Wednesday, February 18, 2009

Good post from Heritage's blog

The Largest Wasted Tax Cut in History - Morning Bell

Apparently the Obama Administration is not happy about how a major portion of their economic stimulus package is being covered. The Atlantic reports that the White House has been pointing out to journalists that President Barack Obama signed “one of the largest tax cuts in history.” But just because the Obama Administration calls something a tax cut, doesn’t make it so. More than a third of Obama’s “Making Work Pay” tax plan goes to people who do not pay income taxes. That makes it a welfare income redistribution plan, not a tax cut. That is why, after President Obama told House Republicans he would not compromise! in any way on his tax plan, he lost the entire caucus.

But let’s set aside the fact that a third of Obama’s ‘tax cut’ is really just welfare by another name. Even the parts of it that do actually cut the income taxes of tax paying Americans are destined to fail. This is because the Obama tax cut repeats the exact same mistakes that President George Bush made. Just like Bush’s 2001 and 2008 tax cuts, Obama’s tax cut is a purely temporary cut designed to boost consumer spending. Both the 2001 and 2008 temporary Bush tax cuts failed to stimulate the economy. Heritage Foundation Vice President of Domestic and Economic Policy Studies, Stuart Butler explains why:

There are several factors behind the failure of temporary tax holidays to stimulate economic recovery. One reason is that even if the key to future growth was to increase household spending, a tax holiday will not prompt the necessary splurge.

Another reason … is that a family considering a significant increase in spending, or an investor contemplating a new business venture or expansion, thinks about the long term, not the next few months.

The only way fiscal policy can change this spending or investing inertia is to improve the prospects for future after-tax income from earnings or from capital investment. The kinds of tax reductions that do that are not short-term rebates or holidays but long-term tax rate reductions that are, as former Treasury official John Taylor recently wrote, “permanent, pervasive and predictable.“

The $116 billion wasted by Obama’s “Making Work Pay” tax cuts are neither permanent, pervasive, nor predictable. American workers will only receive between $8 to $14 a week more in each paycheck, and the actual size of the boost will not be known until the Internal Revenue Service releases new tax tables for employers to adjust their payrolls. Worse, since the tax rebates are p! hased out at higher incomes levels, the plan also raises marginal tax rates on some of the most-productive people in the world.

With about a third of the $787 billion economic stimulus package devoted to tax cuts that have no hope of stimulating the economy, it should come as no surprise that White House press secretary Robert Gibbs said he “wouldn’t foreclose” on the possibility that the Obama Administration would come back to Congress asking for yet more deficit spending stimulus in the near future.

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