President-elect Obama and Congressional leaders are discussing plans for economic stimulus legislation to be enacted in the coming weeks or months. The two-year package being discussed is said to cost around $775 billion and a surprisingly large $300 billion of that would go towards tax cuts.
A new report from Citizens for Tax Justice examines some of the major tax cuts that are being discussed as possible components of the stimulus proposal. Tax cuts are generally less effective in stimulating demand than direct government outlays. But tax cuts targeted to the people who are most likely to immediately spend any money they receive, namely low- and middle-income people, are more effective than upper-income tax reductions.
The report explains that Obama's "Making Work Pay Credit," (a refundable $500 credit for each working spouse) could be sufficiently targeted if improved from its current form. The report also finds that improving access to the Child Tax Credit for poor families, which has also been discussed as a possible component of the stimulus package, would be much more effectively targeted.
The report also discusses why business tax breaks that are being considered as part of the package are unlikely to help stimulate the economy and mitigate the current recession.