Amy Traub

Tax Cuts for Recovery?

The folks at the non-partisan Tax Policy Center have just released a report grading the stimulative potential of different aspects of the American Recovery and Reinvestment Plan now pending in the House.

Looking over their results, one conclusion is the tax cuts overall don’t make for fantastic stimulus. The TPC analysis, which doesn’t look at spending proposals like extending and enhancing unemployment benefits or rebuilding schools, gives no tax provision better than a B+ grade. Half the proposals get a C or worse. The good news is that the majority of the money goes to the best proposals. The Making Work Pay tax credit and increasing eligibility for the refundable portion of the child tax credit each get a B+ and together they account for $163.6 billion over ten years – nearly 60 percent of the tax cuts in the bill.

Ironically, the most efficient tax cuts are precisely the ones running into the most resistance from the right. “A refundable tax cut is spending,” complains Grover Norquist, “If you write a check, it ain't a tax cut." Yet according to TPC, these provisions work best because they provide assistance to low-income households likely to spend the money (middle-income households would also get a boost from Making Work Pay) and because they start fairly quickly. Meanwhile, business tax cuts championed by conservatives tend to do poorly.

Worst of all, according to TPC, are the $200 million in incentives for businesses to hire unemployed veterans and disconnected youth. This appealing-sounding program is deemed “unlikely to generate jobs for the target groups.” To do that effectively, it might just work better to resort to the dreaded spending.

To be fair, President Obama has explained that the economic recovery plan is intended to promote long-term economic growth as well as a jump-start to the economy. Provisions like the investment in renewable energy, which score poorly as stimulus because of their slow impact, nevertheless set the economy on a more sustainable path for the future.

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Posted at 8:21 AM, Jan 27, 2009 in Tax Policy
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