Does the Stimulus Contain $280 Billion in Tax Cuts?

February 12, 2009

Tomorrow begins the final round of voting on the stimulus bill, after much lively debate. Since President Obama first asked for a $300 billion stimulus bill (with a 60:40 spending to tax cuts ratio) to be ready for his signature on Inauguration Day, it’s become a $789 billion compromise package. The Washington Post has an excellent visual depiction of the House-approved version, showing where all that money goes and when it is spent. Details are still sketchy; the final version should be available soon. (UPDATE: The conference report is here – 32 MB PDF.)

Much has been said (and typed) about the merits of stimulus in general and this bill in particular. I personally recommend podcasts done by economist Russ Roberts, who in his weekly podcast program recorded one with a proponent of the bill and one with an opponent. To be as comprehensive as I can be, proponents argue that consumer spending has dropped requiring an increase in government spending, tax cuts are less preferable because they have lower multiplier effects in the economy, the government must be active to counter a lack of confidence, and stimulus spending is a good vehicle for pushing forward many neglected priorities at once and will create or save about 3.5 million jobs. (Some however warn that the stimulus may not work because it is not large enough.) Opponents argue that uncertainty about government action is causing the loss of consumer confidence, tax cuts (particularly a payroll tax cut) would have a greater impact than government spending in spurring economic growth, much of the proposed spending is wasteful and not likely to have a short-term stimulative effect, government cannot create meaningful jobs, and government action will be ineffective until core problems such as too much housing debt and those toxic assets held by banks are addressed. Readers can easily find these arguments and can judge the merits for themselves.

I decided to write this blog post after a friend who supports the bill told me that it contains “$300 billion of tax cuts.” What is a “tax cut”? Is it really equivalent to “direct payments to individuals,” of which there are about $280 billion worth? Much of these “tax cuts” are payments to individuals who do certain things or meet certain criteria. First-time homebuyers get $8,000. Those who buy plug-in hybrid cards get $9,100. Money is potentially provided for unemployment benefits. High-income individuals who might become subject to the Alternative Minimum Tax (AMT) are given a break from that. And those who work will get $400 back (reduced from $500), in $13 dribbles each week, so long as they don’t earn too much money. States get about $50 billion to provide Medicaid treatment for individuals, potentially reducing state tax burdens. (Not likely.) There are tax credits for renewable energy, for power grids, for tuition. There’s even a deduction for sales tax paid on new cars.

Many of these provisions (I’d exclude the $400 credit and the AMT patch) look to me like spending through the tax code. Instead of establishing a government program that would send a $9,100 check to everyone who buys a plug-in hybrid car, the IRS does it via tax forms. Instead of sending an $8,000 check to first-time homebuyers, the IRS does it via tax forms. Etc. The money you get for these things has no relation to what you pay in taxes. It’s often a transfer to a taxpayer from the Treasury (and thus, other taxpayers). You only get the tax reduction if you do these things.

I’m not sure if I could define “tax cut” on my own. (Anyone want to e-mail suggestions?) Massachusetts defines tax expenditures as “designed to encourage certain taxpayer activities or to limit the tax burden on certain types of individuals or endeavors,” and are different from “an across-the-board levy on a base, such as income, to which a specific rate applies and for which no modifications exist.” Maybe that’s a place to start.

With the AMT relief at $70 billion and the Making Work Pay credit at $116 billion, I personally would say the bill has $186 billion in tax cuts (about 24% of the bill), of which the AMT was probably going to happen anyway. (Yes, it’s all paid for by borrowing and not spending reductions, but that’s another debate.)

Expect more in numbers and analysis from Tax Foundation experts tomorrow.


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