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How did the tax cut get so big?
Yes, 40 percent of the Obama stimulus package will be a tax cut. It's already a talking point that "the Democrats have lost their nerve" but the reality is not so devious. Obama wishes to deliver on his pledge to cut taxes (always electorally popular) and upon close inspection the economic team probably hasn't found a lot of first-year stimulus spending it likes. That leads to this obvious policy conclusion and of course it is very good news. No, I do not think these tax cuts will drive recovery but a) less money will be wasted, and b) it shows that the Obama team is willing to flinch and be realistic, not just as a final compromise but indeed as an opening gambit.
The best way to think about fiscal policy is to judge, in advance, what is actually likely to come out of the process. The alternative approach is to recommend policy based on one's personal sense of what should be done and then to blame all the forces which stop that from happening. (Rarely do these people stop to ask whether their political views are robust to the presence of significant opposition.) A lot of people on the left are disappointed, but in my view what is coming out of the process is, so far, above average.
Posted by Tyler Cowen on January 5, 2009 at 03:50 PM in Economics | Permalink
Comments
Is that partially in leiu of the proposed spending? Or would that be wholly on top of it?
Posted by: Economic Geography at Jan 5, 2009 4:03:27 PM
From the doom and gloom perspective -- banks aren't willing to lend to anyone and Obama's top rate economic team can't find reasonable things to spend the money on ---
Sounds like we are heading for a gigantic contraction. No one can find anything worthwhile to spend on.
Posted by: nz at Jan 5, 2009 4:19:54 PM
Tyler: First time commenter. Enjoy your blog and read it every day.
Just remember that Obama's definition of a "tax cut" does not necessarily mean a "rate cut". He is making noises about "ideological tax policy", and a $500 one time rebate costs a lot of money but has NO value from a structural stimulus standpoint.
Posted by: Staring In Disbelief at Jan 5, 2009 4:23:54 PM
Just read your New Years Day post on "What would really change everything." Here's an idea for Obama's stimulus spending: How about nuclear EMP hardening critical core services like water/sewer, power, medical & emergency comm systems? Seems like that would be $200 billion well spent. It's cheap when the alternative is reverting to the 17th century.
Posted by: Staring In Disbelief at Jan 5, 2009 4:32:40 PM
The alternative approach is to recommend policy based on one's personal sense of what should be done and then to blame all the forces which stop that from happening.
That could cut either way. In general I think way too many "serious" commentators want to remain in the realm of the politically feasible, and thereby generate the realm. If we take your quote literally, you are saying experts shouldn't tell policymakers what they truly believe ought to be done.
Posted by: Bob Murphy at Jan 5, 2009 4:53:01 PM
Considering that one of the plans he highlighted in the very first paragraph of his first Saturday video about his stimulus plan was screwing in light bulbs, it's not surprising it turns out that there aren't a lot of useful things to spend money on quickly.
Posted by: Steve Sailer at Jan 5, 2009 5:03:48 PM
Could prizes be considered a stimulus? Thinking about the EMP hardening, I can imagine that some areas are more amenable to technical solutions today, but we don't know what they are. If the prize is out there, even if it isn't spent within the recession, it signals demand and money is spent by those trying to win.
Posted by: Andrea at Jan 5, 2009 5:13:15 PM
nz,
Sounds like we are heading for a gigantic contraction. No one can find anything worthwhile to spend on.
I disagree. I can immediately think of three things for which people will spend lots of money in coming
months:
1. Firearms.
2. Ammunition.
3. Survival kit.
Posted by: MarkJ at Jan 5, 2009 5:53:52 PM
is there solid economic evidence in favor of a tax rate cut rather than a lump-sum tax rebate? there've been several good posts here about why tax cuts may have a higher multiplier than spending. does the effect require them to be rate cuts, or will a rebate that raises marginal tax rates by being phased out at higher levels of income count?
Posted by: DK at Jan 5, 2009 6:26:35 PM
Re: MarkJ:
Snerk. Although, with the skyrocketing rate of firearms purchases in the last couple of months (particularly of those items people presume Obama will attempt to ban/tax out of existence), it could be argued that Obama has been the most pro-gun president ever (and not even president yet!).
Maybe I should put my money in Colt stock. :)
Posted by: Howl at Jan 5, 2009 6:34:48 PM
I think is a very good move, still it works like he think it will
We will have to wait to see how realy good or bad is this idea
Posted by: Jonathan L at Jan 5, 2009 7:51:44 PM
The problem is it means not a lot of stimulus, in which case, why do it at all?
Posted by: Lord at Jan 5, 2009 10:46:43 PM
Bob Murphy: "...way too many "serious" commentators want to remain in the realm of the politically feasible, and thereby generate the realm."
You have no idea… Déjà vu of Andropov coming into power with The Central Committee Directive filling newspapers: “increase productivity 1% and cut labor waste 0.5%”
The fundamentals have been left intact, but raising productivity 1% somehow should pull us ahead. And all the “serious commentators” approvingly bobbing their heads full of economical acumen…
Posted by: Ozornik at Jan 6, 2009 12:26:38 AM
It is a good sign that he is considering not wasting too much of the money on bad spending projects, but on the other hand he may be bowing to pressure to spend a lot of money (on tax cuts or new spending), despite realizing that it is fruitless. That wouldn't be a good sign but it is something many politicians would do.
Posted by: mk at Jan 6, 2009 12:48:56 AM
The real danger is that smallish fiscal stimulus spending gets passed, doesn't immediately turn around the economy, and the Keynesians take it as confirmation that we needed a much larger stimulus instead...
Posted by: Dave at Jan 6, 2009 1:42:27 AM
Hmmm, trying to imagine myself pleased with the process if it yielded $100B grant to The Arts endowment and pay gap sensitivity training for CEOs.
"Obama wishes to deliver on his pledge" How novel!
People playing a losers' game do things that don't get them in trouble. He could slash regulations on the bottom rung of the employment ladder or...yawn...cut taxes. I'm not excited when someone does something but I don't think it's for the right reason, but I will take my money back just the same, thanks.
I need a babysitter, maid, lawn guy, a pickup andropov auto maintenance service would be fantastic and maybe someone to do my research for me. I don't really need more dolares. I need better ways to spend them. Service economy, where are you!?!
Ditto on the prizes. Ideally we want to spur activity. Why spend money when you don't have to? I propose a prize should be offered for the solution of nuclear waste storage. My offered solution is to pay the Yucca mountain people to accept it. Use lots of concrete. At the very least, have that "shovel ready" for the next time.
Anyhoodles, when oh when will posting comments on blogs qualify as tenurable research?
Posted by: Andrew at Jan 6, 2009 2:32:01 AM
DK: is there solid economic evidence in favor of a tax rate cut rather than a lump-sum tax rebate?
While I don't have citations handy, in general, how you respond to a one-off event (lump-sum) is different from a recurring event (rate-cut) with recurring events (or the belief thereof) being more likely to change behavior.
Case in point, I recall seeing articles claiming that only 20% of the last stimulus checks actually getting spent with the rest either being saved or put towards personal debt reduction.
Of course, that may be the effect you want as it arguably would've been a better way to inject capital into the banks. (e.g., could be theoretically neutral to the tax payers, distributed wisdom on investment)
So to simplify, rate cut => increased spending; lump sum => increased savings and which is "better" depends on which effect you want.
Posted by: Jody at Jan 6, 2009 6:26:44 AM
We must have economic Alzheimer's. When has throwing money at a perceived problem ever worked in our past history? Stop the Arrogant Meddling! (aka "ones personal sense of what should be done".) Eliminate mark to market accounting. Send Congress home for 12 mos (unpaid). Send home all govt employees that do nothing but generate reports to other govt branches. Send us our money back. Sit back and watch America rock n roll! And . . . we didnt spend to do it!
Posted by: Dino at Jan 6, 2009 10:06:22 AM
I think one thing that's sort of clever is altering the withholding equation to reflect the tax cut. I bet that this small difference will cause at short term tax cut to behave more like a long term tax cut since people will get acclimated to the difference pretty quickly.
Posted by: Michael Foody at Jan 6, 2009 10:08:24 AM
Remember back when deficit spending was going to kill us all? How times change ...
Posted by: holmegm at Jan 6, 2009 12:05:22 PM
Tyler,
Think a minute (only a minute because you seem to think as quick as you read). The fiscal position of the Obama administration over the next four years is damn difficult at best. Thay have to produce an economic stimulus (I think they should, but that is another matter). So they need the maximum economic expectations bang per real stimulus buck. The way to get that is to concentrate the real part of the stimulus on tax cuts and the part that is about making people feel the country is going somewhere again (plus most of what is necessary to get Congessional assent) on the spending stimulus - most of which won't get spent during the recession and which will be recast in the developing plans for medium term economic recuperation.
Looks to me tha the Obama team is making a pretty good start.
Posted by: David Heigham at Jan 6, 2009 1:03:35 PM
Like most things, the devil is in the details. Here is the meat of the details from the article:
The legislation Mr. Obama’s team is developing with Congressional Democrats will devote about 40 percent of the cost to tax cuts, including his centerpiece campaign promise to provide credits up to $500 for most workers, costing roughly $150 billion. The package will also include more than $100 billion in tax incentives for businesses to create jobs and invest in equipment or factories.
As mentioned before, this is a 1x tax credit event. Not really structural tax cuts. But even more interesting, to me anyway, are the facts that a) the tax credit is for workers, i.e. the employed, and not families, and b) 40% of the 'tax cut' is in incentives for business to create jobs and invest in equipment.
In other words, over $100B of the tax cuts is only available to business that spend money. Given that most businesses are seeing contractions in revenue, profitability and access to credit, where are these businesses going to get the many hundreds of billions necessary to cash in on the $100B in tax credits? It seems to me that this portion of the tax credit is really like a lowering of interest rates. It is a rebate on the expense of borrowing for expansion since most companies have empty coffers to begin with.
Posted by: Josh at Jan 6, 2009 3:07:43 PM
How is it a "flinch" for Obama to make good on 2 years of campaigning for a middle class tax cut? It's only a "flinch" if you assume that no matter what they actually say, Democrats always want to raise taxes on everyone.
Posted by: Alex C at Jan 7, 2009 4:22:44 PM
DUBAI'S rapid expansion in recent years provided jobs for millions. But the global financial meltdown has abruptly ended the dream for many people as more and more firms sack staff to cut costs.
Spectacular economic growth, spurred by a robust construction sector, lured people from far and wide to the booming city on the shores of the Gulf, tempted by high pay, low tax and - for many Europeans - the year-round sunshine.
Foreigners form most of the population in Dubai and with residency permits linked to employment many of the people who are losing their jobs face the added upheaval of leaving the country.
Posted by: Dubai Property Investment at Jan 10, 2009 4:41:46 AM
after reading about Beijing and Dubai regarding its superior architecture boom I started to debate does this mean both cities pass Tokyo as great architecture cities? even though Tokyo is more home grown, it just doesn’t stack up against these cities
Posted by: Minthis Hills at Jan 11, 2009 2:53:56 AM
