Speaking in his town hall meeting earlier in Elkhart, Indiana, President Obama said, “Tax cuts targeted to working families are the most effective means of stimulus that we can provide to the economy.”
That was a shift for Obama. Just a few weeks ago, when he was under criticism from liberal Democrats for not having enough spending in the package, the argument that he made was that spending was the best way to stimulate the economy, and the only reason there wasn’t more spending in the bill was that there weren’t enough worthy projects that were ready to go. Tax relief was described as the next best approach once all of the viable spending options were exhausted.
Yet, if Obama has now come around to the idea that working-class tax cuts are the “most effective” means of stimulus, the best way to accomplish that would be to use the stimulus package to actually reduce payroll tax rates, a policy that I have advocated before.
One of the primary liberal arguments against a payroll tax cut is that individuals would use the extra income to pay off debt and build up savings rather than spend it, thus it wouldn’t be as stimulative as direct government spending. But Obama, perhaps inadvertently, rejected that argument today.
“When you give a tax break to working families who are struggling, they will spend it on a new coat for the kids, or making sure that they get that car repaired that they use to get to work,” he said.
President Obama’s signature tax proposal, a form of which made it into the stimulus package, has been touted as a payroll tax cut, but it’s something quite different. Rather than actually cut payroll tax rates, the government will write checks of up to $500 for individuals and $1,000 for families to theoretically refund a portion of payroll tax contributions.
There are several disadvantages to this approach: cutting tax rates is more effective than a lump sum payment, a rate cut could be implemented more immediately than the time it would take for the federal government to cut checks to taxpayers, and also, if a payroll tax rate cut were the centerpiece of the stimulus package, it could be much more substantial than Obama’s current tax refund.