A Card To Revive Spending

By Dan Newman
Saturday, February 7, 2009

Last weekend, I stood outside the shuttered doors of a favorite local restaurant. As a small-business owner myself, I can only imagine how hard it was for those people to hang that out-of-business sign. I can also imagine the owners of that business sharing my opinion on what America needs most, and that surely isn't tax cuts.

You wouldn't know that from disputes in the Senate this week, where debate hinged on further tax breaks, despite their bulk. At $275 billion, tax cuts from the House bill were already twice the size of any spending project, and now the Senate has suggested $104 billion more. To keep the package closer to the requested $800 billion, several eleventh-hour compromises required reduced infrastructure spending, but not one suggested scaling back tax cuts. Indeed, Sen. John McCain's alternative demanded still more breaks for business.

I appreciate lower taxes, as do my small-business brethren. And we like being courted by politicians, who woo us because we are part of the American psyche as well as for more practical reasons. Small businesses provided a majority of job growth after each of the past two recessions, creating a million jobs between March 2000 and March 2001, even as firms with more than 500 employees lost 150,000 positions in the same period.

So why don't they offer us what we crave, or, more specifically, why aren't tax cuts the solution?

The proposed tax cuts reward those who need it least. One of the more expensive provisions is an expansion to five years of the period over which losses can be used to reduce tax payments of profitable years. In other words, if I lost money this year, the package would allow me to reduce my taxes when I do well several years later. But that has value only when I make a profit again, not while I'm struggling to make rent.

Until late last month, included in the proposed package was a $3,000 tax credit for each newly hired employee that similarly missed the mark. Consider: If the employee demanded the money as a signing bonus, it went to someone who had already received a substantial leap in income over being unemployed.

When I'm struggling, a small reduction in costs isn't going to persuade me to create a new position. At a huge company, that might add up to another job, but for me the choice of whether to create a job rests on only one thing: customer demand.

That's where the government can help right now. Investment in infrastructure and education may pay off in the long run, but those jobs and projects take time to create. What small businesses need, immediately, is healthy demand for their goods and services.

The rebate checks of last year aimed to provide just that, but most Americans saved the money or used it to pay down debt. Less than 20 percent went to bolster consumer spending. There's little reason to expect more from the proposed $1,000-per-household tax cut in the current stimulus bill.

A reduction in sales tax has still bigger problems. In 2001, there was a Senate proposal to reimburse states for lost income, but the legislation collapsed while lawmakers were trying to gain cooperation from each state legislature.

A better choice would be something Americans are likely to spend, and without huge logistical headaches: a gift card. By sending every taxpayer a $2,000 debit card, the government stimulates spending directly. The card doesn't get deposited with a bank, a step that greatly reduced the use of last year's rebate checks for new spending, and with a defined expiration time, perhaps a year, the program could help precisely while other programs get underway.

The American Gift Card could bear a picture of Lady Liberty, since it may be used for whatever taxpayers wish: smarter clothes, dinners out, a weekend away, a new heater. And as gift cards tend to be used in person, they are of particular interest to local businesses.

Gift cards have a nationwide redemption rate of 80 percent. If such debit cards were used at the same rate, the cost of the program would be $270 billion, for a greater effect at less cost than the proposed tax breaks.

And such cards allow people to spend where they find it most valuable, obviating debate about where the government "should" spend money. Consumers will choose what things they need most, and, whatever those are, they would be more affordable.

Best of all, the program could be implemented with all speed at the very time we need it most, helping America while the necessary other programs develop.

I would be grateful for such a card, and I imagine that the owners of any of my remaining local restaurants would be as proud to receive such a card as I would be to use it.

The author opened a retail food store in Seattle five years ago.

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