By Adam Solomon Zemel, cross posted from the Breakthrough Institute
Rumblings on Capitol Hill indicate that Barack Obama is backing off some of the more controversial - and potentially least effective - tax cuts that he had planned on fitting in to a stimulus bill. Democrats in both houses viewed the inclusion of so many tax cuts in Obama's stimulus plan as an overplay for Republican votes on a critical piece of legislation that could set the tone for the President-elect's subsequent four years in office.
According to the New York Times, Obama now plans to scale back some of the tax cuts and reinvest that money in clean energy incentives:
"After Senate Democrats complained last week that the tax package proposed by the Obama team did not focus enough on job creation or on the energy sector, lawmakers said that the incoming administration had agreed to drop a proposed $3,000 tax credit per new employee and to add more energy-related tax breaks."
It seems that Obama has heeded both Senate Democrats and the many economists who have spoken up, arguing that when faced with a possibly $2 trillion economic shortfall, the President-elect must use each stimulus dollar to create as much wealth as possible. Economist argue that every dollar of government spending increases GDP by roughly one and a half dollars, achieving a "multiplier effect" that makes public investments smart stimulus. In contrast, tax cuts and rebate checks, as politically popular as they are, are simply less effective at stimulating the economy. They tend to only increase GDP by about a dollar for each dollar lost to the Treasury, their only stimulative effect coming from the fact that they are financed through deficit spending.
Obama, apparently heeding these concerns, decided to cut the employment tax credit from his plan and expanded investments in clean energy industries instead.
It seems that public support for stimulus - and a little cajoling from Obama's former Democratic colleagues in the Senate - may have emboldened the incoming administration. The political argument for cutting taxes in order to bring the GOP to the table might actually be turning on its head. The public supports a stimulus, including investments in clean energy, meaning that if Republicans don't vote for it soon, it will be bad for their image. This injury might then be compounded in 2010 if the economy is recovering thanks to the stimulus and the Democrats can claim all the glory.
It is too early to begin a detailed analysis of the stimulus package, which will have to wait until legislation has been drafted and released. Overall, however, signs indicate that Obama is keeping his party in mind and staying close to his Senatorial roots as he ascends to the highest office in the land. Whether this further tempers the already fairly cautious politician or gives him more latitude to move his own post-stimulus legislation through Congress, only time will tell.