Pro-Growth or Scattershot Stimulus

The editors of National Review Online analyze President Obama’s flurry of new spending and tax proposals and find them wanting. From the excellent editorial, “Scattershot Stimulus,” which does a good job of drawing distinctions on the worthy R&D tax credit that others gloss over, while still calling for an extension of the 2001 and 2003 tax cuts.

Obama also proposes to expand and make permanent a tax credit for research-and-development expenditures. This would be an improvement over the status quo, under which this tax credit has been “temporary” for government accounting purposes but consistently reauthorized since its creation in 1981. By itself, the policy isn’t objectionable, but it’s being offered in exchange for a worse overall tax climate: The administration has almost certainly oversold the benefits of expanding the credit, which would be small compared to the costs of raising tax rates in a weak economy. Increasing tax rates on income, dividends, and capital gains, even if those hikes were confined to the top two brackets, would weaken incentives for some of the country’s most productive individuals and profitable small businesses to work, invest, hire, and grow. A slightly bigger write-off for R&D isn’t sufficient to cushion that blow, and business owners know it.

And, the conclusion:

If this summer’s employment and housing numbers heralded the death of the latest Keynesian revival, then Obama’s latest raft of stimulus proposals indicates that he has reached the bargaining stage of grief. He is tacitly acknowledging that tax relief is the best medicine for an ailing economy, but he is trying to hold on to the idea that government still knows best where that relief should be “targeted,” and he’s asking for just $50 billion more in new spending in exchange. He still thinks we should let the Bush tax cuts expire, even as key senators in his party and his own former OMB director have abandoned that view. The sooner Obama gets over the denial stage, reaches the acceptance stage, and embraces a pro-growth tax policy, the sooner we’ll exit the depression stage and get on the road to recovery. 

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