GOP Tax Cuts Won't Help Economy Says Nobel Winner

by Tim Shorrock

Recent drops in sales figures nationwide show "there's very little doubt we're in a recession," says Stiglitz. "The proposals from the White House and House Republicans don't address this country's needs."

"The September 11 attacks have brought us together," he adds. "It is not fair if a lot of the tax benefits go to a few rich people."

The House Ways and Means Committee, in a partisan vote of 23-14, passed the stimulus package. Its centerpiece is a tax cut, similar to one implemented during the summer, which would provide tax rebate checks to lower-income workers and accelerate tax reductions for middle- and high-income taxpayers. The bill goes to the full House this week.

The bulk of the Republican package -- $70 billion in tax credits -- will go to corporations through provisions to establish a permanent investment tax credit, eliminate the corporate alternate minimum tax, and cut the capital gains rate. Corporations will also be given accelerated tax write-offs for investments in plant and equipment. A special tax break was provided to financial services companies with operations abroad.

The importance of the tax breaks to the corporate sector could be seen Oct. 12 in the Ways and Means Committee hearing room, which overflowed with corporate lobbyists from, among others, industries including insurance, home building and oil and gas, as well as companies including General Electric. Its financial services subsidiary, GE Capital, has an enormous presence overseas.

To Stiglitz, who won his Nobel Prize for research into the imperfections of markets and their inability to allocate resources fairly, the bill is a classic example of his theories. Not only are the Republican proposals unfair, he says, they will not stimulate the new investments needed to create new jobs.

He is particularly critical of the tax reduction package for individuals in the 28 percent tax bracket.

How much will a worker making $50,000 a year, say a New York City firefighter, get from this? "Zero," says Stiglitz. "But a modest person trying to get along on a $5 million income? Over four years they'll save $600,000."

As for the lower-income bracket, Stiglitz says the Bush tax refund last summer, which provided about $600 to families, had "almost no impact on national consumption."

"Just think about the inequity," he says.

Nevertheless, Republicans say the bill will get the U.S. economy back on track. The package "carefully balances the need for an immediate and vigorous jump-start with recognition of the long-term repercussions on the federal budget," says Rep. Bill Thomas, Republican chairman of the Ways and Means Committee. "The depth and duration of a recession can be minimized with concrete action."

Similarly, the benefits of proposals to reduce the corporate minimum tax and capital gains tax will accrue to "old capital, old investments" made five or even 10 years ago. In any case, "80 percent of the gains go to about two percent of the population," he says.

Congress, Stiglitz says, must recognize that a recession has already begun and pass a "low-cost stimulus" that gets "the biggest bang for the buck," with benefits evenly provided.

First and foremost, he argues, Congress must extend the duration and magnitude of unemployment benefits. "Our safety net is gone," he says. "Our first priority should be full employment."

Second, any investment tax incentive must be temporary, designed to "encourage people to make the investment today when the economy needs it."

Third, the package should expand federal revenue sharing with states and local governments, helping them avoid the inevitable cutbacks during a slowdown "that affect every segment of society," particularly in health care and education programs.

Finally, Congress should focus expenditures on "high return areas" in the public sector, which Stiglitz says has been "starved" for investment. The nation's air traffic control system and inner-city public schools should be first in line.

Stiglitz also criticizes recent legislation bailing out the airline industry. U.S. carriers, he says, "have used Sept. 11 to resolve problems of their own making. Corporate welfare has increased under the current administration. If we try to undo the impact of every change that has occurred, this is not a market economy."

Democratic leaders are opposed to the Republican bill and hope to negotiate a better package after the House approves the legislation and sends it to the Senate. Like Stiglitz, the Democrats say the bill provides too much for business and not enough assistance for the unemployed.

Stiglitz was chairman of the Council of Economic Advisers under President Bill Clinton. He was later appointed chief economist at the World Bank, where he rattled top U.S. Treasury officials with his public critique of the International Monetary Fund's policies in Asia and Russia. He was fired from that position in 2000 and returned to academia. Stiglitz is now a professor of economics at Columbia University in New York City. He spoke with IPS on a visit to Washington.