Should We Devote 40% of the Stimulus to Tax Cuts?

The Wall Street Journal [1] reports this morning that President-elect Barack Obama is planning to devote roughly 40 percent of any new economic stimulus package to tax cuts. Arguing for the idea in the face of failed Bush tax cuts over the last eight years, his spokeswoman is quoted invoking the tired "pragmatic" meme, saying: "We're working with Congress to develop a tax-cut package based on a simple principle: What will have the biggest and most immediate impact on creating private-sector jobs and strengthening the middle class? We're guided by what works, not by any ideology or special interests."

Of course, tax cuts are a strange way to pursue "what works," because as CAF's Isaiah Poole [2] long ago noted, evidence suggests [2] spending - not tax cuts - is clearly "what will have the biggest and most immediate impact" in fixing the economy. Indeed, the Economic Policy Institute reports [3]:

"Most of the money from the recent tax rebate was saved rather than spent, thus blunting its stimulative benefit. By comparison, other options—such as infrastructure spending, aid to states, food stamps, and unemployment insurance (UI) benefits—are much more cost-effective because they target the needs most likely to channel money back into the economy."

Likewise, Economy.com's Mark Zandi (himself a Republican) recently estimated that each dollar dollar of refundable tax rebates only boosts GDP by about $1.26, while each dollar of infrastructure spending could provide a $1.59 boost. Here's his chart on "what works":

The Wall Street Journal's subheadline suggests what's really going on with Obama's tax cut move: It's not pragmatic policy, it's political pandering "aimed at winning GOP support," and such pandering isn't even politically "pragmatic" because lots of Republican votes aren't even needed. After all, Democrats' vast congressional majorities, Obama's election mandate and the economic crisis should guarantee passage of whatever economic rescue package Democrats push. I mean, c'mon - are we really expected to believe that under these circumstances, a new president can't use pressure to get 3 or 4 Republican senators to back a robustly progressive spending package and that instead, he has to substantially weaken that package? Puh-leeeze.

So, then, why weaken good policy (ie. infrastructure spending) with bad policy in order to attract votes the new president shouldn't need? That's the enduring power of the right-wing's tax frame.

For 30+ years, the conservative movement has insisted that tax cuts are always better economic policy than public spending. And despite the fact that such rigid ideology has proven bankrupt over and over and over again, it still confines American politics, as evidenced by a new Democratic president already appearing to embrace the right's basic tax fallacies.

Breaking apart this tax paradigm is going to take a long time. As I showed in my latest book [4], progressives are making headway in reframing the tax debate in some of the toughest political territory in the country. But as I also showed in a recent newspaper column [5], in other places like New York and Washington, D.C., the anti-tax frame remains a powerful force.

Sure, it's good news that the stimulus will likely include a decent amount of public spending. And sure Obama seems intent on making some of his tax cuts progressive by targeting them down the income ladder. But again, he seems to be embracing the right's overall tax frame - and that's a problem.