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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.

J. Aldridge:
Since the Fed Government knows no limits to anything along with an accounting methodology only an organized crime syndicate would appreciate on top of a highly sick and political driven borrowing frenzy, makes any amount of a proposed tax cut insignificant.

With the kind of Federal mentality we have today no amount of stimulus is going stimulate the country for the better.
1.5.2009 8:18am
Houston Lawyer:
These aren't tax cuts, they're just government give aways directly to individuals. This merely constitutes taking my money and giving it to someone else. We are rapidly reaching the point where 50% of all households pay no income tax and these folks really like to bitch when we don't cut their non-existent taxes.
1.5.2009 8:53am
Sarcastro (www):

$300 billion of tax cuts to individuals and businesses

This just in: businesses now count as individuals! Individuals on welfare, even!!

It's socialism!!!
1.5.2009 9:16am
A.C.:
For those of us who do pay taxes, what tax cuts would we most like to see? I favor reducing rates overall rather than giving specific cuts to specific interests, but I certainly have my preferences if we MUST have targeted cuts.

Top of my list is eliminating (or raising by a large amount) the income ceiling for the student loan interest deduction. It's at something like $70K for a single person, which is ridiculous for anyone who has gone to law or medical school.
1.5.2009 9:16am
first history:
OMG, a Lindgren post praising an Obama policy . . . of course it isn't official yet, so I guess there is hope he will revert to form.
1.5.2009 9:18am
first history:
. . . favor reducing rates overall rather than giving specific cuts to specific interests . . .Top of my list is eliminating (or raising by a large amount) the income ceiling for the student loan interest deduction. It's at something like $70K for a single person, which is ridiculous for anyone who has gone to law or medical school.

Yeah, talk about special inerests . . . just what we need to encourage, more sharks (I mean, doctors and lawyers.) I would rather see a reduction in the payroll tax or an expansion of the tax brackets.
1.5.2009 9:21am
first history:
inerests=interests

Shouldn't post without my contact lenses on.
1.5.2009 9:23am
A.:

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.


Are you running for something?
1.5.2009 9:30am
PLR:
Sure, it's Macro 101 that the government multiplier is less than the private investment multiplier. But let's not overstate the magnitude of the difference in the current environment. The multiplier effect relies on the downstream private spending of after-tax proceeds from transactions, and there isn't a whole lot of spending going on these days.

Surely we all remember how all that cash from TARP was supposed to get banks lending again. Well, they did lend to each other, I guess that's something.
1.5.2009 9:30am
A.C.:
I said "if we MUST."

Yes, I do think we want to encourage young people to get as much education as they can absorb. And it would be good if doing so did not put them out of the real estate market for decades or keep them from having children before age 45. Or force them to chase money above all else, when they may have other preferences.

Not that I think expanding the student loan interest deduction will fix those problems by itself. It's just one idea that might help make education a little more affordable.
1.5.2009 9:30am
A.C.:
Part of my thinking on the above is that the people with the biggest student loans are smart young people who attend graduate school, but whose parents are not rich. Rich kids seldom end up with six-figure debt.
1.5.2009 9:36am
first history:
AC:

While investing in higher education is a laudable goal, it is a long-term investment, and does little to promote immediate economic activity. Wihout economic expansion, all we will have are over-qualified burger flippers.
1.5.2009 9:38am
ichthyophagous (mail):
It seems to be dogma that we are in "the beginning of a second Great Depression", as Paul Krugman says. I say, based on the behavior of crude oil prices over the last month, the downturn isn't as severe as all that. OPEC's production cut seems to be working. It just takes time for the capital injections to take effect, and the Obama package as described may likely send the economy galloping out of control.
1.5.2009 9:45am
A.C.:
Oh, I think it would do a lot for the kids who are coming out of school this year and finding jobs (if any) that don't pay what they were expecting when they went in. (If they really are flipping burgers, they will get the deduction as it currently stands, as well as qualifying for programs that temporarily reduce or eliminate payments.) It's money in the pocket for people like that.

Economic activity is not just for middle-aged people, after all, although a lot of politicians talk as if that were the case. Most people over a certain age have their stuff, anyway, and can easily go a few years without redecorating. We're talking here about people who may be in the market for their first real furniture. It takes a lot to set up a household from scratch.

But lowering the student loan burden might also, in the medium term, help allocate highly skilled labor in more sensible ways. Not everyone wants to chase the big money on Wall Street, but a lot of people in recent years have felt that they had to to pay down debt. If a person could pay off professional school debt with a regular salaried job, while still being able to make the transition to middle class adult life, we might channel more of our talent out of silly financial shenanigans and into more productive endeavors.
1.5.2009 10:01am
PLR:
I say, based on the behavior of crude oil prices over the last month, the downturn isn't as severe as all that.
Care to elaborate?
1.5.2009 10:18am
arthur (mail):
By the time my income crossed over $200,000, I was not "so called rich," I was actually rich. Everyone else who earns over $200,000 is rich also.
1.5.2009 10:21am
Awesome-O:
Top of my list is eliminating (or raising by a large amount) the income ceiling for the student loan interest deduction. It's at something like $70K for a single person, which is ridiculous for anyone who has gone to law or medical school.

The phase-out is bad, but at least defensible in a progressive income tax system. What's much worse is the $2,500 cap on the student loan interest deduction. I didn't borrow that much money for higher education (I worked during law school and that covered about half of my tuition), and I borrowed when rates were ridiculously low, but I still exceed the $2,500 cap.
1.5.2009 10:40am
John (mail):
I'm amazed to think anyone would believe the multiplier for government spending would be greater than that for tax cuts.

Almost by definition, government spending will not encourage economic growth. If it did, private enterprise would be out there spending money on those projects. To take an example, consider Obama's infrastructure spending--this is just short term employment that, after the bridge is built, leads to nothing except unemployed bridge builders in a couple of years.

On the other hand, a tax reduction--i.e., a decision to leave earned income in the earner's hands--lets millions of people decide the best use of money. In particular, businesses will have more money to expand, and consumers will have more money to buy. This will lead to economic activity that will endure, unlike building a bridge.
1.5.2009 10:52am
cjwynes (mail):
These Democrat tax cuts usually end up being some kind of narrow, targeted tax credit for people with children. I hope that this time, for once, childless people will get a break too. An across-the-board rate reduction is still the best kind of cut, and if he lets the Bush tax cuts expire then even those of us with modest salaries are going to see a tax increase next year from the 10% bracket's elimination.

And if the tax "cut" for businesses is just that ridiculous thing he talked about a few months ago where he'd give businesses a deduction for hiring new employees, then it's no good. If there's no work for the additional employees, then it won't make sense to hire them even with a tax credit.
1.5.2009 10:52am
cjwynes (mail):
These Democrat tax cuts usually end up being some kind of narrow, targeted tax credit for people with children. I hope that this time, for once, childless people will get a break too. An across-the-board rate reduction is still the best kind of cut, and if he lets the Bush tax cuts expire then even those of us with modest salaries are going to see a tax increase next year from the 10% bracket's elimination.

And if the tax "cut" for businesses is just that ridiculous thing he talked about a few months ago where he'd give businesses a deduction for hiring new employees, then it's no good. If there's no work for the additional employees, then it won't make sense to hire them even with a tax credit.
1.5.2009 10:52am
Awesome-O:
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.

...thereby making a further mockery of the fiction that Social Security isn't welfare. Unless, of course, the cut in payroll taxes comes with a matching cut in future Social Security and Medicare payments for those now paying less in.

I could be brought on board with all these "tax cuts," though. Anyone whose income tax liability is less than zero gets their check, but it comes in a big black and yellow envelope with the words WELFARE CHECK written on it in in 72-point font.
1.5.2009 11:07am
A.C.:
$200K is rich if you get it every year. If it's a one-off, maybe not.

What about $100K, every year? If that's what you earn, it matters a lot:

- How much debt you have, and why;
- What house prices are like where you are; and
- Whether you have a million in savings and a paid-off house that you bought in '84, or $200 in the bank and just enough suits to get through the work week (if you aren't too fussy).
1.5.2009 11:27am
PLR:
What about $100K, every year? If that's what you earn, it matters a lot:

- How much debt you have, and why;
- What house prices are like where you are; and
- Whether you have a million in savings and a paid-off house that you bought in '84, or $200 in the bank and just enough suits to get through the work week (if you aren't too fussy).

Those are measurements of wealth. It's not feasible administratively to take taxpayer wealth into consideration when dealing with a tax based on income.
1.5.2009 11:49am
Clayton E. Cramer (mail) (www):

While investing in higher education is a laudable goal, it is a long-term investment, and does little to promote immediate economic activity. Wihout economic expansion, all we will have are over-qualified burger flippers.
Agreed. We need a lot more people with degrees that will actually be of some economic value, such as Chemical Engineering, Computer Science, Mechanical Engineering, even "soft" subjects for which there is a need (Social Work). But we don't need to subsidize degrees for which there are no jobs, such as Psychology, History, English, Art. And my BA and MA are in History.
1.5.2009 11:51am
Clayton E. Cramer (mail) (www):
"Rich" is an arbitrary definition, but I would say that if you don't need to work to pay your bills (you can live off your interest income), that's rich. Practically speaking, that's about one million dollars (say it like Dr. Evil, if that helps) for a couple. But of course, the Democrats aren't interested in taxing rich people, but those who are trying to become rich. That's why they tax income, not assets.
1.5.2009 11:53am
Clayton E. Cramer (mail) (www):
I'm assuming that Chemical Engineering degrees are in demand. One of my son's friends from junior high completed his BS in Chemical Engineering at age 18, and almost a year later, can't find a job.
1.5.2009 12:05pm
James Lindgren (mail):
Yes, social security is mostly a welfare program, but I'd rather see deficits increased to reduce those taxes and fund the program than spent on infrastructure or bailout projects if they are mainly designed to stimulate growth.
1.5.2009 12:08pm
ichthyophagous (mail):
To PLR:

On 12/17/2008 OPEC cut production by 4.2 million barrels per day effective Jan,1, 2009. See OPEC link
At that time the Feb contract on NYMEX was around $45. Now the same contract is $47.16. That is, the decline in price has been stopped. The price of the nearest contract was below $40 for a while but only briefly. Compare this situation to the entire period from 1993 to 2004 when most of the time the price was below $40. So yes, we have a recession, but can it really be so severe if energy demand remains high?
1.5.2009 12:18pm
A.C.:
There are lots of jobs in psychology, but mostly not for BAs. You need a graduate degree, either in psychology or clinical social work.

History is a pretty good undergrad major for people who want to be lawyers.

I even know a fair number of people who make their livings in the arts, but students in those fields have to do some hard self-assessment regarding their talents and whether they have the patience to do what it takes to get established. I doubt they have trouble with the income cap on the student loan deduction, though, at least not until they have been working for many years.

But I am told that the real hot ticket at the moment is for welding engineers.
1.5.2009 12:39pm
StopTaxingProduction:
Stop taxing production and income. Move to an inclusive consumption tax, and prebate the consumption tax to all up to the poverty line. So:

- the poor (poverty level) pay no taxes... not even FICA
- the IRS is gone
- 2/3 of lobbyists leave K Street as with no tax code, there is no room for favors
- the mechanism for the vast amount of corruption (tax breaks) is gone
- congress has less power
- the government no longer has any need or interest in how much you earn.
- savings are untaxed... only spending
- used goods are untaxed... only new retail sales are taxed.
- no corporate income tax means corporations will relocate to the US, instead of abroad
- no taxes on repatriated profits from overseas.
- you paycheck has no (federal) withholdings... you get the whole thing.
- converts Social Security to a pay as you go system (which it already is, and eliminates the fiction of a trust fund).

FairTax.org
1.5.2009 1:09pm
Gordon Walts Jr. (mail):
I'd prefer a lump sum check. an extra 12 bucks a week in my pay check is useless.
1.5.2009 1:11pm
guy in the veal calf office (mail) (www):
They should permit losses on the sale of a personal residence. Preferably against earned income. That might loosen up the seller part of the market and accelerate the move to equilibrium.
1.5.2009 1:13pm
Kev (mail) (www):
I even know a fair number of people who make their livings in the arts, but students in those fields have to do some hard self-assessment regarding their talents and whether they have the patience to do what it takes to get established. I doubt they have trouble with the income cap on the student loan deduction, though, at least not until they have been working for many years.

This is true. I'm a music professor, and a lot of my students are really hurting financially more often than not; it also takes longer than usual to get through school if they're having to work while doing so (since it gets in the way of the rigorous practice schedule demanded for this major). Thankfully, a couple of high-paying gigs can sometimes reduce the need to work so much.
But I am told that the real hot ticket at the moment is for welding engineers.

To build all those bridges Obama keeps talking about? ;-)
1.5.2009 1:32pm
CJColucci:
But of course, the Democrats aren't interested in taxing rich people, but those who are trying to become rich. That's why they tax income, not assets.

So when do we get the opposition party's plan to tax assets rather than income?
1.5.2009 1:32pm
Jane:
Tax cuts, given to those who pay little to no taxes, do not actually constitute tax cuts. Its a transfer of wealth from those who earn it to those who do not.

As for phasing out these 'tax cuts', an annual income of $200,000 does not make a person rich, unless they are already sitting on a pile of assets. A two career family which has not had time to build assets, or has not inherited assets, is not living a 'rich' lifestyle at $200,000 in annual household income. Comfortable, yes. Rich, NO. And the higher taxes they pay at that income level will make sure they are unable to build wealth.

Remember, the government taxes income, not wealth. So, please, lets stop talking about "taxing the wealthy".
1.5.2009 1:55pm
Clayton E. Cramer (mail) (www):


But of course, the Democrats aren't interested in taxing rich people, but those who are trying to become rich. That's why they tax income, not assets.



So when do we get the opposition party's plan to tax assets rather than income?
Probably never. But remember, the Republicans don't pretend to be the party of the little guy (even though they are closer to being one than the Democrats).

I assure you, if I had been running for a federal office last year, instead of state senate, I would have argued for a graduated tax on assets to replace federal income taxes. People with a billion dollars in assets generally vote (and contribute) Democrat anyway.
1.5.2009 2:04pm
A.C.:
And of course it's obvious that some fabulously wealthy people had negative income in 2008.

Even in normal years, though, income from work may bear little resemblance to actual wealth. People with significant assets can afford to take all those cool, semi-volunteer, non-profit jobs that people who live on their salaries cannot.
1.5.2009 2:07pm
Clayton E. Cramer (mail) (www):

And of course it's obvious that some fabulously wealthy people had negative income in 2008.
Huh? Loss of hundreds of millions of dollars in assets isn't "negative income." I lost about $100,000 in my brokerage and 401k accounts in 2008, but I didn't have "negative income." My bonds continued to pay regular interest payments, and my paychecks continued to come in just fine (until I was laid off part way through the year).
1.5.2009 2:17pm
Mama73 (mail):
ichthyophagous,

I am a free agent designer/copywriter. Business was slower late spring/early summer for me and all my other gainfully unemployed friends. Generally, we're the canaries in the coal mine. We're all doing well now (knock on wood) so I've been wondering if the economy was turning around too.
1.5.2009 2:21pm
Thorley Winston (mail) (www):
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.


Social Security and Medicare as they are currently structured are both unsustainable particularly as the baby boom generation will begin to draw on both programs in a few years. I don't think it makes sense to cut the payroll tax now and then have to hike it again in a few years when OASDI begins to pay out more than it brings in unless it includes some reforms to reduce spending on these programs such as phasing in a higher retirement age, means-testing, or letting younger workers opt at least partially out.
1.5.2009 2:28pm
PLR:
On 12/17/2008 OPEC cut production by 4.2 million barrels per day effective Jan,1, 2009. See OPEC link. At that time the Feb contract on NYMEX was around $45. Now the same contract is $47.16. That is, the decline in price has been stopped. The price of the nearest contract was below $40 for a while but only briefly. Compare this situation to the entire period from 1993 to 2004 when most of the time the price was below $40. So yes, we have a recession, but can it really be so severe if energy demand remains high?

All of that baffles me, but thanks for the follow-up.
I am a free agent designer/copywriter. Business was slower late spring/early summer for me and all my other gainfully unemployed friends. Generally, we're the canaries in the coal mine. We're all doing well now (knock on wood) so I've been wondering if the economy was turning around too.
Even ignoring the woeful consumer retail and housing sectors, one would normally think the economy is turning around if there are employment gains or if businesses are placing orders for durable goods. Neither is happening, but congratulations on your success.
1.5.2009 2:38pm
'08ama (mail):
Awesome !

tax cuts for everyone, not just the top 1%'ers.

Obama is a freaking GENIUS !

Poor Sean Hannity, he already told all his listeners that Obama was going to RAISE their taxes. Now he will have to tell them the truth. They'll be sooooo confused.
1.5.2009 2:52pm
Jimmy S:
'08ama, you're not the only confused one.

I'd been led to believe that tax cuts in the midst of two wars and a domestic fiscal crisis were outrageously irresponsible and potentially dangerous.
1.5.2009 3:24pm
Sarcastro (www):
I thought I hated Obama when he was a Marxist! Now I can hate him even more for his Fascistic, Bush-lite moderation!
1.5.2009 3:29pm
Jane:

tax cuts for everyone, not just the top 1%'ers.


Yea! Tax Cuts for people who don't pay taxes. We used to call it welfare. Now its called a 'tax cut'. And, of course, we can't cut the taxes of the people who actually pay most of the taxes, can we? No, that would be wrong, wrong, wrong. And unfair.
1.5.2009 3:29pm
Joe the Plumber (mail):
By the time my income crossed over $200,000, I was not "so called rich," I was actually rich. Everyone else who earns over $200,000 is rich also

Is that because you say so?

How, pray tell, is 200,000 "rich" in Manhattan if you have 3 kids?
1.5.2009 4:03pm
Joe the Plumber (mail):
Top of my list is eliminating (or raising by a large amount) the income ceiling for the student loan interest deduction. It's at something like $70K for a single person, which is ridiculous for anyone who has gone to law or medical school.

You are operating from the premise that:

A. We as a society should encourage that more people go to college.
and
B. It is anyone's problem but the borrowers how much student loan interest costs.

Both are bad ideas.
1.5.2009 4:06pm
Joe the Plumber (mail):
tax cuts for everyone, not just the top 1%'ers

I've always enjoyed watchings leftists repeat this mantra as if a) anyone has ever campaigned on it and b) it has ever been implemented.
1.5.2009 4:12pm
A.C.:
Joe - Is your opinion of the mortgage interest deduction the same? It's pretty clear to me that there are limits on encouraging even more people to buy houses.

Fine if you oppose both deductions. But if you support one but oppose the other, why?
1.5.2009 4:29pm
Dr. T (mail) (www):
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...

This "bone" is of no value to those who had no net income or profits. Losses need to be deferrable so they can be used to offset profits and/or income in a future year.
1.5.2009 6:21pm
Baseballhead (mail):
Yea! Tax Cuts for people who don't pay taxes.
At what point does this falsehood stop getting repeated?
1.5.2009 8:59pm
Brian K (mail):
How, pray tell, is 200,000 "rich" in Manhattan if you have 3 kids?

and just who made these people live in one of the most expensive cities in the US? i thought republicans were supposed to be the party of personal responsibility...although i suppose even that principle takes a back seat when it comes to helping the rich.
1.5.2009 9:34pm
Brett:
At what point does this falsehood stop getting repeated?


Maybe when it starts being a falsehood, rather than an inconvenient fact.
1.6.2009 1:07am
Brett:
A big part of the GOP's problem is that it no longer has any credibility as the party of small government and fiscal responsibility. Refusing to allow support for Obama's $775 billion spending package to be bought with tax cuts -- however useful tax relief would be in the current crisis -- would be a good start towards rebuilding that credibility.

If Obama and the Democrats want to spend $775 billion of taxpayer money on useless make-work government programs in a futile effort to stimulate the economy, let them. It'll give Republicans something to run on in 2010: "Mr. Obama's own economic advisor has said that cutting taxes is almost three times as effective a stimulus as government spending. So what did Mr. Obama and his Congressional allies propose? Almost three times as much spending as tax relief."
1.6.2009 1:22am

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