First Stimulate the Economy, Then Cut Taxes

by Jonathan Berr | November 1, 2011 2:16 pm

Forget about Herman Cain’s “9-9-9 Plan” or Rick Perry’s “flat tax” — the best way to jump-start the economy is the “Sullivan Plan,” which calls for tax reform to be shelved until the economy has recovered further.

The idea that writer Martin A. Sullivan is proposing is a simple but powerful one. Too often, tax reform plans are done in a vacuum without considering their long-term consequences. Cain was forced to tweak the 9-9-9 plan after experts realized that 84% of Americans would see their taxes go up[1] if it were enacted. Under Perry’s optional 20% flat tax, federal revenue would be slashed by 27% in 2015[2]. Critics claim that the Texas governor’s proposal would benefit the richest Americans at the expense of everyone else.

While the tax code does need reform, creating more jobs is a far more pressing problem. Unfortunately, there is no bipartisan agreement on how to do it. With Washington gridlocked by partisan rancor and both President Barack Obama and Congress at or near record low job approval ratings, odds of any complicated legislation being enacted before the 2012 election are slim to none.

Tax reform is one of the most difficult legislative tasks possible — something reserved for popular second-term presidents with a growing economy and a good working relationship with Congress,” Sullivan wrote in an article for[3]. “Tax reform will again make sense when unemployment and debt are under control or, at a minimum, there is political consensus on the general approach for getting there.”

Sullivan points out that the U.S. can’t cut its way to prosperity just like a private company can’t cut its way to sustained profitability. The American economy needs to be stimulated by increasing — not decreasing — federal spending. Like other mainstream commentators, Sullivan argues that the Obama administration’s $787 billion stimulus plan in 2009 probably prevented the second Great Depression. The time is right for stimulus.

“Stimulus is not an economic policy for all seasons. But conditions now, unfortunately, are perfect.” Sullivan wrote. “Inflation is low. Unemployment is high. Confidence is shot. Interest rates have hit rock bottom, and still business and consumers are not spending.”

The problem is figuring out how much stimulus is enough. As Ezra Klein noted in her Washington Post blog[4] several months ago, a “back of the envelope” calculation shows that for every $100 billion in stimulus spending, 1 million jobs are created for one year. Theoretically, it would shave about one-half a percentage point off the unemployment rate, which is stuck above 9%.

There were about 14 million unemployed people in the United States as of October. Though pouring about $14 trillion into the economy theoretically would put these people all back to work, that is neither feasible nor wise. For one thing, the government wouldn’t be able to spend that amount of money — nearly five times the $3.729 trillion the federal government is slated to spend in the current fiscal year. Moreover, inflation would skyrocket and it would cause the deficit to soar.

The economy, however, easily could handle a spending jolt about the same size of the 2009 plan without breaking too much of an economic sweat (though it certainly would cause a political one). Even modest stimulus measures such as Obama’s recent $300 billion plan have been rejected outright. Meanwhile, the economy continues to lumber along so slowly that many don’t believe a recovery is occurring. And who can blame them? In September, employers created 103,000 non-farm jobs[5]. Though that seems impressive, it really isn’t given that about 45,000 of those jobs were generated because the Verizon (NYSE:VZ[6]) strike ended.

“We need to get the economy up off the floor,” said Chad Stone, chief economist at the think tank Center on Budget and Policy Priorities, in an interview.

That’s easier said than done.

As of this writing, Jonathan Berr did not own a position in any of the aforementioned stocks. Follow him on Twitter at @jdberr.

  1. 84% of Americans would see their taxes go up:
  2. would be slashed by 27% in 2015:
  3. an article for
  4. noted in her Washington Post blog:
  5. created 103,000 non-farm jobs:
  6. VZ:

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