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Again with the Tax Cuts

On Monday, John discussed the politics behind the newly announced tax cuts planned for the new stimulus package. Whatever the political wisdom of this approach, the policy implications are troubling.

Media reports suggest that the main tax provisions of the bill will include allowing businesses to accelerate tax write-offs, providing incentives for business investment, and a tax credit for companies that make new hires or avoid layoffs. But these corporate tax cuts are unlikely to be effective. Commentators on this blog have already discussed the analysis of Mark Zandi – former economic advisor to the McCain campaign – whose economic models indicate that corporate tax cuts will generally provide less bang for the stimulus buck than public spending (Zandi’s calculation for the return on accelerated depreciation of new investment – similar to what the Obama team seems to be contemplating – is actually an abysmally low 27 cents on the dollar).

But the economic rationality behind the numbers is equally compelling. Simply put, businesses don’t make decisions about hiring, firing, and investment based on a nominal federal tax cut. They decide based on economic demand for their products or services. If there’s demand for more widgets, management at the widget factories will invest in more equipment and hire more widget-makers. If demand is stagnant or falling, tax cuts will have to be lavish indeed to induce companies to invest more in churning out a product for which there is little demand. (If the public interest in widget production in itself is that great -- as I’ve argued in the case of the auto industry –- we ought to find a more direct and efficient way than broad corporate tax cuts to incentivize it).

Finally, I’m skeptical of the argument that there aren’t enough productive ways to quickly spend the amount of money necessary to shore up the economy.

Certainly the number of shovel-ready infrastructure projects is limited, but with 46 million Americans without health coverage, $350 billion in state budget gaps prompting states to cut programs that serve the most vulnerable citizens, and millions of Americans facing the imminent loss of their homes because they cannot keep up with mortgage payments, Obama’s spending plans seem far from exhausting the opportunities to put cash into the hands of people who will spend it quickly and improve the country at the same time.

I critiqued Obama’s willingness to buy into the right’s framing of tax issues during the campaign. Yet despite his efforts to portray himself as an ardent tax cutter, exit polls suggest 71% of voters believed their own taxes would increase if he were elected. He won anyway. Maybe the politics of this issue, at least when it comes to the public, are not as ironclad as they once appeared.

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Posted at 8:23 AM, Jan 06, 2009 in Congress | Employment | Federal Budget | Infrastructure
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