What kind of stimulus package?

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As the U.S. economy has reeled from one setback after another during recent weeks, presidential candidates, congressional leaders, the chairman of the Federal Reserve, other eminent economists and now President Bush himself have offered guidelines for short-term remedies in an increasingly desperate effort either to prevent the onset of a recession in an election year or to mitigate the effects of an economic downturn that may have already begun.

Bloomberg.com reported Thursday that President Bush wanted to eliminate the 10 percent tax bracket for 2008. Since the 10 percent rate this year applies to the first $8,025 of taxable income for singles, $11,450 for household heads and $16,050 for married couples (before consideration of the $1,000-per-child tax credit), eliminating the 10 percent bracket would provide maximum tax relief of about $800 for singles, $1,150 for household heads and $1,600 for married couples.

On Friday, when the White House issued its list of principles to guide congressional deliberations in the crafting of a bipartisan stimulus plan, no specific, dollar-denominated proposals were included. The White House statement, however, did declare that "an effective growth package" should include (1) "tax incentives for American businesses — including small businesses — to make investments in their enterprises this year" and (2) "direct and rapid income-tax relief for the American people." Notwithstanding the absence of specificity, it is widely believed that President Bush still strongly favors eliminating the 10 percent tax bracket.

Pointedly — and contrary to the recommendations of many congressional Republicans, several GOP presidential candidates and the supply-side economics community — the president did not even bother to argue for including within the stimulus package a permanent extension of his signature 2001 and 2003 tax cuts, which are not scheduled to expire until the end of 2010, three years from now. Had such a demand been made, it would have been a deal-breaker for Democrats.

Equally noteworthy was the fact that the White House did not recommend an immediate cut in the top corporate income-tax rate of 35 percent. Many Republican members of Congress and supply-side economists have been strongly advocating such a cut for a long time. More recently, four Republican presidential candidates — John McCain, Mitt Romney, Fred Thompson and Rudy Giuliani — have each embraced a major cut in the top corporate income-tax rate.

Pressed at Thursday's House Budget Committee hearing, Fed Chairman Ben Bernanke downplayed the short-term stimulative effect of a big cut in the corporate income tax. Echoing Larry Summers, the Treasury secretary during the last 18 months of the Clinton administration who testified Wednesday before the Joint Economic Committee, Mr. Bernanke argued that "tax provisions that apply directly to capital formation, such as depreciation or [the] investment tax credit, have a bigger bang for the buck" than do general cuts in the corporate tax rate. In his testimony, Mr. Summers added an interesting caveat worth implementing: "To maximize the bang for the buck, a [stimulative] program [embracing accelerated depreciation and investment tax credits] should be incremental and apply only to investment above some benchmark, such as two-thirds of previous investment or depreciation."

The White House did say that "a package that is about 1 percent of GDP would be sufficient to provide a boost to the economy." With nominal GDP likely to approach $14.5 trillion in 2008, the size of the president's package approximates $150 billion. That's real money.

The president will not support any stimulus package that includes increasing taxes, even in the out years, to pay for any temporary tax relief provided in 2008. In this respect, he will not get any opposition from Sen. Hillary Clinton, who has no plans to offset her $110 billion stimulus package ($70 billion in spending, $40 billion in tax rebates) with future tax increases. "The whole point of stimulus," she recently said on NBC's "Meet the Press," is "going to require an injection of federal funding." That's "the very nature of the economic problems we're facing."

Republicans and Democrats will surely battle over including spending in the stimulus package. The White House opposes increasing federal spending, which it said "would have little immediate impact on our economy." Democrats, however, favor numerous spending options. Indeed, among Democratic members of Congress, presidential candidates and liberal think tanks, there is a groundswell of support for (1) immediately extending the normal 26-week limit for collecting unemployment benefits (Mrs. Clinton has earmarked $10 billion for this purpose) and making more people eligible for unemployment benefits (Sen. Barack Obama would spend $10 billion to achieve this); (2) temporarily raising the monthly food-stamp entitlement; (3) increasing aid to state and local governments (in part, perhaps, by raising the federal Medicaid matching rate) in order to forestall growth-inhibiting tax increases or spending reductions that might be necessary to meet balanced-budget requirements (Mr. Obama would send $10 billion to the states hardest hit); (4) providing state and local governments with huge grants to help them mitigate rising foreclosures (Mrs. Clinton has recommended spending $30 billion for this purpose; Mr. Obama recommends $10 billion; and John Edwards, who was paid nearly $500,000 in 2006 by a hedge fund that participated in huge foreclosure operations in Cleveland and Katrina-ravaged New Orleans, has recommended establishing a "home-rescue fund"); (5) increasing home heating-oil subsidies for the poor (Mrs. Clinton wants to spend $25 billion on this effort); (6) large grants to promote energy conservation (Mrs. Clinton, in her Christmas-tree approach, has recommended $5 billion); (7) a major increase in federal funding for infrastructure projects (roads, bridges, sewage systems, etc.) and alternative-energy projects (John Edwards wants to spend $25 billion for these purposes).

Mr. Bush will surely have powerful allies supporting his opposition to both tax and spending increases. Asserting that the Democrats' reflexive preferences for increasing spending and raising taxes (even in the out years) would do more harm than good, Arizona Sen. Jon Kyl, the No. 2 Republican in the Senate, recently told reporters and editors of The Washington Times: "Nothing would be worth more spending or a tax increase."

One area where there likely will be agreement is the need for a temporary income-tax rebate. Interestingly, it was the Democrats who proposed establishing the 10 percent tax bracket as part of the 2001 tax cut. By applying the 10 percent rate to the first $12,000 of taxable income for married couples and the first $6,000 for singles (those sums had previously been taxed at 15 percent) and by making the 10 percent rate retroactive to Jan. 1, 2001, policy-makers were able to mail rebate checks for $600 (married couples) and $300 (singles) during the summer of 2001, which coincided with the middle of that year's recession. Thus, Democrats are unlikely to oppose the president's reported proposal to eliminate the 10 percent bracket altogether in 2008. The battle over the income-tax rebate will be over its refundability.

Citing both liberal and conservative economists, including Mr. Bernanke, Democrats will argue that the rebate will be most effective if it is fully and quickly spent. Low- and middle-income workers are most likely to do this. But because most low-income workers and families and many middle-income families pay only payroll taxes, many of them will not fully or even partially qualify for a non-refundable income-tax rebate. The Center on Budget and Policy Priorities, a liberal think tank, has calculated that (1) "[f]amilies of four making less than $24,900 would be shut out entirely" and (2) "[a]ll households in the 10 percent bracket — families of four with incomes between $24,900 and $40,950 and many families somewhat above that range as well — would get only a partial rebate." That is why Mr. Obama's stimulus plan, which could cost as much as $120 billion, would give an immediate $250 payroll/income tax cut to all workers and a $250 Social Security bonus to retirees.

Let the negotiations begin.