Will the Tax Cuts Help Fix the Economy?
How much will the $300 billion in tax cuts approved today by the House Ways & Means Committee really stimulate the economy? They will help some, but don’t expect them to accomplish a lot.
I’d give the overall plan a Gentleman’s C. Some provisions would channel money to low-income people most likely to spend it, but deliver the cash too slowly. Others distribute the funds relatively quickly, but give an awful lot to wealthier taxpayers who are least likely to spend it.
The business tax cuts may be even less effective. The proposed investment incentives are troublesome on two counts: They are not likely to help companies that are losing money (if you are already not paying taxes, an additional tax break is of no value). At the same time, they would create a windfall for profitable companies that were going to invest anyway.
TPC will release a detailed report card on the Ways & Means bill within the next few days but, in the meantime, here’s a quick look at the pros and cons of the tax stimulus, starting with the breaks for individuals:
Proposals to increase the Earned Income Tax Credit and the child credit get high stimulus marks for targeting those working families most likely to spend the money, one key to getting the economy back on its feet. Unfortunately, many families won’t get their credits until they file their 2009 tax returns in 15 months.
The cash payments to workers through the Make Work Credit, one of President Obama’s big campaign promises, almost mirror the pros and cons of the EITC. By increasing take-home pay by about $10-a-week, it will get cash into people’s wallets quickly enough. However, couples making up to $200,000 would get this payment, and many are likely to save, not spend, those extra dollars. One good idea: Paying out the money a bit at a time rather then in a lump-sum rebate. Some economists think people are more likely to spend money when they get it in small chunks.
It is tougher to see how most of the business credits would help much. The bill would allow small businesses to immediately deduct the cost of up to $250,000 in capital investment they make this year. It would also allow larger businesess to take faster write-offs for investments they make in 2009. But in the real world, how many are in any position to buy new equipment now? Their sales are in the tank and they can’t get credit.
Another proposed change would get cash to businesses that were once in the black, but are losing money now. Making better use of Net Operating Losses would not only provide a much-needed boost to their cash flow, it might also leverage the investment incentives. This may be the best of the business tax breaks when it comes to helping the economy in the short-run.
While some of these ideas may help a bit in today’s lousy economy, what will happen once we get back on our feet? Obama wants to make the Making Work Pay credit permanent, and it is unlikely the increases in the EITC or child credit will ever be rolled back. It is the same for small business expensing of equipment. So we probably are making some important long-run changes to the tax code in the name of stimulus. I’m just not sure they are going to do very much good right now.