Economists divided over cutting taxes

In a rare preinaugural push, Barack Obama took to the Capitol yesterday to build support for his economic plan. (Pablo Martinez Monsivais/Associated Press)

WASHINGTON - President-elect Barack Obama's decision to offer major tax cuts to businesses to help lift the economy out of recession is a significant departure from his campaign pledges that is dividing economists over how effective the cuts will be.

But the new package is designed to quickly win over wavering Republicans who are worried that earlier initiatives focused too much on additional spending, analysts said yesterday.

The size of the proposed $300 billion in individual and business tax cuts - at about 40 percent of the stimulus plan, far greater than Obama had been signaling - surprised some analysts because it follows reports that President Bush's tax rebate effort last year did not do much to stimulate the economy. According to one estimate, less than 20 percent of the tax rebate checks, a maximum of $1,200 per family, were used on consumer spending, with the remainder going to savings or paying off debt.

The Obama team hopes the new individual tax cuts - $500 in savings for most workers and $1,000 for couples - will be more effective because they say the money would be pumped into the economy quickly through a reduction in payroll taxes - faster than through construction jobs created by government spending.

As part of the stimulus plan that could total $775 billion over two years, Obama is also proposing more than $100 billion in tax incentives that represent a potential boon to business interests, letting companies write off more losses and depreciate assets more quickly.

The two business tax breaks were not part of Obama's campaign platform, but were developed in the last few weeks in hopes that they would encourage companies to create jobs. They come on top of Obama's prior proposal for a $3,000 tax credit for each new job, which might be expanded to saving jobs that are at risk of elimination.

Roberton Williams, an analyst with the nonpartisan Tax Policy Center, said yesterday that Obama "has moved from the liberal side of the scale toward the conservative side by adopting the tax cut approach. . . . The key way to think about this is from a political perspective rather than an economic perspective."

He questioned whether businesses would create a job for a one-time $3,000 credit, and whether profitable corporations need a new tax break.

Notably, Obama's new approach drew immediate applause from an unlikely quarter, the US Chamber of Commerce, which said it was "encouraged" that the tax cuts "are large enough to make a difference and will benefit individuals and businesses."

A Chamber official said yesterday that the ideas were pushed during "many dozen" meetings with Obama's transition team during the last few weeks.

But Jim Horney, director of federal fiscal policy at the liberal-leaning Center on Budget and Policy Priorities, said the business tax breaks don't offer "the most bang for the buck." He said the money would be better spent on aid to cash-strapped states that are slashing programs and laying off workers, an increase in unemployment insurance, tax relief for workers, and infrastructure spending.

Analysts said the tax cuts appear designed to win a strong bipartisan majority and quick passage in Congress by overcoming Republican objections that the measure would be too heavily focused on spending on infrastructure and other programs. Obama wants to spend tens of billions on repairing roads, bridges, and schools - construction projects that could start quickly - but also on longer-term projects to encourage alternative energy and improve healthcare information.

Senator Judd Gregg of New Hampshire, the ranking Republican on the Budget Committee, said he would be likely to back Obama's proposal if it also includes "significant investment credits" that help businesses generate jobs. Gregg's support is considered important because of his senior position within the party on budget issues, and because he has been outspoken in questioning whether last year's tax rebates helped stimulate the economy.

He has had extensive conversations about the stimulus package with Obama's aides.

"They are trying to make it clear that they are going to be bipartisan and they want a stimulus package that is attractive from a lot of different political philosophies," Gregg said in an interview yesterday.

Most Democrats are likely to give Obama what he seeks in his first major legislative initiative, but fighting over the details could take weeks. And, in reordering the priorities in his stimulus package, Obama also risks alienating some liberals, although he is not likely to lose their votes.

"I would like to see more spending. It is clear that direct spending of the right sort has a higher job impact," said Representative Barney Frank, a Newton Democrat.

But Frank said he is more focused on a separate part of the economic rescue package, the second half of the $700 billion financial bailout that was approved by Congress last September.

Frank said he is talking with Obama's nominee for Treasury secretary, Timothy Geithner, about using some of those funds to help forestall home foreclosures.

Obama, who spent yesterday lobbying leaders on Capitol Hill and issuing warnings about the worsening economy, noted that he has been vowing to cut middle class taxes for two years.

"There is a happy convergence," he told reporters, "between what I had pledged during the campaign and what's required for the economy, right now, to put more money into the pockets of ordinary Americans."

At the same time, he said, "it is very important to have a balanced recovery and reinvestment package" that includes business incentives as well as individual tax cuts.

However, the personal tax cuts - $500 for individuals making less than $200,000, and $1,000 for families making less than $250,000 - also include a new wrinkle.

They would be distributed by reducing how much federal income tax is withheld from paychecks, not in a reduction of annual taxes, as had originally been envisioned.

Michael Kranish can be reached at kranish@globe.com