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Scot Lehigh

Obama's misguided tax cut plan

By Scot Lehigh
January 9, 2009
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OUR INCOMING president was eloquent yesterday in calling the nation to a higher purpose.

The first question Americans should ask themselves, Barack Obama said, is not "What's good for me?" but rather "What's good for the country my children will inherit?"

If only his full economic plans lived up to that lofty rhetoric.

For the sake of the next generation, Washington policy-makers need to tackle our short-term plight in a way that doesn't do unnecessary long-term harm.

That means steering away from permanent tax cuts.

And yet, new tax cuts are on the near horizon. Obama is moving forward with his campaign call for a middle-class tax cut, while signaling a willingness to come to agreement with congressional Republicans demanding business breaks as their price for backing his recovery plan.

The individual tax cuts Obama envisions would be permanent. The business tax breaks are meant to be temporary, but you can count on this: Once enacted, some will prove difficult to get rid of.

Even deficit hawks acknowledge that bold action is required in these troubled times. But they rightly say that the focus should be on temporary measures, not permanent (or likely to be permanent) tax cuts.

"We are concerned about anything that is going to worsen our long-range financial condition, because it is already dire," says former US comptroller general David Walker, who now heads the Peter G. Peterson Foundation.

Adds Bob Bixby, executive director of the Concord Coalition: "From a long-term perspective, I don't think offering new tax cuts is fiscally responsible . . . I just don't think we can afford to lower our revenue base any farther without doing anything substantial to lower spending."

Nor do tax cuts make particular economic sense.

In trying to spark a demand-led recovery, the goal is to get money into the economy and circulating. Federal spending on the sorts of public projects and purposes Obama outlined in his speech yesterday does that. Similarly, money to states to forestall budget cuts at least keeps spending from shrinking.

But new tax cuts are only effective if people spend most of the money. However, estimates are that just 20 to 30 percent of the last round of tax rebates was spent. Yes, it's possible that permanent tax breaks would boost the willingness to spend somewhat, but there is no guarantee of that.

Nor is there much historical reason to think that business tax breaks will succeed in creating jobs in this kind of recessionary economy.

"I am skeptical that they have any real incentivizing effect," says US Representative Barney Frank (who does support tax breaks for individuals). "It adds to the deficit problem going forward without much payback in jobs."

Further, though broadening support for his economic package is politically attractive now, using tax cuts as a sweetener will only compound Obama's long-term difficulties.

The incoming president has stressed that his top priority is jump-starting the economy, and rightly so. But at some point, this country has to address the issues of deficit and debt. And no matter how much Republican support Obama wins through tax cuts, it's highly unlikely the GOP will ever join him in hiking taxes or letting previous tax cuts expire in the name of deficit reduction.

Recall that when Republican President George H.W. Bush raised taxes in 1990 to bring down a huge deficit, it triggered a revolt in his own party. In 1993, when Bill Clinton pushed a tax hike to reduce federal red ink, he had to pass it without any GOP votes whatsoever. Indeed, conservative savants predicted it would only worsen the country's economic troubles. Thus the boom that followed proved highly inconvenient, until some fabulists managed to persuade themselves that it was merely a second wind for the Reagan economy.

And, of course, Republicans are already insisting that letting the Bush tax cuts expire, as they are slated to do, is tantamount to a tax hike.

So Obama's bid for bipartisanship will only aggravate our fiscal imbalance - without paying any political dividends when the time comes to get our house in order.

That's another reason why, when it comes to our current woes, the best economics is the best politics.

Scot Lehigh can be reached at lehigh@globe.com.

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