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Boring Into the Obama Stimulus Plan

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"Boring Into the Obama Stimulus Plan"

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The first and most important thing about the Obama stimulus plan is that it’s about the size we need. That’s absolutely critical. And while I shared many progressives’ initial flinch away from the idea of having so much of the stimulus be tax cuts, I checked in with some folks and came to the conclusion that Obama’s has the balance about right and they have perfectly valid reasons for relying on a hefty dose of tax cuts.

Still, that leaves the question of what kind of tax cuts. The stimulative effect of tax cuts varies wildly across different genres of cut. The details of the Obama plan thus far released contain plenty of good stuff in terms of refundable tax cuts that make sure to offer both some middle class relief and also get money into the hands of the poor people who are in the most objective need and who have the highest propensity to spend. But there’s also plenty of talk about this idea of letting businesses get a refund on past taxes paid based on present losses.

The way this works is that you may have wracked up enormous profits in past years by, for example, packaging a lot of bad debt and pretending it was good debt. That would mean awesome profits in 2004 and 2005 and 2006 on which you paid taxes. But you may have huge losses in 2008, since actually your business model was a house of cards. Huge losses means no taxes. But this backdating provision would let you spread your losses back in time, allowing you to claim refunds on all the taxes you paid back when your firm was profitable. As stimulus, this doesn’t work. Businesses spend money based on calculations of the likely returns on spending. Insofar as it’s profitable to expand operations, businesses will spend money on expanding operations. Insofar as it’s not profitable to expand, businesses won’t expand. Transferring lump sums of money to existing firms doesn’t alter the profit-loss calculus. A firm with no expansion opportunities it sees as profitable will just pocket the lump sum and consider itself fortunate. And a firm with expansion opportunities it sees as profitable will only be very marginally impacted by an infusion of cash.

Meanwhile, the distributional impact is regressive. Since this is basically free money for corporate executives, business loves the idea. But it’s weak weak weak on the merits and unworthy of an overall solid economic agenda.

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