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

February 8, 2009

So the Senate is set to pass its version of the stimulus bill, which includes more “tax 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 tax 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 rates. 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 credit 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 withholding isn’t affected by AMT.)

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