Obama's Option: Big Tax Cuts

So President-elect Obama’s team is now sending out signals that it intends to make tax cuts liberally in its fiscal stimulus plan. The ostensible reason is to get Republicans on board and make the eventual deal “bipartisan”. I’ll guess that there are a couple of other more realistic reasons.

First, I think that team Obama has probably taken a close look at the numbers and said we better get something going fast. There aren’t enough “shovel ready” (I hope we retire that phrase soon) projects to get money into the economy quickly. There’s lots of tennis courts and community centers that may be ready to go but finance too much of that stuff and the press will be all over it, and not in a good way.

Second, there are a lot of companies, big and small, in precarious states. Short of injecting money directly into a plethora of businesses, the easiest way of trying to save them is through the tax code. It may be a fool's errand but it does have the saving grace of looking good to the electorate. A way of saying we tried. One of the options, to let them claim current losses against past profits, is just a back door government recapitalization.

Third, the Democrats could pass anything they want at this point in time and pull in a lot of Republican votes. They aren’t looking for bipartisanship by adding taxes to the mix, they want cover. Back to my first point. The numbers have scared the bejesus out of them and they recognize full well that this whole thing could still be a disaster in two years. No way do they want to go into the next election cycle looking like they have been pulling all of the levers. Give the Republicans something they can hang their hats on and let them take some of the blame if the worst happens.

Finally, it may be that Mr. Obama is sick and tired of listening to economists who had this all wrong to begin with tell him how sure they are of the ways to fix things. Maybe he just threw up his hands and said take some from column A and some from column B and has decided that foreign affairs might not be such a bad thing to concentrate on after all.

Personally, I’m delighted to see team Obama make this switch. Yeah, there’s some political calculation involved but it also shows some welcome pragmatism.

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Comments

[epeon:]

It would be wonderfully, deliciously ironic if Obama ends up being a big taxcutter. He slashes the marginal tax rate, money flows into the economy, and the economy revives like a sick man with a blood transfusion. And, here is the kicker, it would work. It would wonderfully if Obama can restrain the greenies with their "cap and trade" and other toxic tonics for the economy. If Obama can prevent the environmentalists from trashing the economy and keep spending somewhat in check, the economy will role and he gets a second term.

The irony would be delicious. Obama gets a second term and a place in history by implementing a republican economic plan.

Jan 06 03:14 PM

[DougM:]

The tax "cuts" are never going to be reductions in the high marginal rates paid by the minority of taxpayers who pay most of the taxes. They are almost certainly going to take the form of "tax credits" to people who pay little or no income taxes. He campaigned on this - no surprises here.

Jan 06 03:38 PM

[User 68127:]

The Obama 'tax cuts' are really not tax cuts, but welfare. The most productive members of society, who can spend the most and create the most jobs, will be excluded via income caps and actually shoulder MORE of the tax burden. Those who pay no taxes will get a 'tax cut' (read: socialist welfare payments via redistribution of income). Through Clintonesque word games, Obama and the pliable media turn this into 'tax cuts.'

It would be great if we had true tax cuts--and they would work! That, however, would mean including everyone through MARGINAL tax rate reductions that are PERMANENT. Then the people could decide how to most productively deploy their money and stimulate the economy. I suspect that this is not what the Dems have in mind.

The alternative is to grow government, balloon the deficit, and increase waste and corruption (for examples, look at Illinois, or the national mortgage scandal, or...) all to line the pockets of cronies and appear to be 'doing something'...

Jan 06 03:51 PM

[jepittman:]

The reports I've seen in WSJ and on CNBC are saying most of the tax cuts will be to the lower and middle class and in the form of permanent payroll tax reductions. This arguably is the most efficient form of demand stimulation because it immediately puts more money in consumers hands that they know they will get every payday. They then decide how to use it instead of the government.

Incidently this is potentially the third increase many consumers will have, the other two being lower gasoline prices, and lower mortgage rates (assuming they own a car and a home with a refinanceable mortgage). It will take a little time but these increases cannot but help improve consumer confidence.

The stimulus package will reportedly also include large infrastructure projects like bridge repair, highway expansions (four laneing heavily traveled roads), Interstate resurfacing and refurbishing as well as airport and railroad construction. These projects will run for years and will be constant sources of new demand.

These actions along with the monetary stimulation provided by the Federal Reserve should have the economy returning to positive growth by the second half of the year. The stock markets will see it coming and be moving up well prior to that time.

Jan 06 11:52 PM

[Ant:]

Barry Soetoro aka Obama should use that tax money to buy himself US Citizenship, or a Birth Certificate.
What a smokescreen, it's all welfare.

Jan 07 08:23 AM

[jackooo:]

The unemployed don't need tax cuts. They need cash. The same type of bailout the big guys received.

Jan 07 01:59 PM