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Senate Takes Out Some Spending from Stimulus Bill; Adds Back Spending Through the Tax Code (and an AMT Patch)

2 min readBy: Gerald Prante

So the Senate is set to pass its version of the stimulus bill, which includes more “taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. cuts” than the House version and cuts some spending. The new tax cuts include a deduction for the interest paid on car purchases and for the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. paid on car purchases, as well as an expanded homebuyer credit of $15,000 for any home sale. (In other words, many Republicans in the Senate are selling out to the home builder and real estate lobbies.) The Senate bill also includes an AMT patch for tax year 2009. The Senate bill spends less than the House as they have also removed some spending items.

Many Republicans have argued that tax cuts are better policies than direct spending for a stimulus, but these targeted tax cuts for two industries are really no different than direct spending items. Neither the car deduction nor the homebuyer credit significantly lowers marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. s. Instead, they direct resources into two industries at the expense of higher long-term deficits, just as the spending advocates direct resources into various areas at the expense of higher long-term deficits.

According to the logic of many Republicans in the Senate, if the federal government gave a tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. to Construction Company XYZ to build a new school, that would be great for the economy. But if the federal government wrote a check to Construction Company XYZ to build a new school, calling it an outlay, it would be irresponsible spending and wouldn’t do anything to stimulate the economy.

The moral of the story is that the Republicans may be right to some exent when they say that not all spending is stimulative, but they need to understand that many of their tax cuts are going to have very similar economic effects as direct spending items because in many cases they are economically equivalent.

(As for the AMT patch, this will have really no stimulative effect as a patch was going to pass anyway at some point this year, and withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests. isn’t affected by AMT.)