To a degree, rhetoric contrasts with stimulus plan

Obama wants tax refund for workers

President Obama read a note handed to him during a town hall-style meeting yesterday in Fort Myers, Fla., that said the Senate had just approved the $838 billion stimulus plan. President Obama read a note handed to him during a town hall-style meeting yesterday in Fort Myers, Fla., that said the Senate had just approved the $838 billion stimulus plan. (Joe Raedle/Getty Images)
By Michael Kranish
Globe Staff / February 11, 2009
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WASHINGTON - As President Obama seeks final passage of his economic stimulus bill, he is urging congressional negotiators not to succumb to "failed" Republican suggestions that an economic rebound can come from tax cuts.

But one of the biggest items in the stimulus bill passed by the Senate yesterday, and also in the version approved last month by the House, is a tax-cut proposal that Obama himself is insisting upon - and which one of his newly announced advisers doubts will work.

Obama wants more than $140 billion - nearly $1 in every $5 in the stimulus plan - to give most working Americans a $500 tax refund ($1,000 for couples) in each of the next two years, directly in paychecks. The theory is this will get money into the economy more quickly than any other means, thus stimulating the economy with extra spending.

But Harvard University economist Martin Feldstein, an adviser to several Republican presidents who was picked last week by Obama to serve on his Economic Recovery Advisory Board, is a leading critic of the way the tax cut has been designed.

In an interview yesterday, Feldstein said he told Obama at a White House meeting on Friday that the stimulus plan had substantial faults. Feldstein has argued for targeted tax cuts that would encourage people and businesses to spend the money in ways that would unquestionably help the economy.

Feldstein said that Obama, who promised middle-class tax relief during his campaign, believes giving people a little extra money in their paychecks means they "would go out and spend it" instead of saving it. "The whole hope for this is that people will be fooled into thinking this is a permanent increase in their income when it is just a two-year increase," Feldstein said.

The problem with Obama's version of the tax cut, Feldstein and other critics say, is there is no guarantee that most of the money will flow back swiftly into the economy. When former president George W. Bush provided taxpayers with rebate checks of $600 per individual and $1,200 per couple, many people put the money into their savings accounts, paid off debts, or bought foreign-made goods. By some estimates, the rebate checks had no discernible economic impact and did nothing to prevent the United States from sinking into the worst recession in decades.

By Feldstein's calculation, Bush's tax rebate cost four times as much as it put back into the economy because so much of that money was saved or used to pay off old debts. Feldstein has suggested "annual outlays of $300 to $400 billion" in government spending in 2009 and 2010. He favors boosting Pentagon projects, providing corporate tax breaks for research and development, and reworking the tax credits.

Asked whether he believes the new president has a firm grasp on economic policy, Feldstein, who expects to meet monthly with Obama, measured his words. "It's too early to tell at this point. He was more in a listening mode."

Another Bush adviser who has expressed reservations about the tax credit is Senator Judd Gregg, the New Hampshire Republican who is Obama's nominee to be commerce secretary. Gregg opposed Bush's tax rebate plan last year because he feared it would have little economic effect and he has since concluded that his fears were well founded.

Gregg, who is recusing himself from all Senate votes while his nomination is pending, said in an interview shortly before his nomination last week that much of the Bush tax rebates were spent on buying foreign goods such as Chinese televisions and he feared the same would happen with Obama's plan unless it was modified.

But most of Obama's economic advisers back the tax-cut plan, including one of Feldstein's former students, former Harvard president Lawrence Summers, who is now the head of Obama's National Economic Council.

Obama aides have argued the tax credit is one of the most effective ways to pump money quickly into the economy. Obama's aides stress the tax credit will be administered differently from Bush's tax rebate. The Obama tax credit will be doled out over the course of the year by reducing the amount of withheld federal tax, while Bush's rebates went out in one check to each qualified person. "Because the tax cut is structured to be paid out each pay period, those eligible are more likely to spend it than if they received the money in a lump sum," White House spokeswoman Jen Psaki said.

Obama, on the second stop of a tour to promote his stimulus plan, said yesterday that he wanted to provide "badly-needed tax relief for middle-class workers and families" as well as more aid for the unemployed.

"That is not only our moral responsibility - to lend a helping hand to our fellow Americans in times of emergency - but it also makes good economic sense," he told the town hall meeting in Fort Myers, Fla., battered by the home foreclosure crisis as well as job losses. "If you don't have money, you can't spend it. And if you don't spend it, our economy will continue to decline."

During the event, he was handed a note that the Senate approved its stimulus plan. The 61-to-37 vote again included support from only three Republicans. Senate majority leader Harry Reid and House Speaker Nancy Pelosi immediately set the conference committee in motion and hoped a final deal would be ready by the end of the week.

The $820 billion House version includes more spending and fewer tax cuts than the $838 billion Senate plan, but the tax credit provision is virtually identical in both. Workers who do not earn enough to file federal income taxes - but who do pay Social Security and Medicare taxes - would be eligible to file for the credit. While Republicans say it is welfare for those who don't pay federal income taxes to receive the money, even some Democrats have questioned the priority given to the tax cut.

Senator John F. Kerry of Massachusetts said in a conference call yesterday that the tax credit "wouldn't be the highest one on my priority list," but he said "it represents a very solid promise of the president of the United States from his campaign . . . that was in the context of a very different economic situation."

Kerry said that while many people can use the $500, "in terms of overall stimulative effect, it is not as important as many other things in the bill."

Michael Kranish can be reached at

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