Network News

X My Profile
View More Activity

The tax cut that failed

This is a great opening line by Michael Cooper: "What if a president cut Americans’ income taxes by $116 billion and nobody noticed?"

It happened, of course. But the nobody noticing was by design. The Making Work Pay tax credit was built for stealth. Working off of economic evidence suggesting that people are more likely to save a one-time windfall than a small increase in wages, the tax cut was used to lower the amount of tax withholding in people's weekly paychecks. The hope was that they would spend it, and it would thus do more to stimulate the economy.

This created two political problems for the tax cut. First, it was invisible. A recent CBS/NYT poll showed that fewer than 10 percent of Americans knew Obama had cut taxes. Second, because the administration had a distinct tax-cut design in mind, they added that to the stimulus rather than giving Republicans space to negotiate out a tax-cut portion that they would own. Obama has repeatedly named this as one of his major political mistakes.

Of course, if the tax cut's design had been much more effective at improving the economy, that would be of more political benefit than headlines or a brief moment of Republican buy-in. But the early research (pdf) on that front is not promising: It looks like it may have been less stimulative than a traditional tax cut.

It's a story that reflects both positively and negatively on the administration. The positive side is that they sacrificed politics and messaging for good policy. They were willing to forgo the headlines and the chance to force Republicans to own something if it meant improving the economy. The negative side, of course, is that it doesn't seem to have worked.

By Ezra Klein  | October 21, 2010; 9:35 AM ET
Categories:  Stimulus, Taxes  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati   Google Buzz   Previous: Start your morning with some amazing
Next: Can we cut our way to growth?

Comments

. . . and you can just see the hand of hapless Christina Romer all over this can't you? She and Bernstein make the worst Batman and Robin since George Clooney and Chris O'Donnell!

Posted by: 54465446 | October 21, 2010 9:45 AM | Report abuse

Please clarify: if withholding amounts were reduced, but the tax table didn't change, that would amount to a deferral, not a cut. Was the final tax liability actually reduced, or is this just another stretch?

Posted by: NNevada | October 21, 2010 9:47 AM | Report abuse

I think a lot of middle-class folks didn't actually realize an increase in take home pay due to huge increases in the amounts deducted for their health insurance. So, yeah the tax decrease helped cushion the blow, but it wasn't like anyone actually had significant amounts of new money to spend.

Posted by: AuthorEditor | October 21, 2010 10:08 AM | Report abuse

Greetings.
In response to your 5 people the President should hire piece.
For Polit. Sci., how about
Prof. Matthew Dickinson, a Neustadt disciple,Harvard Ph.D. and former prof. who writes a blog 'Presidential Power-A Non-Partisan Analysis of Presidential Politics', and teaches at Middlebury College?

See: http://blogs.middlebury.edu/presidentialpower

Posted by: dcunning1 | October 21, 2010 10:13 AM | Report abuse

" Working off of economic evidence suggesting that people are more likely to save a one-time windfall than a small increase in wages, the tax cut was used to lower the amount of tax withholding in people's weekly paychecks."

It wasn't a small increase in wages. It was a one-time windfall that also happened to be hard to notice.

The reason small increases in wages are more likely to be spent is because the wage increases are perceived as permanent.

Of course, national savings has been and remains too low, so perhaps the decision by households to save what the government borrowed to give them isn't that bad after all.

Posted by: justin84 | October 21, 2010 10:31 AM | Report abuse

"The positive side is that they sacrificed politics and messaging for good policy. "

"But the early research (pdf) on that front is not promising: It looks like it may have been less stimulative than a traditional tax cut."

If the policy was less stimulative than a traditional tax cut, how was it good policy?

Regardless, I suspect that trying to manipulate people into spending through various government tax policy changes when they would rather pay down debt will be a losing proposition.

Posted by: jnc4p | October 21, 2010 10:40 AM | Report abuse

Forget about the politics of it, there are problems with either tax cut method. With the Obama tax cut, it was simply too small either at the individual level or the aggregate to be very effective. If you are bringing home, oh say, $517 a week are you really going to notice that you are now bringing home $522? even if you should notice that, will it modify your behavior in any drastic way? Not likely, because the amount is too small. You might buy a larger size coffee on occasion, but not make what policy makers would consider needed spending changes to make a difference. With the windfall, yes there is the potential that people might save a portion or all of it, but there is also the argument that at least some will think of it as free money and spend it (on one big item or a couple of smaller items) on an item they would not have other wise bought. That is exactly what I did with the Bush tax cut. Spent it on a small home project, that we had been putting off - wouln't have done it with the Obama cut. Unfortunately, just like with the home buyer credit and cash for clunkers, the problem with the windfall is that it is a one time thing. You'll see a spike in spending and then nothing, so unlike in cardiac arrest where a jolt from a defibrillation device will lead to a prolonged continuously beating heart, the jolt from a one time windfall won't produce the same economic effect, again witness the effects of the Bush windfall tax cut, home buyer credit and cash for clunkers. Oh, and do I need to mention the deficit implications?

Posted by: notamullethead | October 21, 2010 11:57 AM | Report abuse

"They were willing to forgo the headlines and the chance to force Republicans to own something if it meant improving the economy."

They lost that battle.


"The negative side of course, is that it doesn't seem to have worked."

Going to lose the war (2010 mid-terms).

In a nutshell, they tried to game wage earners' psychology and lost.

Those who placed that wager (or provided the rationale for that wager) are long gone and won't have to face the consequences. It's something like the execs who put their corporations on the line, took bonuses on phantom short term profits, and got out before the house of cards collapsed.

Posted by: tuber | October 21, 2010 1:40 PM | Report abuse

"Was the final tax liability actually reduced...?"

Yes.

The comments thread to that NYT piece is... remarkable. Comment after comment containing outright lies about that particular measure, enough to get Cooper to show up and re-state it.

Posted by: pseudonymousinnc | October 21, 2010 5:32 PM | Report abuse

"If the policy was less stimulative than a traditional tax cut, how was it good policy?"

Exactly.

Typical Obama: he claims to do the pragmatic thing, yet ends up with something that didn't work as well as it should have, and all for his own peculiar ideological reasons.

Posted by: B405 | October 22, 2010 11:33 AM | Report abuse

Post a Comment

We encourage users to analyze, comment on and even challenge washingtonpost.com's articles, blogs, reviews and multimedia features.

User reviews and comments that include profanity or personal attacks or other inappropriate comments or material will be removed from the site. Additionally, entries that are unsigned or contain "signatures" by someone other than the actual author will be removed. Finally, we will take steps to block users who violate any of our posting standards, terms of use or privacy policies or any other policies governing this site. Please review the full rules governing commentaries and discussions.




characters remaining

 
 
RSS Feed
Subscribe to The Post

© 2010 The Washington Post Company