Big Spending Moderates
The press has widely reported that the difference between Senate and House stimulus bills is mostly about tax cuts (Senate) versus spending (House). That's wrong. The main difference is about who runs the spending programs-the IRS or program agencies
In fact, the Senate bill includes some major expansions in spending–notably, subsidies for car and home buyers–and cuts in others, such as aid to state and local governments. The new Senate spending was presented as tax cuts, but that is simply window dressing. The add-ons are spending programs, and particularly ineffective ones at that.
Let's take the case of the car buyer interest deduction, an $8-billion tax expenditure. What if instead of running it through the tax system, the Senators had just offered low-interest loans to car buyers? That's clearly a spending program. Suppose they designed the program so that low-income households did not qualify, and the subsidy increased with income, so families earning $40,000 would get $200 off their loan payments and those earning $200,000 would save $1,000? It's still a spending program, albeit a dumb one, especially if the goal is to prod new spending.
That, in a nutshell, is the auto buyers' deduction. Since it's run through the tax code, low-income people (who don't owe income tax) don't qualify. Higher-income, high-tax-bracket people, who buy more expensive cars, get the biggest subsidies. (There's also a similarly misguided $3 billion tax deduction for sales taxes on cars.)
The $39 billion home buyers' credit is even more obviously a spending program. Take a $15,000 federal rebate for all home buyers, disqualify the lowest-income 40 percent of households, and then trim it back for tens of millions more who don't have enough tax liability over two years to use the full credit, and, voila! You have the home buyers' credit. It's spending, whether run by the IRS or by HUD.
Some tax provisions are likely to provide effective economic stimulus. For example, almost all of the benefit of the child tax credit expansions proposed by the House would go to lower-income working families that are most likely to spend their tax credits. Ironically, the Senate cut that provision way back.
And one big piece in the Senate bill–the extension of the AMT patch–is a legitimate tax cut. It's not likely to provide any stimulus, but it's not a spending program in drag.
The choice at base is not between tax cuts and spending. It is between relatively effective spending programs–like aid to state and local governments—and wasteful, ineffective ones—like tax breaks for car and home buyers.