Tax Cuts as Stimulus


There’s some concern out there about the extent to which the Obama stimulus plan that’s emerging in press accounts relies on tax cuts rather than public investments. It’s worth saying that there is a case on the merits for using tax cuts, namely that there’s something of a disjoint between the dollar figure that economists come up with when they try to calculate the level of stimulus needed by looking at national accounts data and the dollar figure that budget analysts come up with when they try to calculate the quantity of spending ideas that are (a) useful, (b) ready to go fast, and (c) genuinely involve only temporary spending commitments. That said, Will Straw and Michael Ettlinger did publish a paper for CAP called “How to Spend $350 Billion in a First Year of Stimulus and Recovery”.

But of that $350 billion, about $50 billion was tax cuts. And that’s a one year proposal. So our guys had $300 billion in spending and $50 billion in tax cuts in the first year. Obama has $300 billion in tax cuts and $475 billion in spending over two years. If you do some crude division, that’s $150 billion in tax cuts in one year (quite a bit more than our proposal) and $237.5 billion in spending in one year (close to our proposal). Which is to say that Obama’s team seems to me to be pushing close to the limits of what’s out there to spend plus adding a lot of tax cuts as gravy. Gravy that, it seems, they’re hoping will attract Republican support. And that I’ll believe when I see. It’s one thing to unveil a compromise as a result of a bipartisan negotiation, and another thing to unveil an opening bid that you say you hope conservatives can get on board with.