Different Views Of Stimulus Plans

Last night I wrote a post about Obama's plan for economic recovery. It's heavy on spending and light on tax cuts. This morning there's a little more information that highlights the differing views as to how the problem should be approached. One involves the British solution and the other points out a growing divide between the Democrats and Republicans on the issue.

First, the U.K. is opting for tax cuts to drive their stimulus program. News reports are that the VAT will be cut from 17.5% to 15% which is the lowest level allowed under European Union rules. There are a few other tax measures as well including a tax rebate to low-income workers and a tax exemption on foreign dividends. Interestingly, the Conservatives are coming out against the plan arguing that it is going to produce a "tax bombshell" in a couple of years.

Contrast that plan with the Obama plan which is very heavy on stimulus spending some of it highly targeted towards green industries. Today, the Republican minority made it somewhat clear that they favor the British approach. John Boehner, a Republican member of the House from Ohio, suggested that cutting capital gains taxes and the corporate tax rate would be the preferred method of increasing employment. He proposal for capital gains relief specifically proposed that any equities purchased over the next two years ought to be exempt from capital gains taxation.

Personally, I feel the British probably got this one right much as they did with their solution to the banking crisis. Grandiose stimulus spending plans tend to be hijacked to some extent by special interests so that the overall impact is lessened. Moreover, to the extent it is targeted on specific industries, particularly when those industries are in their infancy, the beneficial affects tend to be muted. Tax cuts take the discretionary element away from politicians and allow the market to allocate the benefits.

But don't expect the Democrats to follow the British. There are far too many campaign debts to be paid and central planning is an idea whose time has come, at least for a while.

Tom Lindmark

more: U.S. Plan, British Plan