New Year, New Tax Cuts

After months of hearing about how Barack Obama and the congressional leaders will raise taxes, spread the wealth, and spend a trillion dollars to stimulate the economy in the best Keynesian tradition, we begin the new year with this news from By Jonathan Weisman and Naftali Bendavid of the Wall Street Journal:

President-elect Barack Obama and congressional Democrats are crafting a plan to offer about $300 billion of tax cuts to individuals and businesses, a move aimed at attracting Republican support for an economic-stimulus package and prodding companies to create jobs.

The size of the proposed tax cuts -- which would account for about 40% of a stimulus package that could reach $775 billion over two years -- is greater than many on both sides of the aisle in Congress had anticipated. It may make it easier to win over Republicans who have stressed that any initiative should rely more heavily on tax cuts rather than spending.

Talk about having to swallow a jagged little pill! It seems as though the Democrats have gone from complaining bitterly and nonstop about the Bush tax cuts to embracing the Obama tax cuts as the only way to quickly kick-start the economy. According to Obama transition-team spokeswoman Stephanie Cutter:

We're working with Congress to develop a tax-cut package based on a simple principle: What will have the biggest and most immediate impact on creating private-sector jobs and strengthening the middle class? We're guided by what works, not by any ideology or special interests.

Regardless of the irony of their switch, as well as the light it shines on the political posturing of the Left over the last eight years, this is good and welcome news. After all, a tax cut is a tax cut regardless of who’s name is attached and they all work the same way, by allowing people and businesses to keep more of the money they make. In doing that, they encourage things like spending and investment, which are good for a healthy economy. It then follows that doing things to encourage a healthy economy can lead one to recovery and finally to prosperity. If Obama, Reid and Pelosi are willing to admit that much, then there is hope after all.

Business Tax Cuts

The business-related tax cuts in the proposal are, as one expert put it, a real surprise. The major provisions include permitting companies to write off losses incurred during 2008 and  2009 and to retroactively reduce tax bills going back five years; write-offs for expenditures made as of January 1, 2009 in order to stimulate new investment; a one-year tax credit for companies that make new hires or forgo layoffs; and a broad range of small business-specific write-offs on a broad range expenditures worth up to $250,000 in 2009 and 2010.

Republican Nit-Picking

Back in the days of powdered wigs, there were professional nit-pickers. These were the folks employed to pick the little bugs, called nits, out of the wigs of the rich and famous. It was hardly what you might call a prestige profession, but it had to be a step-up from being the powder guy. Today, in Washington, a couple of hundred years later, with bills instead of wigs to pick at, it is still not a prestige job.

As the loyal opposition, the position of nit-picker now falls to the congressional Republicans. With little to complain about now that Obama is poised to deliver one of the largest tax cuts in history, they are attacking the way Federal money will be used to shore up Medicaid and how language like long-term investments that would provide a foundation for economic recovery and future prosperity are really code for Democratic spending plans that have little to do with solving our economic problems. No doubt, once the legislation is fleshed out, they will have more nits to pick; but for now, that seems to be about it.

The Bottom Line

I have to wonder if the issue wasn’t one of credit all along, from who’s hand would the American people receive the boon of a tax cut? In the grand scheme, it really does not matter. If Washington is willing to enact policies that can actually stimulate the economy, that is a good thing. We know that there will be growth in government spending, that was inevitable regardless of who won the election. We can only hope that whatever gains might be realized by cutting taxes will not be wasted by new spending programs, mandates, regulations, fees and all the other little hooks that government likes to use when fishing for your cash. The legislation will be coming along very soon and then we will be able to judge it properly. For now, though, let us be content that someone in Washington understands how economics works, at least enough to put forth this proposal.

It’s a nice change.