Obama's $300 Billion Tax Cut: Lots of Buck, Not Much Bang

The soon-to-be Obama Administration floated quite a trial balloon over the weekend: $300 billion in tax cuts for workers and business over the next couple of years. When you get past the eye-popping number, perhaps the most striking element is how conventional most of the ideas are.

For individuals, they’d include some version of Obama’s Making Work Pay Credit, a refundable tax credit (aka cash payment) for everyone making roughly $200,000 or less. Obama aides did not say how this money would be distributed, although they hinted they’d try something other than the rebates that the Bush White House turned to three times over the past eight years. One idea: reduced withholding, which would release the funds more slowly than a lump-sum payment would.

The research on the last three rebates suggests that people spent between one-third and one-half of the money within nine months of the time it got into their pockets. If Obama pumped $150 billion into these tax cuts and 40 percent, or $60 billion, got spent, the impact on the U.S.’s $14 trillion economy would be real, though modest.

On the business side, Obama aides leaked three ideas. The first: extending bonus depreciation, another Bush measure that would allow companies to write-off the cost of equipment faster. The second: giving companies immediate refunds by letting them use using last year’s losses to reduce prior year tax liabilities. Idea #3: giving businesses a refundable tax credit for each new worker they hire or even each employee they don’t lay off.

The net operating loss idea makes some sense. But other than trying to buy votes from pro-business Capitol Hill Republicans, it is hard to see what the other two schemes would accomplish. Bonus depreciation in its many incarnations has been tried a half-dozen times over the past four decades and its benefits are, shall we say, hard to find. It won't help companies with losses (most of them, these days), or non-profits. A year ago, while both were at The Brookings Institution and TPC, Obama advisor Jason Furman and CBO director-designate Doug Elmendorf wrote of the 2001-2003 versions, “bonus depreciation for business investment did not seem to be very effective in spurring economic activity.”

Refundable tax credits for hiring new workers promise to be an administrative nightmare and won't create many new jobs. It is tough to see how a company that is seeing its sales slaughtered in today’s recession is going to hire just because it gets a few thousand dollars per new worker from the government. Profitable firms would merely take the credit for bringing on workers they were already planning on hiring. 

I can’t begin to imagine how the variation on this idea--credits for not laying someone off--would work. My head throbs at the concept of the IRS trying to administer a rebate based on intentions. Worse, these breaks would never work unless they are refundable and, to be honest, giving such credits to failing business makes my skin crawl. In reality, it would become yet one more bailout—only this time taxpayers wouldn't even get stock for their trouble.

Let’s hope that many of these trial balloons crash to earth long before they have a chance to become law, though I fear they won’t.