As much as 40 percent of the Obama administration's $775 billion economic recovery plan could come in the form of tax cuts, report the New York Times and the Wall Street Journal. The early political entrails-reading suggests that Obama and his economic advisors are hoping to assuage moderate Democrats and Republicans who are worried that the new administration will show no restraint with its "open checkbook" spending agenda. The Financial Times' Edward Luce also reports that Obama isn't interested in just getting the 60 votes necessary to hold off a Republican filibuster, "[his] team has spoken of wanting to attract significant Republican support, not simply picking up votes from a Republican moderate or two."
Paul Krugman is dubious. While acknowledging that tax cuts are probably the quickest way to get help to strapped-for-cash Americans, he fears that Obama is already showing signs of "weakness."
Look, Republicans are not going to come on board. Make 40 percent of the package tax cuts, they'll demand 100 percent. Then they'll start the thing about how you can't cut taxes on people who don't pay taxes (with only income taxes counting, of course) and demand that the plan focus on the affluent. Then they'll demand cuts in corporate taxes. And Mitch McConnell is already saying that state and local governments should get loans, not aid -- which would undermine that part of the plan, too ... I'm really worried that [the Obama people are] sending off signals of weakness right from the beginning, and that they're just going to embolden the opposition.
Whether the Obama plan is a canny piece of jujitsu designed to sweep Republicans off their feet before they even know what happened or a pusillanimous hoisting of the white flag of surrender is the kind of question we won't be able to answer for some time to come. It is clear that there will be a protracted political battle over all aspects of the recovery plan -- any dream that Democrats would have legislation ready for Obama to sign by Inauguration Day is already dead in the water. But before we dismiss the tax-cut gambit entirely, it's worth remembering that not all tax cuts are alike.
When George W. Bush took office in 2001 and immediately started pushing for the biggest tax cut in history in the middle of a (mild) recession, the political debate did not center on whether tax cuts, per se, were good or bad, but on the question of what kind of tax cuts would best help get the economy going. People like Paul Krugman argued strenuously that tax cuts should be targeted to the low- and middle-income workers who were most likely to use the money for consumption purposes, rather than to the rich, who didn't need a break in the first place and wouldn't feel any economic pressure to spend their newfound bounty.
The bulk of the tax cuts that the Obama administration is proposing are exactly the kind of tax cuts that Democrats and left-of-center economists were pushing eight years ago. They're also exactly what Obama was promising throughout his campaign (minus the tax hikes for the rich, which now will have to wait until Bush's tax cuts expire in 2010), so you've got to give him some credit for follow-through. With two weeks to go before Barack Obama takes office, it may be premature to start jumping ship.