How did the tax cut get so big?

Yes, 40 percent of the Obama stimulus package will be a tax cut.  It’s already a talking point that "the Democrats have lost their nerve" but the reality is not so devious.  Obama wishes to deliver on his pledge to cut taxes (always electorally popular) and upon close inspection the economic team probably hasn’t found a lot of first-year stimulus spending it likes.  That leads to this obvious policy conclusion and of course it is very good news.  No, I do not think these tax cuts will drive recovery but a) less money will be wasted, and b) it shows that the Obama team is willing to flinch and be realistic, not just as a final compromise but indeed as an opening gambit. 

The best way to think about fiscal policy is to judge, in advance, what is actually likely to come out of the process.  The alternative approach is to recommend policy based on one’s personal sense of what should be done and then to blame all the forces which stop that from happening.  (Rarely do these people stop to ask whether their political views are robust to the presence of significant opposition.)  A lot of people on the left are disappointed, but in my view what is coming out of the process is, so far, above average.

Comments

Is that partially in leiu of the proposed spending? Or would that be wholly on top of it?

Tyler: First time commenter. Enjoy your blog and read it every day.

Just remember that Obama's definition of a "tax cut" does not necessarily mean a "rate cut". He is making noises about "ideological tax policy", and a $500 one time rebate costs a lot of money but has NO value from a structural stimulus standpoint.

The alternative approach is to recommend policy based on one's personal sense of what should be done and then to blame all the forces which stop that from happening.

That could cut either way. In general I think way too many "serious" commentators want to remain in the realm of the politically feasible, and thereby generate the realm. If we take your quote literally, you are saying experts shouldn't tell policymakers what they truly believe ought to be done.

Could prizes be considered a stimulus? Thinking about the EMP hardening, I can imagine that some areas are more amenable to technical solutions today, but we don't know what they are. If the prize is out there, even if it isn't spent within the recession, it signals demand and money is spent by those trying to win.

is there solid economic evidence in favor of a tax rate cut rather than a lump-sum tax rebate? there've been several good posts here about why tax cuts may have a higher multiplier than spending. does the effect require them to be rate cuts, or will a rebate that raises marginal tax rates by being phased out at higher levels of income count?

I think is a very good move, still it works like he think it will

We will have to wait to see how realy good or bad is this idea

Bob Murphy: "...way too many "serious" commentators want to remain in the realm of the politically feasible, and thereby generate the realm."

You have no idea†¦ Déjà vu of Andropov coming into power with The Central Committee Directive filling newspapers: “increase productivity 1% and cut labor waste 0.5%†
The fundamentals have been left intact, but raising productivity 1% somehow should pull us ahead. And all the “serious commentators† approvingly bobbing their heads full of economical acumen†¦

The real danger is that smallish fiscal stimulus spending gets passed, doesn't immediately turn around the economy, and the Keynesians take it as confirmation that we needed a much larger stimulus instead...

DK: is there solid economic evidence in favor of a tax rate cut rather than a lump-sum tax rebate?

While I don't have citations handy, in general, how you respond to a one-off event (lump-sum) is different from a recurring event (rate-cut) with recurring events (or the belief thereof) being more likely to change behavior.

Case in point, I recall seeing articles claiming that only 20% of the last stimulus checks actually getting spent with the rest either being saved or put towards personal debt reduction.

Of course, that may be the effect you want as it arguably would've been a better way to inject capital into the banks. (e.g., could be theoretically neutral to the tax payers, distributed wisdom on investment)

So to simplify, rate cut => increased spending; lump sum => increased savings and which is "better" depends on which effect you want.

I think one thing that's sort of clever is altering the withholding equation to reflect the tax cut. I bet that this small difference will cause at short term tax cut to behave more like a long term tax cut since people will get acclimated to the difference pretty quickly.

Tyler,

Think a minute (only a minute because you seem to think as quick as you read). The fiscal position of the Obama administration over the next four years is damn difficult at best. Thay have to produce an economic stimulus (I think they should, but that is another matter). So they need the maximum economic expectations bang per real stimulus buck. The way to get that is to concentrate the real part of the stimulus on tax cuts and the part that is about making people feel the country is going somewhere again (plus most of what is necessary to get Congessional assent) on the spending stimulus - most of which won't get spent during the recession and which will be recast in the developing plans for medium term economic recuperation.

Looks to me tha the Obama team is making a pretty good start.

How is it a "flinch" for Obama to make good on 2 years of campaigning for a middle class tax cut? It's only a "flinch" if you assume that no matter what they actually say, Democrats always want to raise taxes on everyone.

after reading about Beijing and Dubai regarding its superior architecture boom I started to debate does this mean both cities pass Tokyo as great architecture cities? even though Tokyo is more home grown, it just doesn’t stack up against these cities

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