Bill's tax cuts underwhelm analysts

• Article
• Comments ()
• Click-2-Listen
• Videos

By Donald Lambro

When the Tax Policy Center graded 17 key tax-cut provisions in President Obama's economic-stimulus bill last week, 10 received a C or D grade and none merited an A.

The tax-policy analysis group, sponsored jointly by the liberal Urban Institute and Brookings Institution, said its scores were an attempt to evaluate whether the bill's tax credits and other tax incentives will boost the economy and deliver the biggest "bang for the buck."

Many of the tax provisions in President Obama's two-year, $787 billion stimulus plan were found wanting, either because the stimulative effects were small, came too late to have an impact on the recession, or went to people who did not need them.

For example, Mr. Obama's $1.7 billion automobile sales-tax deduction received a C- because it would yield "only a small increase in demand for new vehicles," affects only a single industry, and will benefit "high-income taxpayers who are more likely to buy vehicles, with or without a tax subsidy."

Similarly, a $200 million business tax benefit to hire unemployed veterans and troubled youth scored a D because "based on past experience with this wage subsidy, it is unlikely to generate jobs for the target group."

The study, released Friday, just as Congress was approving the massive economic-stimulus bill, was one of many private and a handful of government studies that have picked apart Mr. Obama's plan over the past month and a half.

The Congressional Budget Office last week sent a study to Capitol Hill that said the stimulus package would boost economic growth and increase employment in the short run, but would reduce economic output in the long run because the resulting $1 trillion-plus debt "would 'crowd out' private investment" needed to expand the economy and create jobs.

An earlier CBO study in January said that only a relatively small fraction of the stimulus money would get into the economy by the end of this year, and only half of the stimulus by the end of 2010.

The White House dismissed such criticism at week's end as Congress approved the centerpiece of Mr. Obama's economic agenda. "I'd give it an A," Lawrence H. Summers, director of the National Economic Council, told Bloomberg Television on Friday.

But Mr. Summers and other administration officials were also trying to lower expectations that the plan will bring about any immediate relief from the deepening recession in the months to come.

"We're not promising that you're going to see some miracle cure, that there's some silver bullet for the economy," Mr. Summers also said Friday on NBC's "Today" show. Turning the economy around "is going to take time."

Mr. Summers has been one of the bill's biggest cheerleaders, but he was not always as bullish on infrastructure stimulus bills in the past.

"Poorly provided fiscal stimulus can have worse side effects than the disease that is to be cured," he wrote in a Financial Times column on Jan. 6, 2008, which made the same general point that the CBO would later make about the Obama plan specifically.

"Fiscal stimulus, to be maximally effective, must be clearly and credibly temporary - with no significant adverse impact on the deficit for more than a year or so after implementation," he said then. "Otherwise, it risks being counterproductive by raising the specter of enlarged future deficits pushing up longer-term interest rates and undermining confidence and longer-term growth prospects."

Mr. Summers is not the only one of Mr. Obama's advisers to raise questions about the kind of stimulus bill Congress enacted last week.

Jason Furman, another top economic adviser, wrote early last year that "in the past, infrastructure projects that were initiated as the economy started to weaken did not involve substantial amounts of spending until after the economy had recovered."

Before Obama adviser Christina Romer became chairwoman of the president's Council of Economic Advisers, she wrote that stimulus "countercyclical fiscal policy is not achieving its intended purpose." The reason: "[I]t is difficult for fiscal policy to respond quickly to economic developments."

The theory behind stimulus spending bills is that the injection of large amounts of additional federal funds into the economy will spur increased demand that will boost economic growth.

But its critics point to the size of the record-breaking budget deficit already projected in this fiscal year, even before Mr. Obama's plan was approved.

"If deficit spending were truly stimulative, then the current $1.2 trillion budget deficit would already be overheating the economy," said Brian Riedl, the Heritage Foundation's chief fiscal-policy analyst.