The Gohmert Proposal: Weighing the Pros and Cons of Tax Holiday as Bailout Alternative

     Call it a classic Keynesian fiscal strategy, as some have, but in the midst of this financial crisis, Rep. Louie Gohmert, R-Texas, has a more cost-efficient means of stimulating the American economy than massive bailouts. .

     Gohmert, entering his third term in this upcoming 2009-10 Congress, has proposed a two-month tax holiday for the beginning of 2009. The reprieve would include personal income taxes and FICA (Federal Insurance Contributions Act) taxes – Social Security, Medicare, etc. Gohmert believes the amount of money a federal tax holiday would leave in circulation would be better for the economy than bailing out a handful of banks.

A Modest Proposal

     Gohmert told a gathering at the Heritage Foundation in Washinton, D.C. on Dec. 9 that a tax holiday would be much cheaper than the economic rescue Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are attempting to engineer. Bloomberg reported on Nov. 24 that $7.7 trillion is the amount [1] the government has pledged to rescue the economy – far more than the amount the government brings in annually.

     Secretary Paulson has roughly $350 billion left that “he’s probably not going to spend.”Gohmert explained. “I see that about the same time I notice the $7.7 trillion is estimated to be what Paulson and Bernanke may be throwing at the economy to try and get it to do better and more credit extended – like people who are failing in their mortgage to refinance and be able to finance the part they’re behind on.”

     According to Gohmert, all revenue the government is set to receive in 2008 totals $2.5 trillion. Of that, about $1.21 trillion is comprised of individual income tax money for the year 2008.

     “And when you realize they’re pledging, committing, buying, squandering six and a half times more than we’re going to get in actual income tax for the year 2008,” he said. So Gohmert came up with the idea of declaring a tax holiday for all of 2008.”

     “If everybody got everything back – think about yourself – if you’d got everything back that you’d spent so far into the government, in individual income tax and didn’t have to pay anymore for the rest of the year, do you think you’d have a merry Christmas? Can you imagine the economy this year if you had that kind of … there’d be cars bought, auto dealers, auto manufacturers bailed out by all the cars being bought, homes, buildings being built. It would be fantastic.”

     However, Gohmert admitted he wasn’t getting a lot of support for an entire year, so he scaled it back to just two months. His plan cited numbers from former Speaker of the think tank American Solutions. America Solutions reports [2] Americans pay $101.6 billion per month in personal income tax and $65.6 billion per month in FICA tax. A two-month reprieve from these taxes would cost $334.4 billion, much less than the remaining $350 billion in bailout funds sought by Paulson – a nearly 17 percent reduction in income tax for 2009.

          According to the Tax Foundation, Washington, D.C., Americans spend the first four to five months of work just fulfilling their obligations to the government. Each year, the Tax Foundation does calculations to arrive at Tax Freedom Day -- the exact date during the year that taxpayers have earned enough money to be free of these obligations and begin working for themselves. In 2008, Tax Freedom Day fell was April 23 [3]. But under Gohmert’s plan, it would come much earlier next year.

Keynesian by Any Other Name

     Although many on the right, including former GOP House Speaker Newt Gingrich [4], are touting this idea, there are doubts as to whether or not Gohmert’s plan would work. Business & Media Institute adviser Dr. Gary Wolfram, the William Simon Professor of Economics and Public Policy at Hillsdale College in Hillsdale, Mich. criticized the idea.

     “If I eliminate the individual income tax, what’s that going to do?” Wolfram said to the Business & Media Institute. “That’s a Keynesian sort of idea. ‘Oh, these people have more money and they’re going to go out and spend it.’ But you don’t know that. What they might do is spend it all on exports.”

     “If it makes them work more, work harder, start their own business, that sort of thing – God love you, that’s great,” Wolfram said. “But I’m not going to start my own business if I get a two-month holiday. It’s just another way of operating under a Keynesian model.”

      Wolfram suggested eliminating the corporate income tax, which would save roughly the same $300-plus billion.

     Stuart Butler, vice president for Domestic and Economic Policy Studies at The Heritage Foundation took a similar view of Gohmert’s proposal [5].

     “There are several factors behind the failure of temporary tax holidays to stimulate economic recovery,” Butler said to Heritage’s The Foundry blog. “One reason is that even if the key to future growth was to increase household spending, a tax holiday will not prompt the necessary splurge. That is because Americans adjust their spending according to what economists call the ‘wealth effect.’ When the value of their stocks or housing is going up, as it did for many years, Americans tend to save less and spend more.”

Fear Tactics for Bailout

     After the fact, some members of Congress have said Paulson employed fear tactics to push the $700 billion bailout through the legislative process. Sen. James Inhofe, R-Okla., told an Oklahoma radio station on Nov. 19 [6] that Paulson was instilling fear through conference calls and warning the worst would come if they failed to act. Gohmert said Paulson had a similar message for Inhofe’s House colleagues.

     “He was literally saying we could potentially have a Depression worse than the ‘30s, a stock crash like ’29 and also the banks were going to start failing any day, any moment,” Gohmert said to the Business & Media Institute. “And when the first one started, it would be like dominos and you wouldn’t be able to stop it – that you have to intercede now before the banks start falling and gets worse than the ‘30s.”

     Gohmert, for one, was not persuaded. Despite Paulson’s expertise and efforts, Gohmert said he voted against the bailout because it went against his principles.

      “He has all this financial information,” Gohmert said. “But I do know principles and you cannot abandon your principles that allowed this nation to become the greatest nation in history just because your 401(k) drops 9 or 10 percent one day.”

     However, the initial vote on the $700-billion bailout was voted down [7] by the House and a steep market selloff ensued – which the Texas congressman explained was a “self-fulfilling prophecy.

 “When the Secretary of the Treasury of this country starts saying that we’re going to have a stock market crash on the day you vote this down, it’s a self-fulfilling prophecy – it’s voted down, the stock market goes down. I was grateful it was only 777 points because I had a fear he’d scared it more than that.”

     Gohmert held Paulson responsible for introducing this fear into the market and he contends the solution to stabilize the financial markets would be the passage of his two-month tax holiday proposal [8].

     “So now they’re trying to put out the brush fires and this would help,” Gohmert said.