President-elect Barack Obama and congressional Democrats are crafting a plan to offer about $300 billion of tax cuts to individuals and businesses, a move aimed at attracting Republican support for an economic-stimulus package and prodding companies to create jobs. The size of the proposed tax cuts -- which would account for about 40% of a stimulus package that could reach $775 billion over two years -- is greater than many on both sides of the aisle in Congress had anticipated. It may make it easier to win over Republicans who have stressed that any initiative should rely more heavily on tax cuts rather than spending.
Will this appeal to a bipartisan approach going to reduce the effectiveness of the fiscal stimulus? I have made this argument:
If one is a believer of propositions such as the life cycle model of consumption or the Barro-Ricardo equivalence proposition, one would dismiss out of hand this notion that we can accelerate aggregate demand by passing a tax cut today that will one day have to be financed by a tax surcharge.
But this is weird:
Economists of all political stripes widely agree the checks sent out last spring were ineffective in stemming the economic slide, partly because many strapped consumers paid bills or saved the cash rather than spend it.
HUH? If “strapped consumers” means those facing borrowing constraints, it is precisely these households that are more likely to consume rather than save a tax cut.
Update: Mark Thoma weighs in on this issue and provides us another story by Peter Baker and Carl Hulse that notes:
The legislation Mr. Obama is developing with Congressional Democrats will devote about 40 percent of the cost to tax cuts, including his centerpiece campaign promise to provide credits up to $500 for most workers, costing roughly $150 billion. The package will also include more than $100 billion in tax incentives for businesses to create jobs and invest in equipment or factories.
So only half of the tax cut will go to borrowing constrained households with the rest being given to corporations who are not likely to invest anything extra during this period of weak aggregate demand. Ahem!
10 comments:
Fooled again.
We did not elect Republicans. We elected Democrats and for many of us it was because we recognized that tax cuts are not the answer to anything. With some adjustments to prevent real estate bubbles, the tax code should be returned to the way it was in 1978.
We want more government (Single Payer National Health Insurance) and not less. The Republicans have been discredited and there is no reason to be making deals with them. Trickle down is a lie to increase wealth disparity and that is all it ever was.
If it takes the "nuclear option" in the Senate then so be it. The filibuster is a tool that does the (d)emocratic party no good at all. Please note how well Alito was filibustered.
A more important item on the agenda is an increase in the democratic nature of our government.
I agree. Return to more progressive tax rates. The wealth created wasn't going into anything remotely considered productive. And it still isn't.
Use it or lose it.
I have to say that those who argue that the last tax-cut passed stimulus package was ineffective because people saved/paid bills with it instead of spending it are very, very far detached from contemporary reality as experienced by the working class.
For people working paycheck to paycheck (which includes a lot more of the middle class than some of the economic puditocracy understands) every pay period comes with a process of interior or with couples all to exterior negotiation. After you pay for the bare necessity of rent and subsistence, the rest is all bargaining: pay just enough on the utilities to keep them from shutting off power? Or to remove that worry for the foreseeable future by paying the bill in full with this new check? In any event paying down bills with current dollars unleashes exactly that amount in future spending (plus some dollars if you include revolving interest not paid, less some dollars from inflation effects.)
(Long anecdote omitted). For most people every pay period comes down to a question of 'pay me now or pay me latter'. Quite apart from the actual dollar equation what does it mean to for one month not have to worry about answering the phone without having some creditor dunning you.
I know some people who use most every dollar they get just to pay rent and maybe tuition at the Community College. Because they don't want to be homeless or living five to an apartment forever. I know other people who use almost every dollar they can to buy beer and cigarettes first and then pay rent or other debts where they can. Yet under the preferred model of the tax-cutters the 'spend it now on consumer goods' people are virtuous while the 'pay down my lawful debt' obviously simply don't care about the American economy.
Things that may look rational looking at the economic aggregate from the top down can seem totally perverse when examined individually from the economic household from the bottom up. And this 'heck they just will use it to pay bills and so improve the bottom lines of landlords, public utilities and store owners' seems pretty perverse to me.
Tax cuts can cause a big immediate increase in spending if they change the relative cost of spending now versus spending two years from now.
Obama is proposing a temporary decrease in taxes on hiring extra workers.
A big cut in the marginal cost increases employment above a threshold of 95% of the firms social security wage bill in 2008 would have a major effect at modest cost in subsidy payments. We did this in 1977-78 with the NJTC and despite poor implementation it generated at least a million extra jobs. The 11.1% increase in private employment during the NJTC was larger than for any other 24 month period in the last 50 years. The NJTC also reduced the margin between retail prices and wholesale input prices in construction and eating and drinking places.
If the threshold is 95% of the firm’s 2008 social security wages and a 10% tax credit, the first round GDP stimulus is about $78 billion at a revenue cost of only $45 billion.
The research on the NJTC was published in the May 1979 AER and in Studies in Labor Economics, Sherwin Rosen ed 1981. For more detail see:
http://digitalcommons.ilr.cornell.edu/articles/184/
We really have no history on Obama and that means that the future is a big question mark. Will he reduce or increase taxes? Will he spend on growth promoting programs or pork? Only time will tell and then it will be too late for viable change. He has to get it right the first time!
Please sharpen up your civics and understand that we do not have an elected emperor. The Republicans keep trying, but my copy of the Constitution says that the Congress makes the laws and that the House of Representatives is the source of all appropriation bills. What that means is that the Democratic Congress has control over the budget and the tax laws. The people have spoken by electing Obama as he campaigned on the platform of increasing the progressive nature of taxation. The Democrats who won office in the Congress were partially riding on those coat tails and to not follow through is a lie. Nonetheless: Obama cannot _force_ the Congress to tell the Republicans to sit down and shut up. Only the Congressional Democrats can do that and this is most especially true for the House.
And sit down and shut up is just what needs be said, but don't lose sight of the fact that Congress is a good cop, bad cop routine played out by Dems and Repubs. It looks as though we're in for a great disappointment in regards to returning the agenda to one that favors the majority of the people. Progressive taxation doesn't seem to be a part of anyone's vocabulary in our modern government. Republican controlled
Congresses have been snubbing their Democratic co-conspirators for a long while now, but it seems to be by design and with their consent. Obama seems to be morphing into Republican lite. The great conciliator. I hope I'm wrong, but the man just doesn't seem to understand presidential leadership. Go along to get along is Democratic bullshit for appeasement.
Tax credits only offer a one time windfall and not that much to speak of for the working classes. A lower rate of deducted taxes would supply a small but steady supply of extra cash in hand that would most likely be spent immediately on daily purchases.
Oh, Obama
Even after his brief stint in the Senate, Obama has to realize that the Republican Party is the party of the vampire. It's sole purpose is to find ways to remain in power so they can procure blood for their masters. For example, in passing Part D of Medicare the only reason not to have pharmaceutical companies negotiate with the government on drug prices was vampiring. The Republicans saw to it that the vampire pharmaceutical companies would have a steady supply of blood to feast on: the blood of Medicare recipients.
This activity has got to stop. Obama and the Democrats are in a position to use the bloody stake handed to them by the voters.
When the Democrats pick up the stake the vampire party will try to hide. They will hide behind those in denial: the employees of the pharmaceutical industry and its shareholders. Not all of them are in denial, many are already the un-dead who have feasted on the body and blood of those with chronic diseased and are no longer repulsed. Those closest to this bloody reality--doctors for instance-- are bribe with kickbacks disguised as consulting fees and vacations disguised as junkets. All paid for by the pharmaceutical industry as inducements to look the other way as the vampires feast.
Medicare recipients know the truth. They know firsthand where the vampires feast.
The carnage done by the Republican Party can no longer be hidden for it has touched too many. The voters have cast out the party of the vampires and elected Democrats to be the party of the bloody stake. But, beware, some of the Democrats are already the un-dead. Once bitten by the perks of the vampiring industries these Democrats will help plot ways to hold back the hand in which the bloody stake has been placed.
How do we know who the Democratic un-dead are. They will be the ones who complain that if we force the pharmaceutical industry to negotiate its prices with Medicare and to stop its feasting on the body and blood of the of the old and disabled, jobs will be lost and stockholders not paid.
Perhaps so, but the money saved will go into the creation of more productive jobs. Jobs-- depending on how well the Democrats can wield the bloody stake--that aren't maintained at the price of vampiring.
Concerning Obama, the question for Democrats and the country is twofold: has Obama been bitten, and if he hasn't been bitten is he capable of recognizing the un-dead? If he needs a picture to guide him all he has to do is just look across the aisle at what remains of the Republican Party.
My hope for Obama is that his rhetoric about cooperation is a ruse to lure Republicans closer; that hidden behind his back he holds firmly in his hand the the bloody stake given to him by the voters; and that when he strikes his arm is strong, his eye is keen, and his mark is true.
Wait no longer. Stake them! Stake them Obama! Stake them all, the toady un-dead and the vampire corporations they serve.
wjd123:
Well said!
Obama campaigned on a platform that included tax cuts. I'm not particularly surprised that he's using the stimulus package as a chance to make good on this promise early when it will also generate a certain amount of points with the Republican side of the aisle.
I think we need tax increases, particularly at the high end, but acting all shocked that he's cutting borders on mendacity unless you honestly weren't paying attention to who you were voting for.
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