Yesterday John McCain, harvesting votes in South Carolina, offered his vision of an economic stimulus package: a tax cut triple play. But while the plan sounds great for businesses large and small, it's unclear how it might ward off a looming recession.
McCain's first priority is to slash the corporate income tax rate from 35 percent to 25 percent. Other countries have lowered their rates, he says, leaving the U.S. behind. Among developed economies, "only Japan has a higher corporate tax rate," he said in Columbia (I'm paraphrasing here), "and they're stuck in a recession." Next, he wants to allow firms to expense new equipment in a single year. According to the statement accompanying the proposal, "a recent estimate of a modest expensing provision predicted a gain of 1.5 percent in long term economic growth" and "eliminate the need for complicated accounting for depreciation." Finally, he wants to establish a permanent tax credit "equal to ten percent of wages spent on R&D."
Entrepreneurs will cheer, but what does this have to do with the crisis at hand? The president, speaking today at the White House, insisted that a "growth package" stimulate both business investment and consumer spending. The McCain campaign claims an indirect effect. "Recent studies have shown that corporate taxes are in large part passed on to labor through lower wages," says the release. "Accordingly, cutting corporate taxes can increase wages for American workers." How about it, Inc. entrepreneurs: if your taxes were lowered, would you raise wages? Be honest.
Notably absent from McCain's plan were the tax rebates that are thought to be the most effective way to jump-start the economy quickly. CNN reported this morning that after the $300 tax rebate in 2001, 20 to 40 percent of those checks were cashed within days. Consumers saved about a third of it; two-thirds entered the economy within two quarters. Today the president voiced his support for "direct and rapid income tax relief for the American people," and on this he has the backing of the Democrats who control Congress. (Although they seem less generous: CNN reported the president was considering rebates in the neighborhood of $800-$1,600, while Congressional leaders were at $500.) With rebates the talk of Washington and foreclosure moratoriums the talk of the Democratic presidential candidates, it will be interesting to see if average Americans are willing to board the Straight Talk Express.