Idea to Stimulate The Economy

Posted by Jeff Carter
on August 8th, 2011

The Federal Reserve is out of bullets. No surprise there. People are sick of federal spending to prop up the financial sector, and know the 800 billion dollar stimulus of March 2009 passed by Obama and the Democrats was a total fail.

What can we do to inject cash into the economy without running up debt?

As economists of all stripes will tell you, incentives matter. Taxes are simply incentives to behavior. Raise taxes, you will get less of that activity, lower them and you will get more of it.

Analysts have pointed continuously to the build up of corporate cash on balance sheets. It’s a phenomena not confined to tech companies that have always carried large cash balances, but also extends to every sector the economy.

Why is cash building up?

Companies can’t figure out a decent use for that cash to expand their business. They also are girding themselves to the corrosive effects of uncertain government policy like Obamacare and Dodd-Frank that will take place in the future.

Why not create ways for corporations to send that cash out into the economy and stimulate it without using the machinations of the Federal Reserve or more deficit spending?

Here are my simple proposals:

1. End the tax on corporate dividends. Make it 0%. Corporations and their fund shareholders don’t want to pay dividends because of taxes. Ending the tax will give them incentive to pay a dividend.

2. Put a tax on stock buybacks. Stock buybacks are meaningless actions. It’s the CFO waiving the white flag to the market indicating that they have no good use for the cash. They disguise it as a “payback to investors”, but long term holders of shares don’t benefit.

3. Decrease the corporate income tax to 0%, and tell companies that if they repatriate the trillions in cash sitting outside the US in foreign banks they won’t get taxed at high tax rates. This recognizes that corporations really don’t pay taxes. They are tax aggregators. They collect taxes from consumers, and remit them to the government. Robert Barro and other economists advocate for a 0% tax. Having 0% tax would also incent companies to expand in the US, not overseas creating jobs here (and possibly contributing to the end of the housing crisis)

Taxes are incentives. We already have been downgraded-so we need to aggressively act to get the economy growing. Because tax decreases give a 3:1 bump to GDP growth over a 1:1 bump from government spending, we need to re-jigger our tax code to design it for growth-not penalty.

Ending the tax on dividends and profits, and putting it on buybacks will force CEO’s to make a choice. Expand or distribute their cash to shareholders who can reinvest it in productive assets.

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