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Monday
Jan052009

Why are tax cuts such a large part of the emerging Obama stimulus plan?

In the public discussions of the stimulus plan, there seems to be near consensus on the Left that tax rebates (and especially rate cuts that don't affect household incomes immediately) are relatively ineffective at stimulating demand. Studies of the Bush tax rebates indicated that about half of the give-backs were saved or used to pay down debt instead of stimulating aggregate demand by being promptly spent. The leading "Democrat ideas" have been investment in infrastructure and green energy projects, subventions to State and local governments so they would not reducing spending, and of course extension of unemployment insurance. But over the weekend it was reported that the Obama stimulus plan will include a very large component that is just tax reductions, which is the only stimulus that Republicans approve. What's going on? Has Obama changed parties? Does he lack the nerve for a fight?

Tyler Cowan may have the answer here. The Obama team may not have been able to identify enough "shovel ready" projects to absorb all the infrastructure spending they may have wished. Rather than authorize money that would not be spent soon enough, or spend money on undeserving projects (like digging holes and filling them in), Obama has decided to bring forward the middle-class tax cut he promised and call it part of the stimulus plan. My assessment:  If Obama proposes permanent tax cuts for the middle class only and front loads it with some kind of rebate, then he gets a twofer--stimulus and delivery on a campaign promise.  If he proposes only temporary tax cuts/rebates, he's caving in to the GOP.

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