Tuesday, January 06, 2009


Mr. President Elect Obama is having some very strange ideas about getting the economy moving again. He is proposing tax cuts on business.

WASHINGTON -- 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.
Well that is starting to sound good - until you get to the fine print.
The largest piece of tax relief in the new plan would involve cuts for people who pay income taxes or who claim the earned-income credit, a refund designed to lessen the impact of payroll taxes on low- and moderate-income workers. This component would serve as a down payment on the "Making Work Pay" proposal Mr. Obama outlined during his election campaign, giving a credit of $500 per individual or $1,000 per family.
The trouble with that kind of tax cut is that it doesn't stimulate much.
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. But Obama aides wanted a provision that could get money into consumers' hands fast, and hope they will be persuaded to spend money this time if the credit is made a permanent feature of the tax code.
OK. So stimulating personal expenditures doesn't help much. In fact the DC Examiner (and some one needs to keep examining the DC folks) which has been studying the matter says that stimulating the consumer is not very effective.
One of those studies was done by Obama’s new chief economic advisor, Christina Romer of UC Berkeley, who found $3 in increased Gross Domestic Product (GDP) for every $1 in tax cuts. Increased spending generates at best a mere 40 cents of GDP growth on the dollar. Third, that 40 cents actually goes to special interests like labor unions, politically influential contractors in favored industries and state and local political allies of the party in power.
In other words a stimulus plan based on pork spending creates corruption and shrinks the economy if the pork is paid for out of taxes or increases the debt load if it is paid for by floating T bills. Heaven knows Mr. Obama has enough trouble with corruption. But maybe he is one of those fearless guys like his former friend Blago, or Richardson his former Secretary of Commerce designate, or Hillary who may be tied up with the Norman Hsu corruption. Well there is plenty to go around. And there is also the little matter that voters hate Detroit and auto unions.

So what is the tax plan for business?
As for the business tax package, a key provision would allow companies to write off huge losses incurred last year, as well as any losses from 2009, to retroactively reduce tax bills dating back five years. Obama aides note that businesses would have been able to claim most of the tax write-offs on future tax returns, and the proposal simply accelerates those write-offs to make them available in the current tax season, when a lack of available credit is leaving many companies short of cash.

A second provision would entice firms to plow that money back into new investment. The write-offs would be retroactive to expenditures made as of Jan. 1, 2009, to ensure that companies don't sit on their money until after Congress passes the measure.

Another element would offer a one-year tax credit for companies that make new hires or forgo layoffs, which could be worth $40 billion to $50 billion. And the Obama plan also would allow small businesses to write off a broad range expenditures worth up to $250,000 in 2009 and 2010. Currently, the limit is $175,000.

William Gale, a tax-policy analyst at the Brookings Institution think tank in Washington, said the scale of the whole package is larger than expected. He called the business offerings a true surprise, since most attention has been focused on the spending side of the equation, especially the hundreds of billions of dollars being discussed for infrastructure and aid to state and local governments.

"On the other hand, it was hard to figure out how they were going to spend all that money in intelligent ways, so it makes sense to do more on the tax side," Mr. Gale said.
Not only does it get more money into the economy quicker, it allocates the money most efficiently - to firms that are profitable.

I'm beginning to wonder if I didn't vote for the wrong Republican. No matter. Evidently the right one won in the end. But I got to tell you - my head is spinning. What happened to all that Marxist stuff he studied as a kid? Or all the lefty rhetoric he fobbed off on his south side constituents? His latest stance is a betrayal of their hopes and their votes.

Maybe he is working on the principle of: “if the economy is going good there will be more to steal”. It could be worse.

H/T Jules Crittenden via Instapundit

Cross Posted at Classical Values

1 comment:

al fin said...

Right now it is all just talk. Wait and see how it turns out before letting your head spin.