Magazine article Kennedy School Review

Smart Stimulus amid Deepening Debt: Future-Flow Tax Credits

Magazine article Kennedy School Review

Smart Stimulus amid Deepening Debt: Future-Flow Tax Credits

Article excerpt

Entering 2012, the world finds itself in a precarious financial position. In January of this year, the World Bank released its new economic outlook, warning of a global, double-dip recession. "An escalation of the crisis would spare no one," Andrew Burns, manager of global macroeconomics and lead author of the World Bank report stated in a press release, matter-of-factly, before continuing: "Developed- and developing-country growth rates could fall by as much or more than in 2008/09. The importance of contingency planning cannot be stressed enough" (World Bank 2012). The report lists several key risk factors, including the sovereign debt crisis in Europe; the global spread of risk aversion resulting from the European crisis; and stifled economic growth resulting from inflation-motivated tightening of monetary policy in developing countries.

But the World Bank may have forgotten a critical fourth concern: the snail-paced economic recovery of the world's leading generator of global demand and output-the United States. The United States still faces constrained economic growth and an unemployment rate of 8.5 percent, according to the U.S. Bureau of Labor Statistics. With an already expanded U.S. money supply and all-time low interest rates, monetary policy is no longer an effective tool--even in the short term--to stimulate growth. Meanwhile, record high debt levels and a self-imposed debt ceiling have severely limited the possibility of any fiscal expansion funded by borrowing.

How then can the U.S. government expedite a recovery? I propose a new form of fiscal stimulus, financed by future-flow tax credits rather than government borrowing. Similar tax credit programs have been used on a small scale to promote low-income real estate development and small business investing. I suggest a large-scale, federal stimulus plan that is financed in a similar manner--as a budget-neutral engine of job creation.


Many prominent economists argue that stimulating small and medium-sized business employment is critical to rehabilitating the U.S. economy. During the past two decades, small and medium-sized businesses have been the workhorse of U.S. economic growth, accounting for more than 65 percent of net jobs added (U.S. Small Business Administration). Recognizing the importance of small businesses, the Obama administration created Startup America in 2011 to provide resources to entrepreneurs and, in January 2012, elevated the Small Business Administration (SBA) administrator to a cabinet-level post.

Such approaches are not without their problems. Josh Lerner, Harvard Business School professor and venture capital expert, highlights a core concern with many state-sponsored funds that invest in small businesses: the funding tends to be managed by politicians who direct capital to politically convenient investment opportunities (Lerner 2009). This results, almost inevitably, in poorly performing funds and an inefficient and corrupt allocation of public capital. For example, a late 2011 Republican presidential primary debate revealed that 47 percent of investments from the state-run Texas Enterprise Fund went to companies affiliated with Texas Governor Rick Perry's political donors.

One solution, already implemented in several small investment programs, is the creation of public-private partnerships. In such partnerships, the government incentivizes authorized private investment funds, which bring investment expertise, to raise and place capital in underinvested areas. The incentive comes through a tax credit match, paid out to fund managers over time, on the amount of capital raised and placed. (This mechanism explains the "future-flow tax credit" moniker.) By requiring investment within a certain time frame and in certain sectors or geographies, the government can effectively stimulate job creation in periods of illiquidity or risk aversion and in struggling areas or industries. …

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