Is Obama Overdoing The Tax Cuts?

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JANUARY 5, 2009

Is Obama Overdoing The Tax Cuts?

Today's papers bring word that Obama wants to devote up to 40 percent of the stimulus plan to tax cuts, which seems partly intended to attract Republican support. For what it's worth, I'm not as worried about the idea as Josh Marshall and Paul Krugman, but some of the specifics do make me queasy.

Krugman writes that:

Other things equal, public investment is a much better way to provide economic stimulus than tax cuts, for two reasons. First, if the government spends money, that money is spent, helping support demand, whereas tax cuts may be largely saved. So public investment offers more bang for the buck. Second, public investment leaves something of value behind when the stimulus is over.

That's true enough. But, as Krugman concedes, spending often takes too long to kick in--there are only so many "shovel ready" projects available--which is why he's sympathetic to some tax cuts in principle.

I'd go further and say that even the bang-for-the-buck argument can be overstated. Public investment programs can "seep" a lot, too--contractors and other middlemen often claim big chunks of cash for themselves, which doesn't filter down to workers--and tax cuts, if designed correctly, can give you a lot of pop. For example, temporarily suspending the federal payroll tax--one of the most regressive taxes on the books--would provide a big boost to low- and middle-income people, who are likely to spend it, without producing much of a giveaway to the affluent. (The payroll tax only applies to your first $100,000 or so in wages.)

That said, I'm as concerned about some of the tax-cut proposals being floated as Krugman is. For example, according to the Times, some of the tax cuts will provide investment incentives to businesses---perhaps by allowing them to accelerate their depreciation allowances--which seems more like a sop to business than an efficient way to revive the economy. A lot of companies have more capacity than they know what to do with given the drop in demand, so encouraging them to buy more equipment isn't necessarily a great idea. It's certainly inferior to putting money in the hands of struggling households...

--Noam Scheiber

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