Alternative stimulus plans

Over at Marginal Revolution, Alex Tabarrok has some suggestions

1) Investment Tax Credit Unlike traditional fiscal policy an investment tax credit cannot be fully crowded out and it works best when it is expected to be temporary. Cuts in income taxes stimulate the least when they are expected to be temporary. But in contrast, an investment tax credit stimulates the most when it is expected to be temporary because a temporary credit must be used now or lost while a permanent credit gives you the option to wait.

2) A supply side stimulus: The IRS knows how much income that each taxpayer reported last year. So let's cut everyone's marginal tax rate based on last year's income. In other words, suppose that last year Joe earned $66,520 which puts him in a 25% tax bracket. Joe's tax schedule this year will be exactly the same as last year except for every dollar earned above $66,520 the tax rate drops to 15%. We do this for all taxpayers so that each taxpayer has their own schedule and for each taxpayer there is a decreasing marginal tax rate.Note that this plan increases the incentive to work and it doesn't increase the deficit. In fact, the Tabarrok plan increases tax revenues! The key is a marginal tax cut with a different margin for every taxpayer based upon last year's return.

3). A cut in the payroll tax ala Singapore. If employment is down reduce the cost of employing labor. This policy has lot to recommend it because unlike a fiscal stimulus it lets the reallocation process work towards its long run equilibrium. A construction stimulus, for example, pushes people into construction (or keeps them there) when perhaps labor could ultimately be more productive in other sectors of the economy. The payroll tax cut enhances this reallocation effort it doesn't impede it.

4) Don't Panic. This is the policy that has cured most recessions. The do anything and do it now mindset feeds panic. I do think this recession will be longer than average and quite deep, it is a concern that it is worldwide. But recessions are normal and we have unemployment insurance and other assistance programs to help people through tough times. The economy will recover and its very possible to make things worse by trying to make things better.