THE PLANK JANUARY 5, 2009
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President-Elect Obama is now willing to include as much as $300 billion in tax cuts as part of his proposed economic stimulus. While the final numbers aren't set yet, those tax cuts would apparently account for roughly 40 percent of the total package, which is expected to come in at arond $600 to $700 billion total. Some of the cuts would benefit individuals; others would go straight to businesses, as incentives to create new jobs. The rest of the stimulus would take the form of public investment--i.e., government spending on things like infrastructure, aid to states, and so on.
Strictly on the merits, does this approach make sense?
The general consensus among left-of-center economists these days is that government spending, rather than tax cuts, represent the most efficient way to fight recessions. Among other things, people who receive tax cuts don't always spend the money right away. More affluent people, in partciular, tend to put that money into savings--a move less likely to generate economic activity in the short term. (For more on this, see Hilzoy's post over at the Washington Monthly blog.)
On the other hand, coming up with $600 to $700 billion in well-timed government stimulus may not be as easy as it sounds. For a while now, Obama advisers have been warning that there are only so many ready-to-go infraustructure programs--and only so many social needs the states are prepared to meet quicky. To give you a sense of scale, total non-discretionary, non-military spending this year is only around $500 billion. As Paul Krugman explains on his blog,
...there’s a problem with a public-investment-only stimulus plan,
namely timing. We need stimulus fast, and there’s a limited supply
of “shovel-ready” projects that can be started soon enough to deliver
an economic boost any time soon. You can bulk up stimulus through other
forms of spending, mainly aid to Americans in distress--unemployment
benefits, food stamps, etc.. And you can also provide aid to state and
local governments so that they don’t have to cut spending-avoiding
anti-stimulus is a fast way to achieve net stimulus. But everything
I’ve heard says that even with all these things it’s hard to come up
with enough spending to provide all the aid the economy needs in 2009.
Still, economic logic isn't the only reason Obama is going for such large tax cuts. Political necessity, or perceptions thereof, figure prominently as well. Senate Minority Leader Mitch McConnell and his colleagues have been complaining about the stimulus, saying it involves too much government spending. By tilting the stimulus more in the direction of tax cuts, Obama and his advisers hope to make speedy passage easier.
It's this line of thinking, as much as the package itself, that has Krugman--and others, like Kevin Drum, at Mother Jones--concerned. Obama just won a substantial victory in the presidential election, bringing with him huge congressional majorities. And it's not like the country is in an uproar over the prospect of a large stimulus focused on spending. (I imagine most people haven't even given the issue that much thought.) So why not just push through a more pristine proposal? Here's Drum:
Obama's team is so focused on getting a big bipartisan majority for
their stimulus legislation that they're negotiating their goals down
even before they actually start negotiating. I'm reluctant to critique
Obama's political instincts, since they've proven shrewd so often in
the past, but I gotta say: this isn't going to work. Obviously Obama
needs a modest level of Republican support just to get the bill passed,
but he doesn't need 80 votes, and straining to get there will just
produce a watered-down plan without getting anything in return. The American public really doesn't know or care if this bill passes
by one vote or thirty votes. So why waste time on this? It's just a
gold-embossed invitation for Republicans to obstruct and posture
endlessly, something they hardly need any encouragement for.
I am generally inclined to give Obama the benefit of the doubt on politics. I second-guessed his strategic wisdom on more than one occasion during the campaign. In virtually every instance, I was wrong. Avoiding the skirmish here might make sense, both as policy and politics, as long as the tax cuts are temporary and as long as, for the most part, the individual cuts at least provide financial relief to people who can use it. (Note, too, that the business cuts may not actually cost that much in the long run, since many businesses will simply claim deductions now they'd otherwise claim in future years.) Still, it's hard not worry that this is a (discouraging) sign of things to come.
Update: An Obama adviser responds.
--Jonathan Cohn
15 comments
Right, and when will these tax cuts get repealed? When will Bush's be repealed?
- satyendra
January 5, 2009 at 12:51pm
Shorter Cohn - "Even a broken clock is right two times a day."
- kgrant1054
January 5, 2009 at 12:59pm
Remind me who won the election again? Why play nice with the GOP already? I don't get it.
- tnmats
January 5, 2009 at 1:01pm
The problem with big tax cuts is that it betrays the principle that guards against generational attack (sorry blackton): that the spending will be used in a way that not only stimulates the economy but will grow the economy in the long-term. Tax cuts are almost pure here-and-now spending. You could continue the hybrid car buying subsidy with that kind of money for goodness knows how long, just to name one better use.
- Lymon1
January 5, 2009 at 1:13pm
I think political instincts during an election campaign are a very different set of skills than those needed to work with Congress. Not saying they're completely unrelated, but running a flawless race doesn't mean you know how to get your bill passed.
- jandura07
January 5, 2009 at 1:16pm
satyendra- The cuts are temporary -- i.e., one-time deductions and rebates -- so they don't have to be repealed.
kgrant1054- You should consider becoming an editor.
- Jonathan Cohn
January 5, 2009 at 1:19pm
I agree that the money could be more well spent, but I'm not so sure that a couple of tax cuts and some extra refunds for taxpayers isn't a decent use of some of the money.
To say it another way, if it isn't going to actually hurt anything (aside from overall price tag), and it will help in most circumstances since many of the hoarders will wind up putting the money into a bank (many of which need more capital right now), and it will make Republicans happy, why not? To be sure there are better uses for the money, but that just seems like we're letting the perfect become the enemy of the good.
And I'm not convinced that the war on when to end a tax-break is not a seperate issue entirely and cannot be excluded from the current conversation.
- GSpinks
January 5, 2009 at 1:47pm
Thanks Jonathan, I guess I did hear that before but forgot. Yes, that means there would have to be a bill to prolong the Bush tax cuts, and in this case the right and easiest thing to do would be nothing. I hope this current tax cut proposal has a similar defined time frame or sunset measure.
- satyendra
January 5, 2009 at 2:45pm
Spinks, interesting point about how the banks are so bad off even hoarding money under the figurative mattress looks good right now.
How can you separate the expiration of tax cuts from the current discussion? Bush recklessly doubled our nat'l debt primarily through tax cuts. I thought the U. S. gov't was already spending $250 billion a year on interest payments alone. We don't want to get to a point where the interest payments exceed our nat'l budget. That's default.
- satyendra
January 5, 2009 at 2:49pm
If the government wants to stimulate the economy, it's generally better off spending that money directly
- Anonymous
January 5, 2009 at 4:20pm
As Chris Mitchel might say this debate is whether the money taken from our left pocket will go to our right or breast pocket.
In my own words, this whole notion of stimulus is to much math chasing to little logic. Those quants and derivatives will never sell for their former price, their value is simply lost. The notion of stimulus is to replaced this lost value by redistributing existing value, either by taxation or debasement of the currency. The problem is that after the reordering of value, there is no net gain, only a shift from one to another.
If money went into savings, for instance, it would be used for future value, so its value is denied when the currency is debased. Money from taxation is entirely circular, with currency taken out of one hand and put in another, minus, of course, the generous overhead of the IRA.
This is why stimulus has never worked in the past. During the 70's in America, in the 90's in Japan, in the 00's in Argentina, and if your willing to look at the numbers with a cold eye, during the Great Depression.
Yet Keynesian economics only seams to become more dominant with failure...
- cthulhu2008
January 6, 2009 at 12:44am
People will hoard the money? Look around. Millions of Americans are broke, they're scared, they or someone in their family is about to lose their job. Most of that money will be used to pay off credit cards and/or pay the rent. Some of these comments remind me of Cokie Roberts' advice on Stephanopoulos' Sunday show regarding the tough times ahead. She said, in that creepy smiley way of hers, that Americans are just going to have to give up their personal trainers and....
Give up their personal trainers?!? Move over, Marie Antoinette. Cokie Roberts, there's a gal with a feel for the common man.
Back to Obama and the tax cuts. I'm less concerned about all the talk about tax cuts than no talk about cutting wasteful programs. Obama should seize this moment to go after the billions tied up in subsidies and boondoggles that are sacrosanct to Democrats.
- fougasseu
January 6, 2009 at 6:00am
While the Obama-Biden Plan for economic revitalization, as per their change.gov website, is well-intentioned and has many good ideas, there are some tax-cut ideas which are poorly-conceived and counter-productive. Some particulars:
1) New American Jobs Tax Credit
Jobs need to be offered in response to actual business need, not government subsidy, for them to actually contribute to the economy and to be productive and sustainable. Anyway, the $3000 credit per job is not enough to actually induce businesses to hire more people. Accordingly, these credits would simply reward businesses for hiring they would have done anyway, without such credits. As such, this would be a big cash giveaway, on the order of tens of billions of dollars, to no positive end.
2) Zero capital gains rate for investment in small business.
As per Economics 101, economies work efficiently when economic decisions are based on the intrinsic economic merit of those decisions, and not skewed by externalities, such as special tax preferences for certain actions. Decisions to invest in small businesses, or in any other businesses or economic activities, should be based on their intrinsic economic merits, not on relative tax advantages. When such tax-advantages are introduced, then decisions inevitably skew investments in ways contrary to what would best fit and respond to economic conditions and realities. Taxation of all investments, in fact of all income, should be subject to uniform taxation regimes, so as not to artificially skew incentives in ways that inevitably worsen investment decisions.
3) Special tax-rates for seniors
Why should income tax rates be based on age? All people of all ages face various challenges. There is no economic or moral reason why people of one age should have more favorable tax-rates than people of another age. Income rates should be based on income levels, period.
4) Middle class tax-cuts
During the Presidential campaign, Barack Obama properly excoriated President Bush for enacting large tax-cuts "for people who did not even ask for them". He further properly pronounced that we should not take the same actions and use the same approaches over and over again and expect different results. For the past eight years, we have had big tax-cuts, big deficit-spending, and a big deficit-funded tax-rebate stimulus attempt. Yet, this has not prevented two recessions, including the present one, and has introduced many financial and economic problems, including hurting American trade competitiveness by artificially making the dollar expensive relative to other currencies. So, why does he plan to repeat George Bush's mistakes, and then expect a different outcome? For many reasons, we need to reduce federal deficits, and this will require increasing tax-rates at least to Clinton era levels, about which few complained. Tax-rates especially need to be raised on higher-income people, but all Americans who received tax-cuts under President Bush should have those cuts revoked, not increased. Perhaps the tax-cut-reduction on the 93% of the middle-class that are still employed could be postponed for a year. But stimulus spending need not and should not all be deficit-financed. One of the things which could most inspire public and business confidence, and therefore improve the functioning of the credit and investment markets, would be evidence of responsibility at the top regarding federal budgeting.
5) Suspending taxation of unemployment benefits.
Definitely unemployment benefits should be extended; during recessions it takes much longer for people who lose jobs to find new employment. But, there is no reason why those benefits should not be taxed, just like all other income. For many, those unemployment benefits might even be higher than the wage-income of others who are working. Why should people with low wage-income have to pay more taxes on their income than people who are receiving higher income from unemployment benefits. Income is income. The rates of taxation of all income should be based on income levels, not on the source of that income. This is not only fair, it also promotes the sense of a shared fate and a shared responsibility for the overall society.
6) Exempting 401k and IRA withdrawals from taxation
The contents of 401k and IRA accounts have already had favorable taxation treatment all along, since they were initially invested. There is no reason why these particular funds should get even more special tax-treatment by being exempted from taxation upon withdrawal. Why should they get even more special treatment relative to investments people made outside such tax-favored accounts? Many people did not even have 401k plans available to them, so they could not even make such investments. Again, income taxation rates should be based on income levels, not on the source of the income.
And we should remember that this economic crisis began with the mortgage-repayment crisis; successfully addressing the former probably will require sufficiently resolving the latter. Addressing the long-term mortgage problem seems more valuable than a short-term tax-cut cash-injection stimulus. And, restoring federal fiscal responsibility, as well as improving financial market regulation and transparency, seem critical to building public confidence sufficiently to restore good functioning of the investment and credit systems.
- jsincalif
January 6, 2009 at 8:34pm
All sorts of opinion is out there concerning PEBO's desired stimulus package. I pick Jonathan Cohn's over at the Plank because it pretty much covers what I want to cover. For instance: The general consensus among left-of-center economists these days.
- Anonymous
January 8, 2009 at 3:23pm
Years ago, in college, we talked about the theory of totality. At the time, in the late 1980s, the word “totality” referred to the full-on construction of reality that is mediated by corporations in conjunction with governments. The kern of
- Anonymous
January 9, 2009 at 8:29pm