand, there are a few capital projects that need our attention, e.g. a statewide interoperability system.  A project such as this is a long-term asset for the public good, but these projects should be few in any spending plan.

This brings the discussion of using a sizeable amount of the $1.2 billion to put money back in the pockets of Missourians in the form of a rebate.  This is exactly what Washington does not want us to do with the money, which means it is probably the best route to take.

Admittedly, a rebate by itself won’t work in stimulating the economy due to its temporary nature in a families’ disposable income.  The last federal rebate did not increase consumption or stimulate aggregate demand.  It did help families with meeting monthly expenses, paying down some debt, or putting the money into savings - all good things.

This money gives Missouri an opportunity to provide real stimulus for Missourians.  A rebate, coupled with a permanent tax cut will stimulate Missouri’s economy and help Missouri families.  This past week, the Missouri House passed a permanent income tax cut and that bill is now in the Senate for consideration.

The General Assembly has an opportunity to put into place a stimulus package that will work by combining a one-time tax rebate for each Missouri income tax filer and passing a permanent income tax cut.  This approach is lasting; a permanent income tax cut isn’t a blip on the screen for Missouri families’ disposable income.  It is pervasive throughout the economy benefiting individuals and businesses, especially small businesses in each of our communities and denies the government from picking winners and losers. 

It is also predictable in the long-term, Missouri families and businesses will know what to expect in the years to come.  There will not be a question of whether a government check will come in the mail alleviating the erratic, politically driven government interventions seen to date, the tax code will remain beneficial to our pocketbooks beyond the rebate check.

Short-term fiscal policies will fail to promote long-term growth.  These proposals are intended to allow people keep more of their own money, to allow them to make decisions for themselves and their families, to give individuals more liberty in their consumption, savings, and debt retirement.