WASHINGTON -- President-elect Barack Obama's proposed tax cuts to get the economy moving again may look good on the outside, but if you lift the hood, there's not much inside to get us where we need to go.
Obama's plan includes $300 billion in tax cuts, the heart of his $850 billion economic-recovery plan. But the core of his anemic, start-stop tax cuts to get consumers spending again is expected to total $150 billion over two years.
That is about the size of last year's one-time tax rebates that boosted the economy for a few months, then ran out of gas when workers either saved their rebate checks or used them to pay old bills, not make new purchases.
To be fair, $150 billion is still a lot of money, and Obama's advisers are considering several ways to give it away -- through lower Social Security payroll taxes or reduced income-tax withholding over a period of months. But a one-time $500 rebate does doesn't contain enough octane to drive a massive $14 trillion economy for the long haul. That requires permanent tax-rate cuts to fuel long-term growth.
"Decades of economic research has demonstrated that permanent, as opposed to temporary, reductions in taxes are keys to changing consumer behavior," said Stanford University economist John Cogan.
"The failure of the recent (Bush) tax rebates to help the economy is more evidence of this fact. Given that Social Security is projected to start incurring deficits in only a few years, a payroll-tax reduction would seem to be necessarily temporary. If so, we should expect such a tax reduction to have only a negligible impact on the economy," Cogan told me.
Other parts of Obama's tax-cut plan to stimulate the economy make no logical sense.
Take, for example, his proposal to give a business tax break for every new worker hired. Businesses are laying off workers in droves because sales are down and they can no longer afford to employ existing workers, let along hire new ones.
No amount of per-worker tax subsidy changes that stark reality. To help businesses get back on their feet, the government could permanently cut corporate tax rates (which are the second highest in the industrialized world). But Obama flatly opposes that. Indeed, he wants to raise corporate taxes on companies that do business abroad or drill for oil.
He does deserve credit for proposing that businesses be given more tax breaks to purchase equipment and expand their operations.
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