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The Senate bill supposedly wooed a few recalcitrant Republicans by trimming spending (see above) and throwing in simple, clear-cut, and effective tax cuts. The tax portions of the Senate stimulus bill do contain approximately 40 separate tax-related provisions aimed at boosting the economy, amounting to an estimated $385.3 billion in cuts and government give-backs.
The Senate might have done something straightforward, like cutting the corporate income tax or cutting the payroll tax that all workers pay. Instead, most of the provisions are tax credits, many of which are refundable. In other words, individuals and businesses need to pay their taxes up front and then will get money back from the government. These sorts of programs, aimed incentivizing investment, are better understood as spending programs disguised as “tax cuts.”
Among the various tax provisions are programs such as the following:
- The “Making Work Pay” credit: This would
provide a refundable tax credit of $500 to individuals making up to
$75,000 and a credit of $1,000 for couples making up to $150,000.
It is intended to act as a refund of the Social Security payroll
taxes paid by workers, though even those with no tax liability
would also qualify to receive a check from the government for the
amount of the refundable credit. Additionally, workers receiving
this tax credit would receive credit as if they had paid into
Social Security and thus accrue benefits toward a retirement
pension. The Making Work Pay tax credit is the centerpiece of the
Obama “tax cuts."
However, they are akin to welfare checks. Such tax credits are not likely to stimulate the economy because they provide no incentive for individuals to be more productive, but would simply pay them whether or not they were productive. Also, the potential consumption that might result from the tax credits will not have an effect on job creation. Business owners might notice a blip in their sales but they know that it is the result of a one-time tax credit. They won’t build new factories or hire more employees based on a blip. The total cost of this is expected to be $140 billion.
- Temporary Increase in the Earned Income Tax Credit or EITC: The EITC is a refundable tax credit available to low-income individuals, which increases with the number of children. Those that earn approximately $13,000 per year receive the maximum benefit (currently $5,028) and those who earn higher incomes receive lesser amounts. The stimulus proposal would increase the tax credit for those with three or more children, raising the total tax credit by about $600. EITC is essentially a welfare program, and while it may help shield its recipients from poverty, it is purely redistributive and will not spur economic growth.
- Temporary Increase of Refundable Portion of Child Credit: Individuals with children qualify to receive a refundable tax credit of $1,000 per child until 2010, at which point it returns to $500 per child. If the individual does not owe any taxes, the tax credit is refundable only for those that make more than $12,550, which is intended to assist low-income working parents. The stimulus proposal would lower the amount that parents would have to earn to $6,000. By lowering the amount of income to $6,000, it might decrease the incentive for people to be profitably employed, and therefore would have the opposite of a stimulative effect on the economy.
- Waiver of Requirement to Repay First-Time Homebuyer Credit: Current law allows first-time homebuyers to receive an interest-free federal loan of $7,500 (in the form of a refundable tax credit) to purchase a home. The loan has to be repaid over 15 years through an individual's tax returns. The stimulus proposal would waive the repayment requirement, effectively giving all first-time homebuyers a $7,500 credit. This proposal may stimulate the purchase of homes, but do we really need the government to push people toward home purchases? In a time when the housing market is contracting to correct the abuses of the past, it is misguided to assume that additional interventions to spur home purchases will help the economy.
- Build America Bonds: The stimulus creates an incentive to invest in municipal bonds that provide financing for public building projects. Like many of the other bonding provisions in the bill, this gives an incentive for private capital to flow toward public investment rather than private. Public investments are only going to promote economic growth if the government decides to use the funds more productively than they would otherwise be used in the private sector. There is no reason to think, however, that the government has suddenly become better at investing people’s money.
There are many more bad policies and spending decisions in the Senate stimulus bill, but even a cursory glance at the parts outlined above give a good sense of the overall legislation—and what is likely to be signed into law by President Obama.
And here is one more thing to consider: There is absolutely no evidence that any stimulus package in the past 80 years has goosed economic activity—not FDR’s during the Great Depression, not Japan’s during the 1990s, and not George W. Bush’s in 2001 and 2008. If anything, the economic evidence suggests that such spending packages actually intensified and prolonged misery.
Instead of rushing through legislation that will likely have no short-term effect on the economy, is guaranteed to have negative long term ones, and that serves the traditional interest groups that politicians are always busy catering to, the Senate should have cut spending like Ireland is now doing and cut marginal tax rates across the board. That would not only have stimulated the economy, it would have been fiscally responsible considering the massive entitlement crisis that is coming our way. But such legislation, alas, will have to wait for another day. Or another crisis.