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Obama Stimulus Package to Include Major Tax Cuts.

President-elect Barack Obama is reportedly about to announce a much bigger tax cut than was expected, as part of his stimulus package.

Obama Eyes $300 Billion Tax Cut:

Huge Breaks for Firms, Individuals Are Aimed at Winning GOP Support for Stimulus

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. It may make it easier to win over Republicans who have stressed that any initiative should rely more heavily on tax cuts rather than spending.

Though the Wall Street Journal presents this as a political move to gain Republican support, it seems like smart policy to me. And it would be consistent with the likely influence of one of Obama's economic advisers, Christina Romer.

Here is Harvard's Greg Mankiw writing (in a superb post) last month:

By contrast, recent research by Christina Romer and David Romer looks at tax changes and concludes that the tax multiplier is about three: A dollar of tax cuts raises GDP by about three dollars. The puzzle is that, taken together, these findings are inconsistent with the conventional Keynesian model. According to that model, taught even in my favorite textbook, spending multipliers necessarily exceed tax multipliers.

This research by Romer makes sense to me. I question how government spending promotes substantial economic growth; it's private investment that needs to be encouraged, and lower taxes would seem to achieve that much better that big pork-barrel spending or big bailouts of financial institutions. (After all, we already have one of the most progressive federal income tax burdens in the developed world.)

One must always be careful to note that the devil is in the details. As with most proposals that include income tax cuts for those who don't pay income taxes, it might be better to call this class of cuts welfare payments, rather than tax cuts, but the theory of the earned income credit is that it's sort of a refund of federal payroll taxes.

To promote employment that lasts and adds to real economic growth, I would instead favor a direct long-term cut in federal social security payroll taxes.

Even though Obama's tax cuts will probably be phased out for those making over some amount (perhaps $200,000), one bone that could be thrown to the so-called rich would be allowing them to deduct their actual net investment losses from their overall earned income, instead of allowing just $3,000 in net losses a year. With a market downturn, these investment losses tend to be real losses, not artificial losses generated from some questionable tax shelter. As such, they ought to be deductible in the year realized.

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