Obama’s lessons in tax cuts


What if you cut taxes and no one noticed? And then they blamed you for actually raising their taxes…

There has long been a policy debate about how best to do tax cuts to “stimulate” the economy. Bush did it with one-time lump sum rebate checks in 2008. Whereas in his stimulus, Obama did what economists say is the more stimulative approach — stretch the cuts over time so people have bigger paychecks week after week. The theory is that people are more likely to save a one-time lump sum, while they are more likely to spend the incremental weekly increase, thereby injecting more money into the economy. Turns out the problem with the latter approach is that they hardly notice:

From Obama, the Tax Cut Nobody Heard Of (NYT)

In the Peter Baker interview with Obama published over the weekend, which is worth a read if you haven’t read it already along with the lengthy transcript excerpts, Obama addresses this problem as well as acknowledges another tax-cut mis-step:

“Now in retrospect, I could have told Barack Obama in December of 2009 that if you already have a third of the package as tax cuts, then the Republicans, who traditionally are more comfortable with tax cuts, may just pocket that and attack the other components of the program. And it might have been better for us not to include tax cuts in the original package, let the Republicans insist on the tax cuts, and then say, O.K., you know, we’ll compromise and give you your tax cuts, even though we had already proposed them. “

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Obama’s lessons in tax cuts

  1. Unless you also cut spending, it is not a tax cut. It is a tax deferral. The bills will have to be paid eventually, and if you do not do it by cutting spending it means you will have to raise taxes. Even Ronald Reagan's tax "cuts" were really merely tax deferrals, because spending kept increasing.

    • Wooooosh

  2. The money they have to pay later is quite scary. It took Germany up to this year to finish paying the cost of running the past World war. With US trillions of debt, it is way beyond comprehension, I hope earth still exists at the time they finish paying.

    • I don't see it as scary….possibly because I was around when we went from 'millions' to 'billions' and the same alarms were raised.

      Also because the US GDP was $14.59 Trillion in 2008

    • I would like to stretch my debt payments out past the end of life on this planet. If the US can do it, more power to them.

    • They have a much bigger economy to pay it. Its no different than carrying a larger mortgage because you earn more money. Their debt is only slightly larger than ours as a percentage of our overall economies. Although if they don't start getting a grip in the next five years it might get ugly.

      • The problem is that debt-to-GDP has been rising steadily since the 80's (it was dropping for a while in the 90's before George Bush did his magic) and there is really no way they can possibly stop it. So their not earning enough to keep up with their mortgage (in your analogy). Their medicare and social security costs are rapidly ballooning as their population ages and their economy is stuck in a rut. So yes, it is quite scary.

  3. But the Republicans would have argued for cutting some of the spending and replacing them with tax cuts. When you didn't, they'd blame you for the overall cost and attack you for not including tax cuts. Barack Obama from December of 2009, do not listen to this crazy man! The Republicans will never like you until you're popular and you'll never be popular until the economy improves. Ignore their proposals for tax cuts entirely, scrap your own and force more stimulus spending.

  4. Also, Luiza, what economist says tax cuts stretched over time give more stimulus than a lump sum payment? People are more likely to save windfalls, all other things being equal, but the stimulus package was designed for a time when things weren't equal. The economically better policy was to target lump sum payments to individuals with little propensity to save.

    • Bush did the Ralph Klein lump sum payment and people went to Walmart with it.

      • See, stimulative.

        • I thought you wanted people saving?

          • Not in a recession – that's the worst thing they could do. Individuals with low propensity to save means those who will spend the greatest share of their income, and that's who I think should be targeted with lump sum payments in a recession.

          • You've lost me now.

          • When you see the recession as a result of collapse in demand because people have
            no money or are tentative about spending what they do have, the answer is seen as
            putting money in the hands of people (through stimulus) in the expectation that they
            will spend it … thereby creating demand.
            The blanket statement that the stimulus was 780B is misleading. Due to massaging
            through Congress most of that was drained off in tax cuts and longer term spending.
            The actual spending on relatively immediate stimulus spending was in the order of
            $150B. Given that the most credible recommendation for effectiveness was for $1.2T
            it was just enough to have some temporary effect and to be declared a failure for not
            doing enough.

  5. The deficit spending by the Obama admin, is several times as large as Bush.

    I'm amazed at those who complained Bush's deficit was too fast at 70 mph, but look for excuses for Obama when he's got the deficit pedal to the medal at 150 mph.

    70 is fast, perhaps too fast for some. 150 is deadly.

    That's Obama's tragectory for the country – fiscal destruction.

    • No chet, it's not. Stop trolling.

  6. He's also a muslim, hope ya know.