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December 13, 2002, 9:00 a.m. Kerry’s Tax Plan A “gift” that keeps on taking.

residential hopeful and Sen. John Kerry (D., Mass.) is trying to spread some Yuletide cheer by supporting a “payroll tax holiday” as part of a so-called economic-stimulus package. This element of Kerry’s plan, a form of which was sponsored in 2002 by Sen. Pete Domenici (R., N.M.), ensures that workers and employers would not pay payroll taxes on a portion of their earnings. Such legislation is sure to surface again in the new year.

Kerry adamantly states, “We need to give a tax break now, today . . . to move our economy forward in the form of a payroll-tax [rebate].” He concludes, “It puts more money in people’s pockets than the president’s plan, which is mostly [for] the wealthy people and mostly down the road.” Of course, this statement overlooks the fact that the top tenth of Americans pay two-thirds of all income taxes, and Kerry opposes accelerating Bush’s tax cut anyway.

Exactly why Kerry (and some members of the GOP) continue to embrace stale Keynesian economics is somewhat unclear, but the love affair shows no signs of stopping. The failure of President Ford’s rebates to stimulate the economy in the mid-70s should have convinced policy makers not to propose this tired remedy. In addition, the 2001 rebate checks provide confirmation that it takes more than a temporary cash infusion to get an economy back on its feet.

The problems with one-time rebates or "holidays" are many. As Nobel Laureate economist Milton Friedman proved, consumer consumption is a function of a person’s “permanent income” — that is what a person perceives their long-term earnings to be. Therefore, temporary fluctuations in wealth will have little, or no, effect on their spending. Uneasy about their future economic status, most Americans will use the extra cash to pay off debt or will put it in their piggybank, instead of spending it.

Even if some Americans do use the money to buy their child a G.I. Joe with the Kung-Fu grip at the after-holiday sales, this would have little effect on the economy. To begin with, the amount of money flowing into the economy would be relatively small in the grand scheme of things, and it would be a one-time surge. This will not cause any businesses to expand, create new full-time jobs, or increase investment.

Kerry seems to acknowledge this problem by proposing limited and targeted tax incentives for selected businesses. But the plan would often take away much more than it gives by halting future scheduled tax-rate reductions originally enacted in 2001. Since many small businesses file under the personal income-tax system, this is a trade-off that will hurt, not help, most members of this vital job-creating sector.

Furthermore, our current recession has never been a consumption-based downturn. Despite a few fluctuations, consumer confidence has remained fairly steady throughout. Retailers are already celebrating a boom in holiday sales — Wal-Mart alone racked up over $1.4 billion the day after Thanksgiving.

The problem lies in the entire business sector’s unwillingness to invest on a sufficient level after the 2001 market correction. Last year’s attack on the very heart of our country’s financial markets, and the uncertainty over a possible war with Iraq, continue to leave investors nervous.

To address these doldrums, Washington should immediately, and permanently, reduce corporate and personal income-tax rates and capital-gains tax rates. It should also repeal the hideously complex and burdensome alternative minimum tax. Finally, Congress must end the double taxation of dividends. These actions will allow the economy to recover by encouraging work and investment.

If, in addition, Washington wants to give us a temporary tax holiday as a belated Christmas present, all the better. We deserve it. Taxpayers have been especially good in 2002 — forking over billions to bureaucrats without complaint. Passing the payroll-tax holiday instead of the other tax cuts, however, would equal a big lump of coal we’ll lament year-long. Whether it comes from Congress or a presidential candidate, it’s also a “gift” that’ll leave us longing for something better.

— Eric V. Schlecht is director of congressional relations for the National Taxpayers Union.