[I]f they were repealed in a year [note that this means moving the sunset date a year earlier than currently scheduled], the Bush tax cuts could spur a burst of economic activity in 2008. If people knew that their tax rates were going up next year, they'd work to make sure that more of their income is taxed at this year's lower rates. Investors would likewise have a giant incentive to cash out their capital gains now to avoid paying higher taxes later. In 1986, stock sales doubled as taxpayers rushed to avoid the capital gains tax rate increase scheduled for 1987. If people pour their stock gains into yachts and fast cars, that's pure fiscal stimulus.
The money involved could be considerable. Capital gains in 2007 were something like $700 billion, representing well over $1 trillion in asset sales. It looks as if gains will be much lower in 2008, but a looming tax increase could easily spur an additional $500 billion in sales. If only 20 percent of that translated into extra spending, we'd have as much or more short-term stimulus as we could get from the package Congress and the president are considering.
Best of all, this is one stimulus proposal that would reduce the deficit -- the single largest threat to the economy's long-term health. And that long-term benefit wouldn't depend on our getting the timing and amount of stimulus right, something policymakers are notoriously inept at.
Best economic stimulus proposal ever.
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