The Wonk Room has been following the developing saga regarding tax cuts that President-elect Barack Obama is looking to include in an economic recovery plan. Today, the Senate Finance committee held a closed door meeting to discuss the plan, and some Democratic Senators emerged skeptical of the cuts, saying they “wouldn’t do much to stimulate the economy or create jobs.”
Lawmakers were reportedly “especially critical of a proposed $3,000 tax credit for companies that hire or retrain workers”:
- Sen. Kent Conrad (D-ND): If I’m a business person, it’s unlikely if you give me a several-thousand-dollar credit that I’m going to hire people if I can’t sell the products they’re producing…That to me is just misdirected.
- Sen. John Kerry (D-MA): I’m not that excited about it…The creation of a tax credit for hiring isn’t going to make up for the lack of goods being sold.
Also criticized was a plan to distribute tax cuts incrementally through workers’ paychecks:
- Sen. Ron Wyden (D-OR): In tough times, people don’t respond that well to marginal changes, such as a small amount of money added per paycheck.
Kerry said he’d “rather spend the money on the infrastructure, on direct investment, on energy conversion, on other kinds of things that much more directly, much more rapidly and much more certainly create a real job.”
Indeed, significantly more stimulus “bang for the buck” comes from direct investment in infrastructure than from any type of tax cut. One dollar invested in infrastructure has a return of $1.59 in GDP growth; the most effective tax cut, a payroll tax holiday, only returns $1.29, while most tax cuts don’t even return 50 cents.
However, in order for the stimulus to be large enough to make a difference, it is going to have to include some tax cuts, as there is only so much infrastructure spending that can be implemented quickly. But as Matthew Yglesias wrote, to be an effective stimulus the cuts need to “put money in the hands of individuals with a high propensity to spend.” This means lower- and middle-income families, not corporations or millionaires. To his credit, Obama has proposed some cuts of this kind.
The tax rebate passed last year by Congress was ineffective because it was poorly targeted. Economists have calculated that taxpayers spent just 12 percent of the rebate and put the rest of it into savings accounts or toward old debts. The current economic crisis is too dire for another misfired effort.
Sen. Tom Harkin (D-IA):
There’s only one thing we’ve got to do in this stimulus, and that’s create jobs. I’m a little concerned by the way Mr. Summers and others are going on this … it still looks a little more to me like trickle-down.