Monday, January 5, 2009

Tax Cut Obama

President-elect Barack Obama has come through with his first positive surprise.

Approximately 40% of the "stimulus" package will come in the form of tax cuts. Tax cuts are always a good thing. Here's WSJ reporting the news:

President-elect Barack Obama and congressional Democrats are crafting a plan to offer about $300 billion of tax cuts to individuals and businesses, a move aimed at attracting Republican support for an economic-stimulus package and prodding companies to create jobs.

The size of the proposed tax cuts -- which would account for about 40% of a stimulus package that could reach $775 billion over two years -- is greater than many on both sides of the aisle in Congress had anticipated...

The Obama tax-cut proposals, if enacted, could pack more punch in two years than either of President George W. Bush's tax cuts did in their first two years. Mr. Bush's 10-year, $1.35 trillion tax cut of 2001, considered the largest in history, contained $174 billion of cuts during its first two full years, according to Congress's Joint Committee on Taxation. The second-largest tax cut -- the 10-year, $350 billion package engineered by Mr. Bush in 2003 -- contained $231 billion in 2004 and 2005.
This is Obama, of course, so there is a bit of a redistributionist element to the tax cut. WSJ again:
The largest piece of tax relief in the new plan would involve cuts for people who pay income taxes or who claim the earned-income credit, a refund designed to lessen the impact of payroll taxes on low- and moderate-income workers. This component would serve as a down payment on the "Making Work Pay" proposal Mr. Obama outlined during his election campaign, giving a credit of $500 per individual or $1,000 per family.
I have to think Obama's, pro-tax cut, choice to head the CEA, Chrstina Roemer, had significant influence in Obama going in this direction.

I should note, spending cuts should accompany the tax cuts to keep the plan from becoming inflationary, however, I see no chance of that occurring at this time. So we really have only one-half of a decent equation based on this news, but a tax cut is much, much better than this "stimulus" ending up as government spending.


  1. Do we know if they are just doing rebates, or are they lowering the marginal tax rates?

  2. Bob,

    It appears that they will be one time cuts versus a change in rates. A lot of it appears to be going to business in the form of accelerated tax breaks.

    It's not the greatest, but when you consider it is 40% of Obama's "stimulus" program, it is a great relief versus increasing government spending.

  3. Robert,

    I'm a ABCT adherent, but how are budget deficits inflationary?

  4. Brian,

    Government budget deficits are always bad. When the gvt raises more more money, they can borrow it, which is crowding out private sector borrowing, or the Fed can buy the gvt debt which they do through the printing of money, which is highly inflationary.

    Given the size of the "stimulus" package, along with other gvt obligations in the first six months of the year,I fully expect the Fed to play a major role in the buying of new gvt debt.

  5. Ok, gotcha. It is through the Fed buying up debt to maintain low interest rates that causes the inflation, not necessarily the borrowing itself. I was having trouble seeing how government borrowing alone would be inflationary.