Harvard Economist Rips Economic Stimulus Bill

Published April 1, 2009

Economist Robert Barro of Harvard University calls the stimulus bill “a terrible piece of legislation.”

In a Tax Foundation podcast interview, Barro attacked both the tax and spending aspects of the bill, saying neither element is likely to spark the economic growth touted by President Barack Obama and other supporters.

“I think it’s a terrible piece of legislation, really on both sides, that is the expenditure side and on what they purport to have as a tax reduction side. I don’t think it’s going to help the economy on either dimension,” Barro said.

‘Hardly Any Tax Cuts’

Barro said the bill’s tax provisions are “not really cuts in taxes that matter in terms of incentives. People need to understand the difference between changes in tax rates, so a cut in the marginal rate on income has an incentive effect motivating people to do things like work harder, maybe do more investment, produce more goods and services[;] … there’s really hardly anything of that type in this bill.”

Instead, much of what is being called tax cuts in the bill is really another form of spending, Barro says, because it’s mostly “redistribution of income from the rich to the poor” through the earned income tax credit and other measures.

“The transfer part, which is what they call tax reduction, is really just another form of expenditure, so it’s almost all a spending bill,” Barro said.

Barro also objects to the temporary nature of the tax changes in the stimulus bill. He says it is important to have a stable tax structure.

“I am not a big fan of the recently departed President Bush, but I think the 2003 legislation is the one really effective economic program he put forward,” Barro said. “That was basically a program of cutting marginal income tax rates, particularly on forms of capital income such as dividends, and that was put in as more or less a permanent change in the structure, so people could count on what the structure was.”

Tax Cuts Spurred Growth

Barro noted strong economic growth occurred after long-lasting cuts in income tax rates in the 1980s and 1960s.

“It’s very unfair that Obama has blamed [the 2003 tax cuts] for part of the current financial collapse,” Barro said. “There is really no linkage between the tax-rate-cutting program of 2003 and the financial housing collapse that we have seen in recent months.”

Barro also fears the economic impact of the federal government’s soaring budget deficit, projected to approach $2 trillion this year, and the soaring national debt, already near $11 trillion.

“Even if there had been no financial crisis, no macroeconomic problem, we were on a path where tax rates were going to have to be rising from the federal government,” Barro said. “And now we are piling on top of that this very substantial increase in the national debt, which is going to require further tax increases to finance that debt. So we are certainly on a path where tax rates are going to be rising considerably.”

Barro says Obama and Congress are “really just taking political advantage of the situation to basically put out a lot of spending and transfer programs that Democrat officeholders wanted to do anyhow, dramatically expanding the role of the government in the economy, particularly in ways that don’t seem to be helpful. It’s obviously a big advance in what looks like socialism, which is also what happened [in] the 1930s.”

‘Poor Form of Taxation’

Barro said lawmakers would have done much better by abolishing the corporate income tax, which he called “a very poor form of taxation.” He said ending the corporate tax, which consumers ultimately pay through higher prices, “would have been a tremendous positive signal to the business sector, to the stock market; it would have had a big positive effect.”

Barro expects even worse action to come. “They’re probably going to throw in more subsidy-type programs that would make things worse.”

Robert Carroll ([email protected]) is vice president for economic policy at the Tax Foundation.

For more information …

Tax Foundation podcast on the economic stimulus bill with Professor Robert Barro of Harvard University: http://www.taxfoundation.org/podcasts/podcast20090218.mp3