Beware, Mr. Obama, of Tax-Cut Seduction

Of all the ailments sapping the U.S. economy, failure to cut taxes isn’t one of them.

The Bush administration has been an extravagant orgy of tax-cutting. Taxes were cut in 2001 by $1.35 trillion over 10 years. In 2003 they were reduced by $350 billion more. Tax cuts came again in 2004 ($146 billion) and, for good measure, in 2006 ($142 billion).

This tally doesn’t include the one-time tax “rebate” that went to 130 million households last spring, part of a stimulus package that was supposed to keep the economy from falling into a dark pit. The fall came anyway.

The lesson of the Bush era is that relying on tax cuts as the centerpiece — often the only piece — of economic policy is just plain bad policy. Now the candidate of change is about to become president, and he wants to spend a big chunk of his new economic stimulus package on — well, on more of the same.

No doubt Barack Obama eventually will put forth a tax package that is not so heavily skewed toward helping those who are most comfortable and who need money the least, the chief beneficiaries of tax cuts over the past eight years. And there is some merit in the president-elect’s idea of refundable tax credits for the working poor, who would be most likely to quickly spend the few extra bucks in their paychecks.

But who can seriously argue that a family still managing to earn an income of up to $200,000 is enduring such economic hardship that it, too, needs a tax cut? Not coincidentally, high-income Democrats were among his core supporters during last year’s campaign. Obama has previously said he intends to help. A little perspective: Median household income in 2007 was $50,233, according to the Census Bureau.

Without question, a large and quick stimulus is urgently needed. No one wants the economy to deteriorate so badly that we stop hoping things will only be as awful as they were during the recessions of the late 1970s and early 1980s and resign ourselves to enduring something more like a second Great Depression.

There are, according to most mainstream economists, some near-certain ways to prop things up. Among them are rushing aid to strapped states, which are now being forced to slash their budgets — thus pulling more money out of the economy — and cut services such as health insurance that are desperately needed by the newly desperate. Another is extending unemployment benefits for the swelling number of jobless.

Probably the least efficient way to stimulate the economy is with tax cuts, notably the impossibly inefficient break Obama wants to give businesses that create jobs or merely retain workers. There is no way to tell whether the company that “created” the job would have added a worker or kept one on the payroll. No one has found a way to statistically account for a cashier who leaves Wal-Mart for Target. No new job is created, but the new employer gets the tax break nonetheless. “It’s a waste of money,” says Howard Gleckman, senior research associate at the Urban Institute and editor of its TaxVox blog on tax policy. “It’s either a colossal waste of money or a little waste of money.”

In fact, much of the business-tax package Obama contemplates fails his own test of cutting business taxes “where it makes sense and is going to work.”

Tax breaks to individuals are dubious — the rebate fiasco is Exhibit A. With the extra cash, a taxpayer could pay down a credit card balance, put the money in savings, or purchase, say, a T-shirt that was made by cut-rate workers in Asia. None of these options, however financially virtuous or even necessary for the person who needs the T-shirt, creates a new American job.

Obama promotes tax cuts not to enhance the economy but to elevate his political standing. During his campaign, he promised tax cuts for those he considers middle class — which seemed back then to include everyone earning up to $250,000. There is also the matter of wanting a strong, bipartisan vote in favor of his plan. Republicans still cling to the discredited tax-cut dogma as the solution to every economic problem. That doesn’t mean Democrats should.

Marie Cocco’s e-mail address is mariecocco(at)washpost.com.

© 2009, Washington Post Writers Group