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.

Today, President-elect Barack Obama is scheduled to meet with the heads of both chambers of Congress “to discuss a massive economic stimulus plan” that could amount to $775 billion over two years.

According to various reports, the legislation will “direct about $300 billion of the stimulus package, or about 40 percent, toward tax breaks.” These cuts would, in part, “serve as a down payment on the ‘Making Work Pay’ proposal Mr. Obama outlined during his election campaign, giving a credit of $500 per individual or $1,000 per family.”

The size and scope of the cuts — particularly a proposed “business tax package” — seems to be a political move aimed at attracting conservative support for the legislation. Sen. Mitch McConnell (R-KY) and Rep. John Boehner (R-OH) have threatened to stall or block the stimulus bill if they are not given time to “dissect it for signs of ‘fraud and waste.’” However, McConnell did signal that a potential area for “quick, bipartisan agreement” is tax cuts.

While tax breaks can be economically stimulative if they are targeted correctly (particularly to lower-income Americans), at the end of the day they are simply not the best way to kick start the economy. As Yves Smith wrote at Naked Capitalism, “the problem with tax cuts is they may not be spent“:

And the degree to which they are saved means the stimulus was ineffective. In other words, reliance on tax cuts runs the risk that greater spending will be required to achieve the same result than via government spending. That is not a theoretical concern. We saw it, big time, with last summer’s tax rebate.

Moody’s Economy.com calculated that the most fiscal stimulus “bang for the buck” comes from spending increases (particularly infrastructure investment, extending unemployment benefits, and temporarily increased funding for food stamps), while tax cuts are much less effective. Furthermore, as Paul Krugman noted, “public investment leaves something of value behind when the stimulus is over” whereas tax cuts do not.

Already, Congressional leaders have conceded that the stimulus package will not be ready until February, instead of being set for Obama’s signature on Jan. 20, which was Rep. Nancy Pelosi’s (D-CA) initial goal. It is important, though, that this package gets sorted out as soon as possible so that the country avoids Krugman’s “nightmare scenario“:

It takes Congress months to pass a stimulus plan, and the legislation that actually emerges is too cautious. As a result, the economy plunges for most of 2009, and when the plan finally starts to kick in, it’s only enough to slow the descent, not stop it.