As The Wonk Room noted earlier, President-elect Barack Obama — in an attempt to garner conservative support — has directed about 40 percent of his proposed economic stimulus package toward tax breaks. These cuts, while appropriate if targeted correctly, are really not the best way to jumpstart the economy.
However, the anti-tax crusaders at the Club for Growth believe that Obama’s proposed tax breaks don’t go far enough, and that he should drop his cuts aimed at the middle-class to focus on cutting taxes for corporations and the wealthy. From a press statement today:
The Club for Growth gives Barack Obama credit for including tax cuts in his stimulus bill, but urges the President-Elect to replace his tax credits with real, pro-growth tax cuts that will actually encourage work, investment, production, and a burst of economic growth…These include lower marginal income tax rates, lower corporate tax rates, and the elimination of the capital gains tax.
The Club for Growth closed by saying, “We urge President-Elect Barack Obama to embrace a stimulus bill that will actually live up to its name and stimulate the economy.”
However, the Club has put forth two competing assertions. It wants a bill that “actually” stimulates the economy, but the actions it proposes are the least stimulative ones that the federal government could take.
According to an analysis by Moody’s Economy.com, cutting corporate and capital gains taxes offers very little in terms of stimulative effect. For each dollar spent on a capital gains tax cut, there is only a 37 cent boost to GDP, while for each dollar spent on a corporate tax cut, the return is an even more paltry 30 cents. Compared to the $1.64 return on a dollar invested in extending unemployment benefits or the $1.73 return from a temporary increase in food stamps, this is chump change.
The reason for these differing returns is fairly simple: stimulus dollars are most effective when aimed at those who will use them immediately. Corporations and the wealthy don’t necessarily need to spend money, whereas a lower-income worker or someone who is unemployed is almost certain to use any available funds right away.
With the $700 billion Troubled Assets Relief Program (TARP), it became apparent that banks were hoarding the money, and thus the effect of the bill was diminished. The same could happen with an ill-conceived stimulus package, whereas properly targeted tax cuts — as well as, increased spending on infrastructure, aid to state governments, and supporting the social safety net — will have a much stronger effect.