Will Obama's Proposed $300 Billion Tax Cut Be Enough?

Aides to the President-elect revealed further details of the economy recovery bill yesterday as his inauguration approaches. Of the total $675B-$775B package, aides indicated that approximately $300B of the program would be used for tax cuts. Of the $300B – approximately ½ would be used for individual tax breaks, while $100B of which would be set aside for businesses to encourage hiring. The individual tax cuts would equate to approximately $500 for individuals, or $1,000 per family.

While it seems as if the package is likely to pass, there is some strong opposition from Republicans in Congress. In fact, the newest details of the plan were announced after a growing sentiment of concern of too much spending, with too little disclosure of the details of the plan, by the Federal government. A New York Times article published yesterday entitled: “Obama Plan Includes $300 Billion in Tax Cuts,” quoted republican Senator Mitch McConnell: “Nobody thinks we ought to be spending this money on things like mob museums and waterslides… and if the money were lent rather than just granted, states would I think spend it wisely, and the states that didn’t need it at all wouldn’t take any.”

Of course, the big question is whether it will be enough or not? Obama’s advisors are making it clear that there are plenty of other measures which were discussed during the election that are not being reflected in this package, and will hopefully follow. However, the 2002 refunds only demonstrated marginal returns, and with an even worse economic environment now than there was 7 years ago, the effectiveness of this tax break remains to be seen.

Clearly, the tax break is designed to encourage spending from consumers. However, with such looming problems as the omnipresent fear of layoffs for most Americans, an exploding number of “underwater” mortgages with the continuing housing crash, and credit markets which are still not entirely unthawed, Americans are more likely now than ever to use the tax break as a buffer in savings, rather than go on a buying spree.

The Obama administration acknowledges that this is simply a measure to reduce the blood-loss which has been occurring in financial markets for the last few months. The same NYTimes article quoted Vice-President elect Joe Biden: “’There is no short run, other than keeping the economy from absolutely tanking. That’s the only short run,’ Vice President-elect Joseph R. Biden Jr. said on ‘This Week.’ He added: ‘We’ve got to begin to stem this bleeding here, and begin to stop the loss of jobs and the creation of jobs.’”

In theory, it should work to help ease the markets and relieve some financial stress for most working Americans, however it will be interesting to see how the average American uses the tax break.

Comments

[Moon Kil Woong:]

A tax cut is better than most stimulus plans simply because it leaves financial decision making to more efficient market participants: you. However, $300 billion one way or the other is like offering a person with a severed arm a band-aid. $300 billion won't even make up for the 2.5 million people who just lost their jobs for a year. Let alone the $10+ trillion dollars just lost in the stock market. Or the Trillions lost in real estate.

All wise people ask is a stable financial foundation in which we can clean up after the financial storm and start rebuilding our economy and financial base. Hopefully, this time it won't be built on the Green-sand (Sorry, I had to throw that dumb pun in there).

Jan 06 02:36 AM

[Crocodilian:]

What will Americans do with a tax cut? Probably save it at higher rates than they have in the past. Some factors that suggest that the propensity to consume should fall dramatically:
1) In a deflationary environment, a dollar in your bank account, even at %1 interest, is worth more than the asset you might buy for that dollar, so not spending is economically rational.
2) If you think that your circumstances may worsen, you save because you expect to have fewer dollars in the future than you do now

So its to be expected that a tax cut will produce less-than-historically... spending. Therefore, if we want to stimulate final demand, government spending is probably the more efficient way to go

Jan 06 03:04 AM

[Timothy Swift:]

Consumers are in a pickle. Housing is declining, mortgage and credit card debt is a concern of the treasury (consumer lending), retail spending is in a tail spin including and especially the autos.

Add to that job losses are top of mind and unemployment may expand past 10%.

Tax cuts are the best stimulus as it best matches human capital and financial capital. Who cares how tax cut money gets spent? Unfortunately, government spending focuses too far down the income earnings ladder and is likely to push skilled workers into unskilled work. Certainly not a well thought out use of human capital. In fact its a terrible use!

Savings dollars must swell to force investors, individuals, banks, hedge funds, PE whatever, to chase return, i.e. increase risk. Its simply the natural order of things, which explains the often quoted flight to quality to treasuries. Money needs to flow to riskier asset classes to grease the wheels of commerce.

If we really want to see this ship right itself in short order suspend the mandatory withholding of income, payroll and medi taxes. Let's call it "a loan to tax payers."

It'd chase lenders out of the credit card business as savings increases and would do more to stabilize mortgage buyers at the margin of foreclosure than anything else the gov could do to stabilize that market...

On another note and since I believe words mean things... How is an expansion of the child tax credit or the earned income credit a tax cut, and why is it included in the tax cut line item (if $300 bln could be called a line item)? Saying its to offset the payroll tax simply lacks intellectual integrity.

A tax cut decreases revenue while an increase in a credit of any kind is an expense. Two very different sides of the ledger.

Jan 06 01:09 PM

[axelrod608:]

Enough for what ? To get re-elected in a few years ? Probably. But a miniscule tax cut will have negligible effect on markets, the economy, the deficit or the national debt. Or anything else. Only if you believe a butterfly in Malaysia fluttering its wings powers the breeze in Belize can you believe a minor tax cut will make waves in the economy.

Tax cuts are political BS, not engines to power the economy.

Jan 06 01:48 PM

[Chancer:]

A tax cut of $1000 per family will not do much for this economy; but the deficit increase will certainly do damage to the next business cycle. They could do more to put $ in consumer pockets if they cut (as in "by law")interest rates which cuts mortgage payments every month (and I say that as a taxpayer with no mortgage). Cutting your mortgage payment by $100+ per month helps consumers and the housing market. it also does not cost the government as a tax cut does. You could also increase the mortgage interest deduction- like double it.

Jan 06 02:09 PM