Tax cuts all around

by Russ Roberts on January 4, 2009

in Politics

Obama plans to have tax cuts in his stimulus package:

Aiming to foster bipartisan support for his record-setting economic
stimulus, President-elect 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 roll-out 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.

I stopped reading there. First, I had to clean the coffee off my computer screen from my spit take. Is there no end to the humor of Washington? Second, I wanted to play a little game. I’m going to guess what kind of tax cuts have the evidence on their side. I’m going to guess it’s rebates to the middle class rather than cuts in rates that supply-siders would like. Let’s see if the article says anything else. Yes it does. Next sentence:

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.”

So how’d I do? What grade do I deserve? Of course you’ll have to take
my word that I stopped reading at the line about ideology. But I did
sign the honor code.

The payroll tax credit is a rebate of payroll taxes for low-income workers. As faithful readers of this blog surely know, an increase in spending coupled with lower tax collections is an INCREASE in taxes. AN INCREASE in taxes. NOT A TAX CUT. If I spend more money and collect less, the government is promising to collect more taxes in the future. It is not a tax cut. Not a tax cut. Not a tax cut. And when you don’t cut rates but rather give people a lump sum of $500, there are no incentive effects other than to increase the probability that the US Treasury will be unable to honor its obligations in the future.

I can’t wait to see all the studies that show how a rebate creates jobs. What a relief to know that this is just one more example where the Obama administration will not let petty ideological principles get in the way of what works.

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