Economists, Democrats Criticize Obama Tax Cut Plan

Image has not been found. URL: /wp-content/uploads/2008/11/obama-speaking2.jpgSen. Barack Obama (D-Ill.)(WDCpix)

Hoping to brace a jittery American public for yet another taxpayer rescue of the sinking economy, President-elect Barack Obama stressed yesterday that no plan will be successful without bipartisan cooperation.

“The true test of the policies we’ll pursue won’t be whether they’re Democratic or Republican ideas,” Obama said at George Mason University in Northern Virginia, “but whether they create jobs, grow our economy, and put the American Dream within reach of the American people.”

Illustration by: Matt Mahurin

The reference to “Republican ideas” required no translation. Obama’s plan calls for hundreds of billions of dollars in tax breaks for businesses and individuals that some reports estimate amounts to 40 percent of the entire stimulus package. The strategy is part effort to make good on campaign promises of cutting taxes and part effort to entice Republicans in Congress to support the huge spending package.

Politically, then, the tax cuts kill two birds with one stone. But what the tax cut plan fails to do is win over many economists who say those breaks will do little to boost the economy and, more importantly, some key Democrats in Congress whose reservations, if not resolved, could hinder Obama’s hopes to pass the bill quickly.

“I’m not that excited about that,” Sen. John Kerry (D-Mass.) told CNN Thursday, referring to a provision providing a $3,000 tax break to businesses that hire new employees or retain current ones. “I’d rather spend the money on the infrastructure, on direct investment, on energy conversion and other kinds of things, much more directly and much more rapidly and much more certainly create a real job.”

Earlier this week, the Obama team outlined its $775 billion plan to pump some life back into the ailing economy, including funding for infrastructure projects, energy innovations and low-income health care. Yet roughly $300 billion — almost 40 percent of the spending — would go toward tax breaks, according to that blueprint.

Republicans, led by Senate Minority Leader Mitch McConnell (R-Ky.), have applauded the tax provisions as sound measures to prompt growth through private industry. But in interviews this week with economists across the ideological spectrum, many questioned their effectiveness beyond a political lure.

Some experts wonder, for example, how the government would be able to determine that employers, for the sake of a $3,000 tax break, retained employees they originally intended to fire. “I don’t imagine how you do that,” said Dean Baker, co-director of the Center for Economic and Policy Research. “And I’m not a fan.”

Chad Stone, the chief economist at the Center on Budget and Policy Priorities, argued that the business tax break might tempt companies to cheat by claiming retainees they never intended to get rid of. “There are a lot of opportunities to game the system,” Stone said.

The skepticism is not limited to the left. Jagadeesh Gokhale, an economist at the libertarian Cato Institute, said the $3,000 credit is far too small to convince struggling businesses to keep employees — who cost many times that number — on board. “It’s a drop in the bucket,” Gokhale said, “and it’s probably not going to be successful.”

Another tax provision in the Obama plan would grant most workers a $500 break — $1,000 for couples — off of their payroll taxes. That plan is sure to be popular. Yet a similar strategy was tried last year in the form of $600 rebates mailed directly to taxpayers, and many experts question its effect as a stimulus. Baker, for example, estimates that rebate recipients spent just 30 or 40 cents per dollar, the rest going into savings or used to pay down debts.

On Wednesday, House Majority Leader Steny Hoyer (D-Md.) claimed a distinction between last year’s rebates and Obama’s payroll break of this year. “They are not rebates,” Hoyer told reporters. “They are tax cuts. There is a difference. There is not going to be any lump sum sent out to anybody. What they will get is more dollars in their paycheck.”

But economists say the difference is largely insignificant. “Fundamentally,” Stone said, “a tax rebate is a tax rebate.”

Obama is also pushing a tax break that would allow businesses to apply any losses suffered this year to any profits made in the past five. That would grant a windfall to industries that have lost the most in the downturn. But many economists say it would do little to benefit the larger economy. The companies most likely to benefit, Stone pointed out, “don’t have demand for the stuff [they] already make. So added cash flow — what are [they] going to use it for? … It’s most likely the case that companies will just pocket the money.”

“That’s almost a special interest tax break,” Baker said, claiming that it was targeted to help Wall Street and builders — two industries most responsible for fouling the economy. “They’re at the bottom of the list of industries that deserve saving,” he said.

The comments come on the same day that Obama urged Americans to accept the enormous spending package as a kind-of necessary evil for getting the economy back on track. “Only government can provide the short-term boost necessary to lift us from a recession this deep and severe,” Obama said. “Only government can break the vicious cycles that are crippling our economy.”

Complicating the debate, the Congressional Budget Office released figures Wednesday estimating that the federal deficit in 2009 will hit $1.2 trillion, representing 8.3 percent of the entire economy — the largest deficit since 1945.

Still, unlike the debate surrounding the Wall Street and Detroit automaker bailouts, public sentiment appears to be on the side of Obama’s economic stimulus plan. A Politico poll released Thursday indicates that 79 percent of voters support the yet-to-be-released spending bill.