WASHINGTON – Economic stimulus proposals favored by Democrats, including tax rebates, extended unemployment benefits and a temporary increase in food stamps, are cost-effective ways for Congress to try to boost the economy, the Congressional Budget Office said Tuesday.
At the same time, the CBO said, some options floated by Republicans, such as extending President Bush’s tax cuts, cutting corporate tax rates and giving businesses new incentives to invest, may be less cost-effective in the short term.
The nonpartisan CBO echoed the views of many economists who say the most effective way to stimulate the economy is to provide money – either through tax cuts or direct payments such as food stamps – to people most likely to spend it quickly.
The CBO provides economic and budgetary analysis to Congress. Tuesday’s study was requested by Senate Budget Committee Chairman Kent Conrad, D-N.D., and House Budget Committee Chairman John Spratt, D-S.C.
The study said lump-sum tax rebates like the $300-600 rebates delivered to taxpayers in 2001 are among the more cost-effective ways for Congress to jump-start the economy, though the CBO cautioned that rebates are more effective when given to middle- and lower-income taxpayers more likely to spend it.
The CBO also gave high marks to cash payments to the poor and the unemployed as cost-effective ways to stimulate the economy. During recessions, Congress regularly extends unemployment benefits beyond the 26-week limit. Democrats are eyeing a temporary boost in food stamp benefits.
“When the economy is weak, the key impediment to economic growth is how much demand there is,” CBO Director Peter Orszag said. “And from that perspective what you want to do is get money to people who are going to spend it really fast.”
Rep. Roy Blunt of Missouri, the No. 2 Republican in the House, said Tuesday he supports tax rebates between $250-500 for individuals combined with temporary increases in tax cuts aimed at promoting business investment. Rep. Eric Cantor, R-Va., proposed cutting the tax rate on corporate income from 35 percent to 25 percent.
The CBO said such state aid works best if it prevents states from cutting spending or raising taxes in response to budget shortfalls that often occur during economic down times.
Republicans took issue with the CBO’s conclusions.
“Not only has consumer spending pulled back but we’ve seen a drop off in the major capital expenditures,” House GOP Conference Chairman Adam Putnam of Florida said Tuesday. “So whatever we move forward with needs to strike that balance between business and consumer spending.”