Tax Cuts Off the Table (Once Again)
February 6th, 2009 . by economistmomThe Washington Post reports on President Obama’s rally cry to Congress to work things out on the recovery package. The sticking point in the Senate seems to be the perception among centrists that there’s too much in the package that is not effective as true, short-term “stimulus”:
As debate resumed on the Senate floor, a bipartisan group of nearly 20 moderates kept trying to hammer out a compromise that would attract more Republican support by cutting roughly $100 billion from the bill.
But President Obama seems to want the total package to stay just as big as it–around $900 billion:
Obama said that the House and Senate versions of the economic recovery package can still be improved and refined and that some provisions may need to be dropped and others added.
“But broadly speaking, the package is the right size; it is the right scope; it has the right priorities to create 3 [million] to 4 million jobs and to do it in a way that lays the groundwork for long-term growth,” he said.
Well, I’ve seen the list of the pieces of the package that would potentially end up on the cutting room floor, and it’s no wonder why it’s been hard for the Senators to find much savings (my emphasis added):
In their talks last night, the group of Democratic and Republican senators failed to reach agreement on which programs to trim. Instead, as the chamber has debated the bill this week, its cost has grown by almost $40 billion, with the tab now at more than $920 billion.
Reid said yesterday that he would allow the centrist, bipartisan group to continue working and that, if it reaches consensus, he would schedule a vote for today on final legislation. If that fails, he said he would call for a rare Sunday session for a key procedural vote that would require 60 votes for passage…
“It’s very difficult, because everyone has certain pet programs in this bill,” said Sen. Susan Collins (Maine), the leader of the Republican faction in the bipartisan group. “We’re trying to focus it on spending that truly helps stimulate the economy. People have different views on whether or not a program meets that test.”
Collins is one of three Senate Republicans whom Obama hosted at the White House this week for one-on-one sessions in an attempt to win their support. She told reporters yesterday that he agreed to her effort to reduce the overall cost of the package to $800 billion. That would require dramatic reductions in funding for popular items such as school construction and special education…
The House approved an $819 billion package last week, but the Senate has added more than $100 billion in tax cuts to its version of the legislation, which started at about the same figure as the House measure. Efforts to reduce the cost of the Senate bill are not focused on those tax cuts, but on parts of the more than $550 billion in spending that House and Senate Democratic leaders originally sought.
Two sticking points for Republicans were funding for school construction and Head Start, both viewed as worthy programs but not ones that would provide a sufficient boost to the economy…
So tax cuts are off the table, given a “bye” in this test of whether proposals meet the criterion of effective (high “bang per buck”) short-term economic stimulus. Note that the list of untouchable tax cuts in the recovery package includes the $70 billion for Alternative Minimum Tax relief alone–which the Tax Policy Center grades as a “D-” in terms of its “stimulus effect,” saying it’s “neither timely nor targeted” and “makes no sense as economic stimulus”, and which economist Mark Zandi says has a multiplier (”bang per buck”) effect of less than half a dollar per dollar spent–one of the most ineffective forms of stimulus he has considered in his analysis. Meanwhile, Zandi’s analysis clearly shows that infrastructure spending is one of the most direct and effective ways for the government to stimulate the economy (immediately boost GDP and create jobs). So why is cutting out any tax cuts off the table? Because tax cuts sound like they lead to smaller government and have broader benefits than construction projects to modernize particular schools, even if that school construction would actually create more jobs than AMT relief will (especially per dollar spent). And because no politician, even those Democratic politicians who favor spending programs over tax expenditures, likes to be on the record opposing a tax cut (or favoring a tax increase that would pay for other tax cuts or government spending).
It is distressing that tax cuts are ‘off the table’ when it comes to adjusting and focusing the Stimulus package.
I’m one of those voters who can’t understand why the Republicans’ push for tax cuts is being given the respect it’s received, given how (not) well the Republicans’ previous tax cuts worked.
My “I’m not a professional economist” belief is that the indirect spending of tax cuts doesn’t have the same precision as the direct spending of investments in systems & programs, or in safety nets. Tax cuts are stimulus by omission rather than stimulus with a committed purpose. And I wrong in thinking that the impact of tax cuts is more diffuse (many places the ‘freed’ money can go) relative to focused investment/spending?
AMT is an abomination!!! Do you have to pay it? A lot of us in CA do.
I see your point that it’s not good stimulus. But politically speaking, the AMT relief will be enacted one way or another, right? Otherwise, much of the upper middle class will get caught up in it.
Although not good for stimulus, it’s better for the deficit if $X of AMT relief is carved out of a fixed cost stimulus package rather than there later being a separate $X deficit-increasing bill for AMT relief.
JohnB wrote:
AMT is an abomination!!! Do you have to pay it? A lot of us in CA do.
I see your point that it’s not good stimulus. But politically speaking, the AMT relief will be enacted one way or another, right? Otherwise, much of the upper middle class will get caught up in it.
True. Hence, the real abomination is that we leave a flawed law on the books because it improves our future deficit projections. Our politicians could easily fix the AMT by indexing it. Instead, they do so via yearly patches because it allows us to pretend that we will receive additional revenue when it supposedly ends NEXT year. The difference in revenue is the gap between the yellow and blue line at this link. As can be seen, this difference is dwarfed by the projected increase in the deficit if the Bush tax cuts are extended (the difference between the orange and yellow lines) and the actual increase in the deficit if the monies borrowed from Social Security and the other trust funds are included (the difference between the blue and red lines).
Although not good for stimulus, it’s better for the deficit if $X of AMT relief is carved out of a fixed cost stimulus package rather than there later being a separate $X deficit-increasing bill for AMT relief.
There’s no evidence that the dollars for AMT relief crowded out any other spending or tax cuts. And, as Diane quotes the Washington Post in her most recent post:
House moderates oppose including the AMT provision in the stimulus package, arguing that the issue should be addressed in the regular budget process so that its cost can be offset by spending cuts or tax increases…
In any event, I believe that the current stimulus bill should only contain temporary stimulus for the current economic crisis. Limiting it as such is the best way to avoid any unnecessary hits to our deficit. All other good ideas, including AMT relief, can be handled by the normal legislative process.