Tax Cuts Work Best to Stimulate Economy

If it really is necessary for the federal government to spend $775 billion it doesn't have to stimulate a withering economy, at least President-elect Barack Obama is giving the spending bonanza a better chance to work by targeting 40 percent of the money to tax relief.

Details leaking out about Obama's stimulus plan indicate that at least $300 billion will go to individual and business tax cuts. Cutting taxes will deliver far better results than the earmarks that are expected to consume much of the rest of the package.

What Obama reportedly will propose are tax credits of $500 per individual or $1,000 per family for those who pay federal income taxes or are eligible for the earned income tax credit, designed to soften the impact of payroll taxes on lower-income workers.

The credits for individuals would come in the form of reduced tax withholdings, rather than a one-time check, making it more likely that the money will work long-term to stimulate the economy.

Businesses would be able to write off last year's losses, as well as losses occurred this year, and they'd get a one-time tax credit for hiring workers or forgoing layoffs. Smaller business would be able to write off a wide variety of expenditures, encouraging them to invest to create jobs.

These are all solid ideas that should help get the economy moving. Tax cuts are proven to be far more reliable than spending programs for strengthening the economy. The Bush administration's tax cuts in 2001 kept the economy growing through the Sept. 11 attacks, two wars and Hurricane Katrina. Had Congress and the administration done a better job of monitoring the mortgage markets and Wall Street, those tax cuts would still be doing their job today.

What hasn't been revealed is whether Obama intends to make good on his campaign pledge to raise income and payroll tax rates on upper-income earners and hike the capital gains tax to 20 percent from the current 15 percent.

Doing so would be a mistake.

Investors are already skittish about putting their money to work; uncertainty about tax rates or increases in taxes will make them even more so.

And Obama should target the 35 percent corporate income tax rate, which is among the world's highest. Making the tax rate competitive would encourage more domestic investment.

Obama is getting heat from the left, which prefers more spending on social programs and government-funded jobs. But he sees the tax cuts as a way to win the support of skeptical Republican members of Congress. Obama reportedly wants 80 to 90 votes in the Senate to signal broad bipartisan backing for the package.

He'll have a much better chance of reaching that goal if he leaves the tax cut portion of his proposal intact and pledges not to raise taxes on any group of taxpayers.

As for the rest of the stimulus package, helping states meet unemployment insurance and Medicaid obligations is essential. But the hundreds of billions of dollars he wants for infrastructure projects could wind up as the biggest boondoggle since the Hurricane Katrina relief project.

Without vigorous oversight, the disastrous New Orleans results will be repeated; billions of dollars will get spent with little result, and many of the new construction jobs will go to illegal immigrants.

If Congress agrees to take on this enormous debt in the name of stimulating the economy, it better do everything possible to keep it from becoming history's biggest pork barrel.

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