CNBC host Erin Burnett asserted that there were "interesting ideas" in Rush Limbaugh's Wall Street Journal op-ed criticizing President Obama's economic recovery plan and offering Limbaugh's own suggestions for what should be included in a stimulus plan. Specifically, Burnett said that Limbaugh's suggestions of "cutting the corporate tax" and "slashing capital gains [taxes]" are "serious things to say." But Burnett did not note that many economists do not view corporate and capital gains tax cuts as "serious" or effective methods for stimulating the economy.
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During the January 29 edition of MSNBC Live, CNBC host Erin Burnett asserted that there were "interesting ideas" in conservative radio host Rush Limbaugh's January 29 Wall Street Journal op-ed criticizing President Obama's economic recovery plan and offering Limbaugh's own suggestions for what should be included in a stimulus plan. Specifically, Burnett said that Limbaugh's suggestions of "cutting the corporate tax" and "slashing capital gains [taxes]" are "serious things to say." But Burnett did not note that many economists do not view corporate and capital gains tax cuts as "serious" or effective methods for stimulating the economy.
In his op-ed, Limbaugh wrote:
I say, cut the U.S. corporate tax rate -- at 35%, among the highest of all industrialized nations -- in half. Suspend the capital gains tax for a year to incentivize new investment, after which it would be reimposed at 10%. Then get out of the way! Once Wall Street starts ticking up 500 points a day, the rest of the private sector will follow.
"[C]utting the corporate tax rate"
According to a January 2008 Congressional Budget Office (CBO) report, "Options for Responding to Short-Term Economic Weakness," "a reduction in the corporate tax rate" is "not a particularly cost-effective method of stimulating business spending" because "[i]ncreasing the after-tax income of businesses typically does not create an incentive for them to spend more on labor or to produce more, because production depends on the ability to sell output." Indeed, Mark Zandi -- the chief economist and co-founder of Moody's Economy.com, who was reportedly a McCain campaign economic adviser -- included in 2008 written congressional testimony a table stating that every dollar spent through a "Cut in [the] Corporate Tax Rate" produces a GDP increase of only $0.30 -- the third least-efficient provision of the 13 he studied.
In the table included with his testimony, Zandi lists only "Accelerated Depreciation" and "Make Bush Income Tax Cuts Permanent" as having a lower "Fiscal Economic Bank for the Buck" than a "Cut in Corporate Tax Rate":
Additionally, in a January 23, 2009, report, Center on Budget and Policy Priorities (CBPP) research fellow Chye-Ching Huang wrote that "[n]umerous government and independent studies agree that corporate tax rate cuts provide relatively little 'bang-for-the-buck' as stimulus." Huang also wrote:
Cutting corporate tax rates on a temporary basis, as some have suggested, could even discourage investment. Cutting tax rates reduces the value of deductions that companies claim when they invest, make other purchases, pay wages, or depreciate equipment; for example, a $1,000 deduction is worth $350 at the current 35 percent corporate tax rate but would be worth only $250 at a 25 percent rate. If tax rates were cut on a temporary basis, companies would have an incentive to delay investments until the rate returned to 35 percent and deductions regained their lost value.
A permanent corporate rate cut would not have this disincentive effect. But neither would it provide timely stimulus, because it would provide no incentive for businesses to speed up investments. Firms could keep investments on the timeline already planned -- or even delay investments until the economy recovered -- and still get the benefits of the rate cut. Furthermore, a permanent rate cut, if deficit financed, would worsen the long-run budget outlook, which could hurt the economy over the long term.
"[S]lashing capital gains [taxes]"
According to a 2003 Congressional Research Service (CRS) report: "A capital gains tax cut appears the least likely of any permanent tax cut to stimulate the economy in the short run; a temporary capital gains tax cut is unlikely to provide any stimulus." Indeed, CRS stated under the heading of "Effects on the Economy" of "Permanent Tax Cuts" that "[t]here are reasons to expect that capital gains tax cuts would have the smallest stimulative effect on the economy of virtually any fiscal stimulus option."
Additionally, in a January 15 CBPP report, Huang and executive director Robert Greenstein wrote that "a capital gains tax cut is unlikely to release new resources that consumers would quickly spend":
Any windfall that taxpayers receive from a capital gains tax cut is unlikely to be spent quickly. The main beneficiaries of capital gains tax cuts would be high-income taxpayers, who own the vast majority of assets. For example, the Urban-Brookings Tax Policy Center has estimated that 98 percent of the benefit of temporarily cutting the capital gains rate in half would flow to the top 20 percent of households; 75 percent of the benefit would flow just to the top 1 percent of households.
The fact that capital gains tax cuts go mostly to high-income households makes them very poor stimulus, since high-income households are much more likely than low-income households to save rather than spend a significant portion of any new resources they receive. To boost consumer spending, stimulus resources should be directed at those who will spend these funds quickly.
From the 3 p.m. ET hour of the January 29 edition of MSNBC Live:
NORAH O'DONNELL (anchor): I want to bring in Erin Burnett, of course, with CNBC. And Erin, I know you spoke with Rush Limbaugh today. He is trying to be a voice on the stimulus, calling it the "porkulus" bill.
O'DONNELL: What did he tell you today?
BURNETT: You know, it was very interesting, Norah. I think, you know, recently he's gotten a lot of commentary for making a statement along the lines of he hoped Obama would fail. And I think in the interview with us today, he was very specific to say he supported the president, he just doesn't support his policies. So, I think it's clear he's trying to make a real policy statement here, rather than just saying something outrageous.
And when you actually read the op-ed that he wrote in The Wall Street Journal, there were some interesting ideas in there. One of them was cutting the corporate tax. That's not something in there, but a lot of lawmakers and economists think it could be a good idea. Another idea he had was slashing capital gains. So both of those are serious things to say.
And Norah, it brings me to your -- when you were talking with a couple of the people in Congress. You know, I spoke to [Sen.] Richard Shelby [R-AL] a few minutes ago, and he said he hopes no Republican votes for this. I don't know if it's too much to say that there's a mutiny here, but there is a real dissatisfaction, not just among Republicans but a lot of moderate Democrats, about what's actually in this stimulus, and that maybe it's a lot more of the same rather than something that signals change and a new way of thinking about things.