Out of Control Policy Blog

Proposed Stimulus: Obama Tax "Cuts" are Bull-ogna

Its Monday, January 5, 2009. The start of the new year. Let the Washington Games begin!

A Washington Post report this morning gives one of the first glimpses of whats coming from the Obama administration-elect in terms of stimulus. Surprise, surprise tax "cuts" are expected to weigh heavily in order to draw bipartisan support, but as was the case through-out the campaign, Obama is engaging in wordplay, offering a smoke screen of cuts that are actually rebates (another form of stimulus spending) and will require an increase in taxes later.

First, the story:

Aiming to foster bipartisan support for his record-setting economic stimulus, President-elect Barack Obama plans to propose huge tax cuts for businesses and middle-class workers that will total about 40 percent of the package, or up to $310 billion, congressional officials said.

The revelation is part of an intricately orchestrated rollout of the plan that includes an appearance by Obama on Capitol Hill on Monday and a major speech about the economy later in the week.

Obama plans to ask Congress for a stimulus package of $675 billion to $775 billion, so the planned tax cuts will total about $270 billion to $310 billion, the officials said.

Obama strategists say he wants to get 80 or more votes in the 100-member Senate, and the emphasis on tax cuts is a way to defuse conservative criticism and enlist Republican support.

But officials say the tax cuts will be based on historical and empirical evidence of what works, not ideology. Rather, the targeted tax cuts will be designed to stimulate job growth in the private sector and help middle class families, the officials said.

For families, the tax cuts include the $500 Making Work Pay payroll tax credit Obama proposed during the campaign.

For businesses, the tax cuts would include breaks for small employers and a "new jobs credit."

Lets break this down. Its nice to see that the change we can believe in won't alter the way Washington plays games with taxpayer money. We can give Obama the benefit of the doubt until we hear from him later this week, but if "officials" are really committed to "historical and empirical evidence" of how to get out of a recession, they won't stimulus spend. Japan spent 10 years--its "lost decade"--trying to spend its way out of recession and wound up doubling unemployment and increasing the debt level above GDP. "Historically" real tax cuts for the wealthy and business world increased productivity and national growth, but they aren't politically savvy, so we're unlikely to see those too.

The fact is that stimulus spending and tax rebates only help the problem in the short-term and force us to deal with it down the road.

The basic economic argument against cutting taxes, decreasing revenue, while increasing spending is that you have to raise taxes in the future. That's what the Bush administration did, and look how it worked out. The Bush Tax Cuts were a good idea in principle, but coupled with mind-boggling spending increases the government has found itself $10 trillion in the hole eight years later.

It may be odd to hear a libertarian criticize tax cuts, so don't get me wrong. The way out of this recession is tax cuts, but only if it is couple with a promise NOT to spend more federal money. Let the business world have a greater incentive to create and produce by keeping more of their profit. That will stimulate growth and encourage jobs.

Lets look again at the tax cut proposals. The "Making Work Pay" tax credit will give $500 per worker ($1000 per family) back to Americans, regardless of whether they pay taxes in the first place. The idea is to "offset the payroll tax on the first $8,100 of their earnings while still preserving the important principle of a dedicated revenue source for Social Security." Obama claims this will help people who struggle to pay their taxes. What will it really do? Yes, it will help some people avoid paying taxes. Yes, it will inject more money into the system short term. But no, it will not end the recession.

The Bush administration tried this in early 2008 with the $300-$600 checks everyone got. But most people saved those, and the $150 billion or spent didn't spark a recovery. What would another $75 to $150 billion do? While Americans know better what to do with their money than the federal government, many people got those checks who didn't pay taxes in the first place, so they got other people's money back. That redistributory system doesn't encourage growth, it just hands out money. For those who are struggling to pay their bills the money will just go into groceries or rent checks. For those who are fine it will get spent on a luxury good. Where is the economic data that proves this money will increase consumer demand and thus make companies produce more stuff? Its the Keynesian path out of recession, and the data isn't there.

How about the Obama "New Jobs" credit? I written on this before at OOC. Essentially, the money firms would receive for hiring a new worker would cover less than half would it would cost to hire them. I'd have to do the math again, but its something on the order of $1.50 an hour that employers would get from the government for hiring a worker. If a company has the money to hire someone, they will. If they don't, an extra $1.50 is hardly gonna push a lot of firms over the threshold of affordability.

And again, we're just going to have to pay for this all again in the future, so there is no cut. Its actually a tax increase. Its all bull.

Anthony Randazzo is Director of Economic Research


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