Opinion

The Great Debate

Blunting Obama’s tax cuts

June 10, 2009

Christopher Swann– Christopher Swann is a Reuters columnist. The views expressed are his own –

Obama’s tax cuts were meant to be the first strike force of the stimulus package. The main selling point — other than political popularity — was speed.

Higher take-home pay in April and May would be the first evidence many Americans would see of their government’s broad effort to rescue the economy. The hope was that this would prop up spending long before lumbering public work projects could get under way.

Yet the financial impact already looks set to be swept away. The recent run-up in gasoline prices and a surge in personal savings have provided an uncomfortable reminder of the diminutive size of the tax cuts.

The cuts are just part of a broad government campaign to revive the U.S. economy — along with fresh infrastructure projects, help to the states and bank bailouts.

Even so, boosting take home pay has been an important part of the White House strategy to prop up spending.

But the “Making Work Pay” deduction in withholding tax will amount to an estimated $116 billion spread over two years.

In April — the first month in which Americans would have noticed the extra take-home pay — the annual infusion was just shy of $50 billion. Even if you add a one-time payment to Social Security recipients and extra unemployment benefits, you still only reach about $80 billion over the year.

Compare this with the impact of rising prices at the pump. Americans have been spending roughly $240 billion a year to fill up their cars. A 38 percent increase in retail gasoline prices since the first quarter — if sustained — will increase their yearly bill by more than $90 billion.

This alone would be enough to swamp the tax element of the stimulus.

A second imposing obstacle has been the increasing desire of Americans to save. Early estimates suggested that jittery consumers stashed away two thirds of Bush’s 2008 tax rebate, turning a bazooka for spending into a pea-shooter.

Obama’s package was drafted with precisely this danger in mind. Behavioral economists, like Richard Thaler, believe that one-off bonanzas are more likely to be hoarded, while consumers will spend inconspicuous monthly sums.

Again, this clever policy making may be overwhelmed by the sheer scale of the problem. Americans are scrambling to pay down debt. In April consumers paid down around $15.7 billion — once again more than double the monthly impact of personal tax cuts.

People with any ability to replenish their savings seem keen to do so. Americans squirreled away an extra $130 billion in April compared with March — a total of $620 billion.

To be sure, the outlook would be even grimmer were it not for this well-timed help to the consumer. An increase in take-home pay may also have a psychological effect that outweighs its financial impact. But little should be expected from the tax cut portion of the “stimulus package”.

Indeed, it might more accurately be called a “damage limitation” package.

Comments
3 comments so far | RSS Comments RSS

I would just like to thank President Obama for a stimulus that allowed my family to go out for hamburgers in April and May. I don’t think anybody really noticed a difference.

Posted by Craig Coal | Report as abusive
 

I’ve seen before that Americans are paying down debt instead of spending on new things. Doesn’t that have the effect of raising capital for banks (and other creditors), which should loosen up the credit market, which is what this crisis is mostly about? Another large lump check seems like it would help out the economy more in the long run, instead of this plan, which doesn’t seem to help the economy ever.

 

The government should have continued with residential stimulus instead of giving money to the banks. Businesses are the markets to make money. If they can’t sustain their operations then they shouldn’t be in business.

But instead of returning the tax money back to the consumer. Government bails business out and leaves the American family to fend for itself. Broke banks want you to pay them. Government wants you to pay them by taking your tax money.

If the consumer had been bailed out, mortgage payments would have been caught up with. Money would have been put back in savings. And banks would have had a much healthier consumer based to which to lend. But business searching for government welfare asked for and received money that should have gone to public social safety nets so that those at the top wouldn’t have to take any money from their own private reserves to fix their businesses.

The government needs to do it’s real job and invest in the American family. Bail them out. No bank is too big to fail. But even one family is too important to fail.

 

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