Obama's Option: Big Tax Cuts

by: Tom Lindmark

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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