Economic plan falls short

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President-elect Barack Obama's proposed tax cuts to get the economy moving again may look good on the outside. But if you lift the hood, there's not much inside to get us where we need to go.

Mr. Obama's plan includes $300 billion in tax cuts, which is the heart of his $850 billion economic recovery plan. But the core of his anemic, start-stop tax cuts to get consumers spending again is expected to total $150 billion over two years.

That is about the size of last year's one-time tax rebates that boosted the economy for a few months, then ran out of gas when workers either saved their rebate checks or used them to pay old bills, not make new purchases.

To be sure, $150 billion is still a lot of money, and Mr. Obama's advisers are considering several ways to give it away. Either through lower Social Security payroll taxes or reduced income tax withholding over a period of months. But a one-time $500 rebate just doesn't contain enough octane to drive a massive $14 trillion economy for the long haul. That requires permanent tax rate cuts to fuel long-term growth.

"Decades of economic research has demonstrated that permanent, as opposed to temporary reductions in taxes are keys to changing consumer behavior," says Stanford University economist John Cogan.

"The failure of the recent [Bush] tax rebates to help the economy is more evidence of this fact. Given that Social Security is projected to start incurring deficits in only a few years, a payroll tax reduction would seem to be necessarily temporary. If so, we should expect such a tax reduction to have only a negligible impact on the economy," Mr. Cogan told me.

Other parts of Mr. Obama's tax cut plan to stimulate the economy make no logical sense. Take, for example, his proposal to provide a business tax break for every new worker hired. Businesses are not hiring, and are laying off workers in droves, because sales are down and they can no longer afford to employ existing workers, let along hire new ones. No amount of per worker tax subsidy changes that stark reality.

To help businesses get back on their feet, the government could permanently cut corporate tax rates (which are the second-highest in the industrialized world). But Mr. Obama flatly opposes that. Indeed, he wants to raise corporate taxes on companies that do business abroad or drill for oil.

He does deserve credit for proposing that businesses be given more tax breaks to purchase equipment and expand their operations.

Expanding deductible expensing of capital purchases by businesses "will encourage growth," said Club for Growth President Pat Toomey. "Unfortunately, most of the rest of what is being described as 'tax cuts' either won't change incentives or are not even tax cuts. Temporary, capped tax credits do not increase incentives and will not spur growth. 'Refundable tax credits' - those paid out to people who do not owe taxes - is an Orwellian description for government spending," Mr. Toomey said.

The problems with Mr. Obama's tax plan are fourfold:

(1) They are short-term when the economy's needs are long-term. To succeed, businesses must have tax policies that are not phased out in a year or two.

(2) He seems to have trouble understanding that businesses will hire more workers when their profits start to rise and business improves. Government can help boost profits (a word Mr. Obama rarely if ever utters) by cutting corporate tax rates, which will make businesses more competitive at home and abroad and boost their bottom line.

(3) There seems to be no recognition among his advisers that capital is the lifeblood of the U.S. economy and the businesses who make it run. Raise the cost of capital, as Mr. Obama has proposed, by increasing the capital-gains taxes and dividends, and you get less of it. Cut the capital-gains tax, or eliminate it for that matter, and you'll unlock needed investment capital and put it to work.

(4) A dynamic economy requires that we offer permanent incentives at all income levels to work, save, invest. Raising taxes on workers in the top tax brackets to redistribute their income to those on the lower brackets will not create economic growth, it will lessen it. Mr. Obama has wisely agreed to indefinitely postpone his plan to raise the top income tax rate to nearly 40 percent, but he hasn't abandoned it.

There seemed to be a collective sigh of relief among tax reformers this week when Democratic leaders said work on the stimulus package he wanted to sign on Inauguration Day will take much longer than expected - maybe a month or two more. That offers his critics time to give his proposals a much-needed debate and the chance to argue that an economy as big and complex as ours will need larger tax-cut incentives to put the economy back on the road to recovery.

Donald Lambro, chief political correspondent of The Washington Times, is a nationally syndicated columnist.