Did the Tax Cuts in the Stimulus Work?

Among the many questionable assertions in Drew Westen's Times article yesterday was that Obama's "half-stimulus" was "diluted" with "tax cuts that had already been shown to be inert."

While I was certainly no fan of including nearly $400 billion in tax cuts in the stimulus, and have myself suggested that this part of the stimulus was a waste, I now realize that this isn't right. Yes, tax cuts for the rich are a terrible form of stimulus -- and this is no doubt what Westen meant by labeling such cuts "inert." But the tax cuts included in the stimulus were for ordinary people and had the effect of putting cash into people's pockets. These cuts included $64 billion for the Making Work Pay tax credit to help low-income workers and $72 billion to save middle and upper middle class households from paying the Alternative Minimum Tax. The cuts also included $14 billion in help to first-time home buyers and $3 billion for "the cash for clunkers" program.

According to a study by economists Mark Zandi and Alan Blinder, these tax breaks definitely did have a positive effect. For instance, the refundable tax credits generated $1.22 in economic activity for each dollar spent; and the job tax credit for business generated $1.30. Meanwhile, though, the most effective forms of stimulus were direct spending for infrastructure ($1.57), unemployment benefits ($1.61), and food stamps($1.74).

I can see why a progressive like Westen might miss these subtleties given the distaste so many of us had for the tax portion of the stimulus. What's really weird, though, is that so few conservatives seem ready to admit that a stimulus packed with tax cuts was actually a success.

In any case, one last set of figures from the Zandi/Blinder study that are helpful to have around is their analysis of the bang for the buck that would come from other kinds of tax cuts like making permanent the Bush income tax cuts ($.32), making permanent the cuts on capital gains and dividends ($.37), and cutting corporate income taxes ($.32). Now these cuts are definitely what you'd call inert.

Of course, we didn't need Mark Zandi and Alan Blinder to tell us that tax cuts for the rich aren't a good way to stimulate growth. We just needed to live through the Bush years, an era with the lowest rates of GDP growth, job creation, and household income growth of any eight years in American postwar history.