Recently in Economic Stimulus Category

When anti-tax activists and lawmakers complain that Congress and the President are pursuing policies that will cause taxes to be too high, the first question anyone should ask is: Compared to what? What exactly is the alternative to allowing the Bush tax cuts to end (at least for the rich) and finding new ways to raise revenue?

This week the House GOP showed us what the alternative is and it's frightening. On Wednesday, the ranking Republican on the U.S. House of Representatives' Budget Committee, Congressman Paul Ryan (R-Wisc.), released a budget plan which he argues is a more fiscally responsible alternative to the budget outline proposed by President Obama and the similar budget resolutions approved by both chambers last night. His proposal is apparently an update of the plan that House GOP leaders introduced last week and is different in some key respects.

The revised House GOP budget plan would move towards cutting and privatizing Medicare, convert Medicaid into limited block grants to states, and even cut Social Security benefits for some retirees. The plan would deeply cut the relatively small amount of government spending devoted to non-military, non-mandatory programs by refusing to adjust the budgets of these programs for inflation and population growth for five years. The House GOP plan would repeal the recently enacted economic stimulus law (the American Recovery and Reinvestment Act of 2009, or ARRA) a year before its expiration at the end of 2010.

A report from Citizens for Tax Justice compares the income tax proposals in the House GOP plan to the income tax proposals in the House Democratic plan in 2010, and finds that:

• Over a third of taxpayers, mostly low- and middle-income families, would pay more in taxes under the House GOP plan than they would under the House Democratic plan in 2010.
• The richest one percent of taxpayers would pay $75,000 less, on average, in income taxes under the House GOP plan than they would under the Democratic plan in 2010.
• The income tax proposals in the House GOP plan, which is presented as a fiscally responsible alternative to the Democratic plan, would cost over $225 billion more than the Democratic plan's income tax policies in 2010 alone.

Read the report.

Yesterday, the ranking Republican on the U.S. House of Representatives' Budget Committee, Congressman Paul Ryan (R-Wisc.), released a budget plan which he argues is a more fiscally responsible alternative to the budget outline proposed by President Obama and the similar budget resolutions working their way through the House and Senate right now. His proposal is apparently an update on the plan that House GOP leaders introduced last week and is different in some key respects.

A new report from Citizens for Tax Justice compares the income tax proposals in the House GOP plan to the income tax proposals in the House Democratic plan in 2010, and finds that:

• Over a third of taxpayers, mostly low- and middle-income families, would pay more in taxes under the House GOP plan than they would under the House Democratic plan in 2010.
• The richest one percent of taxpayers would pay $75,000 less, on average, in income taxes under the House GOP plan than they would under the Democratic plan in 2010.
• The income tax proposals in the House GOP plan, which is presented as a fiscally responsible alternative to the Democratic plan, would cost over $225 billion more than the Democratic plan's income tax policies in 2010 alone.

Read the report.

Congress seems set to approve, before their Presidents' Day recess, a final economic stimulus bill that marks a victory for progressives and economists who argue that federal government spending and aid for working class families can kickstart the economy far more effectively than tax cuts for businesses or the investor class.

The agreement hammered out this week by a House-Senate conference, which is presumably the final bill, will cost about $787 billion. Around 40 percent of that will go to tax cuts, most of which will be in effect for two years. Almost half of these tax cuts are progressive breaks for families, including the refundable Making Work Pay Credit, an important expansion of the refundable part of the Child Tax Credit for low-income families, a modest expansion of the EITC, and a new partially refundable education credit (the American Opportunity Tax Credit).

According to the official cost projections from the Congressional Joint Committee on Taxation (JCT), the tax provisions categorized as "business" tax cuts (which does not count several provisions that do benefit businesses, like energy incentives and provisions relating to tax-exempt bonds) will only make up 1 percent of the total cost of the bill. Even if we define business tax cuts as including the energy incentives and other provisions that do benefit businesses, these only make up around 7 percent of the total cost of the stimulus bill.

Some lawmakers felt a political need to keep the total cost of the bill below $800 billion. It is unfortunate that some of that was filled up with a $70 billion reduction in the Alternative Minimum Tax (AMT), which is not likely to stimulate the economy (as explained in the following article).

But overall, the bill marks a bold and effective step by the federal government without funneling very much of the benefits towards corporate tax breaks. While the bill is not perfect, it's hard to complain about it.

For more on the stimulus package, see the following Tax Justice Digest articles:

Non-Stimulative Tax Cuts: A Big One Is Kept in the Final Package, But Many Others Were Significantly Scaled Back

Stimulative Tax Cuts: Included in Final Package (But Scaled Back Slightly)

Even a Pinch of Tax Reform: Stimulus Package Includes Provision to Rescind the Bush Treasury's "Wells Fargo Ruling"

Impact of Selected Tax Cuts in Final Economic Stimulus Bill, State-by-State

On January 28, the House of Representatives approved an economic stimulus bill with an official cost of $819 billion, and $275 billion of that went to tax cuts. One alternative stimulus bill that received quite a lot of support from the House Republicans consisted entirely of tax cuts and included provisions that would clearly not provide an immediate boost to the economy (like making permanent the Bush tax cuts for capital gains and dividends, which do not even expire until the end of 2010). CTJ released state-by-state figures showing that the poorest 60% of taxpayers would receive over half of the benefits of the key tax cuts under the House Democrats' plan and less than 5% of the benefits of the House GOP plan.

House Republicans put forth another plan, this one with strong backing from their leadership, that would reduce the bottom two income tax rates from 10% and 15% to 5% and 10%, and provide more tax cuts for businesses. CTJ released state-by-state figures showing that less than a quarter of the benefits of the individual tax cuts in this House GOP plan would go to the poorest 60% of taxpayers.

The House Democrats' plan was passed without a single Republican vote. Progressives found that the House-passed bill did contain some tax cuts that were basically giveaways for business (as CTJ also argued in its reports). But overall the House-passed bill promised to be an effective boost for the economy.

The Senate took up its bill the following week and managed to lard it up with several ineffective tax cuts. Fortunately, the House-Senate conference that met to work out the differences between the two chambers significantly scaled back many -- but not all -- of the ineffective tax cuts.

Amnesty for Offshore Tax Avoidance: Rejected on Senate Floor

As the stimulus package was being debated on the Senate floor, progressives did score several defensive victories. For example, the body rejected an amendment offered by Senator Barbara Boxer (D-CA) that would provide a tax amnesty for corporations that had moved profits offshore (often only on paper to avoid taxes). Profits that were "repatriated" to the United States would be subject to an almost non-existent 5.25 percent tax rate instead of the usual 35 percent tax rate. As explained in a CTJ report on "repatriation," this idea was tried five years ago and did not lead to any of the job creation that was promised. Worse, repeating this debacle would only encourage companies to move profits offshore, since they would figure that if they waited a few years, Congress would once again be in the mood to enact a tax amnesty. Fortunately, a solid majority of senators saw that this was terrible tax policy and rejected this amendment.

The Senate's Senseless Six

But plenty of ill-advised tax cuts did make their way into the Senate-passed bill, some as provisions included in the bill reported out of the Finance Committee, and others adopted as amendments on the Senate floor. Earlier this week, CTJ ranked several tax cuts included only in the Senate bill (or taking a larger form in the Senate bill) as the "Six Worst Tax Cuts in the Senate Stimulus Bill." (Read the full report here or the two-page summary here.) The largest of those six tax cuts is included in the final package, but several others have been excluded (or mostly excluded) from the deal.

1. One-year AMT "patch": included in conference agreement.

This one-year reduction in the Alternative Minimum Tax will provide essentially no benefit to the poorest 60 percent of Americans -- and unfortunately was included in the final stimulus package. For more details, as well as state-by-state figures showing how taxpayers would be affected, see CTJ's new report on the AMT "patch."

2. Homebuyer tax credit: dramatically scaled back in conference agreement.

The House-passed bill had a version of this provision that waived the repayment requirement for the limited $7,500 first-time homebuyer credit that Congress enacted in its housing bill last year. The Senate adopted an amendment by Senator Johnny Isakson (R-GA) (who voted against the bill itself) to provide a $15,000, non-refundable tax credit with no income limits for any home purchase (not just for first-time home purchases). The Senate version would cost $35 billion more than the House version. Fortunately, this provision is scaled down in the conference agreement to something closer to the House version, with an increase in the maximum credit to $8,000, at a cost of $6.6 billion.

3. Deduction for automobile purchases: dramatically scaled back in conference agreement.

This $11 billion provision was added to the Senate bill as an amendment offered by Senator Barbara Mikulski (D-MD) as an above-the-line deduction for interest payments on an automobile purchase as well as the state and local sales taxes paid on that purchase. Apparently, members of the House-Senate conference decided that subsidizing consumer debt is not such a great idea. This provision has been reduced to a $1.7 billion provision allowing a deduction for just the sales taxes paid, but not the interest, on an automobile purchase.

4. Suspension of taxes on UI benefits: included in conference agreement.

The Senate included in its bill this provision to eliminate federal income taxes on the first $2,400 of unemployment insurance benefits in tax year 2009. The best way to target aid to those who could use some help is to target aid by income level. This provision would target aid to those whose income takes a particular form rather than those whose income is below a particular level, meaning a person whose spouse earns $300,000 a year would still get this tax break if they have unemployment benefits. This provision is included in the conference agreement.

5. Five-year carryback of net operating losses (NOLs): dramatically scaled back in conference agreement.

This provision would put money in the hands of business owners but do nothing to change their incentives to invest or create jobs. The version of this tax cut included in the House-passed bill would cost $15 billion while the Senate version would cost $19.5 billion. Fortunately, the version of this tax cut in the conference agreement is smaller than either of these, with a cost of only $1 billion (officially). The conference agreement would allow this tax cut only for companies with gross receipts under $15 million.

6. Delayed recognition of certain cancellation of debt income: included in conference agreement.

Under current law, any debt forgiveness that you enjoy is considered income subject to the federal income tax. (If it was not, then we would all want our employers to issue us loans and then forgive the debt, rather than paying us salaries.) This provision, which was included in the Senate bill and also in the conference agreement, weakens this essential rule. It allows companies that have debt cancellation income to defer taxes on that income for five years and then pay the tax in increments over the following five years.

CTJ has long argued that some tax cuts could have a chance of effectively stimulating the economy -- if they are extremely targeted to poor and working class families. Several tax credits meeting this criterion were included in the House and Senate stimulus bills, although the details differed. CTJ released state-by-state fact sheets showing how families with children would be impacted by these tax cuts, and in many states families would gain between $800 and $1,000 in 2009 alone. The conference agreement does include these provisions, although some of them are scaled back somewhat.

1. Making Work Pay Credit (MWPC)

This was originally proposed by Barack Obama during his presidential campaign as a refundable tax credit of $500 for working people, or $1,000 for couples. Technically, the credit would be capped at 6.2% of earnings up to $8,100 (or twice that for married couples), meaning this credit would be the equivalent of a refund on Social Security taxes paid on that amount of earnings. The House and Senate bills both included this and only differed on the income limits and some other details. The conference agreement, however, limits the MWPC to $400 for singles and $800 for married couples. The credit will also be dribbled out over time through a reduction in withholdings, since some policymakers have decided that simply issuing checks (as was done with the rebate checks sent to households last year) results in families saving the money, which will not stimulate the economy immediately.

2. Expansion in the Earned Income Tax Credit (EITC)

Currently, low-income workers with no children can sometimes receive a very small EITC equal to a maximum of 7.65 percent of eligible earnings, while the maximum EITC for families with children is 34 percent for those with one child and 40 percent for those with two or more children. Under the House and Senate bills, families with three or more children could receive a benefit equal to a maximum of 45 percent of eligible earnings. The maximum benefit under current law is phased out at an income level that is higher for married couples than for singles. The bills would increase that difference, further reducing the "marriage penalty" in the EITC. These changes are included in the conference agreement. The total cost of these changes to the EITC is about $4.7 billion, which is much less than the cost of other provisions and this probably accounts for their survival in the final agreement.

3. Making the Refundable Portion of the Child Tax Credit (CTC) More Readily Available for Poor Families

Currently a parent who earns less than $12,550 in 2009 is too poor to benefit from the $1,000 per-child credit. People who pay federal payroll taxes but earn too little to pay federal income taxes do not benefit from a tax credit unless it is refundable. Currently the refundable portion of the CTC is limited to 15 percent of earnings above $12,550 in 2009 (this threshold is indexed for inflation). The House-passed bill would have removed this earnings threshold so that the refundable portion of the CTC would be equal to 15 percent of any earnings (the maximum credit would remain unchanged at $1,000 per child). The Senate-passed bill settled on a less generous provision retaining the earnings threshold but lowering it to $8,100.

Citizens for Tax Justice released a one-page fact sheet on Tuesday night showing how families in each state would be affected by the House and Senate provisions and how many more children would be helped by the House version compared to the Senate version. The conference agreement steers a little closer to the House version, setting the earnings threshold at $3,000.

Congress has, perhaps with good reason, temporarily set aside concerns about balancing the federal budget. Stimulating the economy and stopping the downward spiral of reduced demand and layoffs has become a higher priority than raising enough tax revenue to pay for public services. But one provision in the stimulus bill would raise revenue (albeit a mere $7 billion, officially). This provision would rescind IRS Notice 2008-83, also called the "Wells Fargo ruling" after its largest beneficiary.

In October, the IRS issued this two-page notice declaring, with no authorization from Congress, that banks could ignore a section of the tax code enacted under President Reagan to prevent abusive tax shelters. In December, over a hundred organizations signed a letter to the House and Senate asking them to rescind the Wells Fargo ruling.

An online six-minute video from the American News Project (click here if you need the YouTube version) explains how Treasury officials under former President George W. Bush issued the Wells Fargo ruling with no legal authority and gave banks a hand-out beyond their lobbyists' wildest dreams.

A provision rescinding the ruling was included in both the House-passed bill and the Senate-passed bill and is included in the conference agreement.

The economic stimulus bill that the Senate approved today includes several tax cuts that are not in the stimulus bill approved by the House of Representatives two weeks ago and which should be excluded from the final bill that goes to the President.

The bill approved by the House of Representatives two weeks ago has a total cost of about $819 billion, while the cost of the Senate bill had grown last week to about $940 billion. A group of self-styled centrist Senators then put forth a compromise that took exactly the wrong approach to cutting down the costs: They mostly removed government spending that economists believe will stimulate the economy -- like aid to state governments, school construction, food stamps -- while they left in most of the regressive tax cuts that Senators have added to the bill.

A new report from Citizens for Tax Justice lists the six most regressive and ineffective tax cuts included in the Senate stimulus bill that are not in the House bill (or, in some cases, are much more limited in the House bill).

Legislation to kickstart the economy is badly needed. Lawmakers who are sincere in their desire to stimulate the economy in the most cost-effective manner should seek to exclude from the final bill these tax cuts, which economists believe will do little to boost consumer demand. They add $124 billion (according to official projections) to the cost of the Senate's stimulus bill compared to the House stimulus bill. The real cost of these provisions is considerably more.

Here are CTJ's worst six tax cuts in the Senate stimulus bill:

1. One-year AMT "patch"
2. Home buyers' tax credit
3. Deduction for automobile purchases
4. Suspension of taxes on UI benefits
5. Five-year carryback of net operating losses (NOLs)
6. Delayed recognition of certain cancellation of debt income

Read the CTJ Report: http://www.ctj.orgpdf/sixworsttaxcuts.pdf
Read the Summary: http://www.ctj.orgpdf/sixworsttaxcutssummary.pdf

The report also explains that some tax cuts could actually be effective in stimuluating the economy -- if they are extremely targeted to poor and working class families. The Making Work Pay Credit and the EITC expansion that appear in both the House and Senate bills accomplish this. So do the provisions in each bill to make the Child Tax Credit more available to poor families, but the report explains that the House provision does a much better job of this than the Senate provision.

A House-Senate conference will now attempt to work out the differences between the House and Senate bills and settle on a final bill, which President Obama wants to sign by the end of this week.

Senators Who Vote Against the Stimulus Are Opposing Significant Tax Cuts for Families with Children

Find a fact sheet showing how families with children in your state would be impacted.

New state facts sheets from Citizens for Tax Justice show that the economic stimulus proposals being considered by Congress include several tax cuts that could significantly benefit working class families with children in every state. The stimulus bill approved by the House of Representatives last week costs a little over $800 billion and about $275 billion of that would go towards tax cuts.

About half of the tax cut portion of the bill consists of a refundable "Making Work Pay Credit" (MWPC) worth up to $500 for most working people (or $1,000 for married couples). The House bill also includes an expansion in the Earned Income Tax Credit (EITC) and a provision making the Child Tax Credit (CTC) more accessible to low-income families. All three of these provisions would create or expand refundable income tax credits, which are the only type of income tax cut that can benefit parents who work and pay federal payroll taxes but do not earn enough to owe federal income taxes.

Refundable credits can allow a family of modest means to have negative income tax liability, meaning the IRS actually sends them a check instead of taking a tax payment from them. This check can be thought of as a way to offset the federal payroll taxes and other types of taxes that working families pay.

The stimulus bill that the Senate is considering this week also includes the MWPC and EITC provisions. It also includes a provision that will make the CTC more accessible to low-income families, but which will not reach as many families as the CTC change in the House bill.

In many states, families with children would receive about $900 to $1,000 in tax cuts from the stimulus proposals.

Find a fact sheet showing how families with children in your state would be impacted.

Senators should support the stimulus bill they are considering this week because, overall, it would provide the boost that the economy needs right now. If the Senate does pass its bill, then a House-Senate conference will likely spend next week working out the differences between the House and Senate versions, and there will hopefully be opportunities to ask conferees to make wise choices. For example, if the Senate version of the bill still includes the less generous expansion of the Child Tax Credit, hopefully conferees will choose to include in the final bill the more generous CTC change approved by the House.

Progressive organizations are distributing the following information to help constituents contact their Senators and urge them to support the stimulus bill being considered in the Senate this week.

The following toll-free number can be used right now to reach the U.S. Capitol, where an operator will connect you to your Senators:
866-544-7573

Progressive organizations have suggested the following message to Senators: Please vote for the economic recovery bill and oppose delaying tactics. Our state needs the jobs that will be saved; our people need its protections against hunger, sickness and unemployment. We need to rebuild our schools and roads. Vote for the American Recovery and Reinvestment Act of 2009!

On Friday, January 23, House Republican Leader John Boehner (OH) and Republican Whip Eric Cantor (VA) presented their "Economic Recovery Plan" to President Obama. The Republican plan is based on income tax cuts for relatively well-off families and business tax cuts. As a brand new report from Citizens for Tax Justice explains, it is unlikely to provide the needed boost to consumption that economists believe can come from either direct government spending or putting money in the hands of working class people who are likely to spend it quickly.

Less Than a Quarter of the House GOP's Tax Rate Reduction Proposal Would Go to the Poorest 60 Percent of Taxpayers

The House GOP plan proposes to reduce the two lowest individual income tax rates from 15% to 10% and from 10% to 5%. To get the maximum tax cut of about $3,400 from this rate reduction, taxpayers would have to have enough taxable income to reach the start of the third income tax bracket. For example, a married couple with two children would typically need to earn more than $100,000. That's considerably more than most people earn. In fact, only one in five of all taxpayers has enough income to reach the third income tax bracket and receive the full benefit of the proposed tax rate reduction.

On the other hand, the plan proposed by Democrats in the House of Representatives (which is scheduled to come to a floor vote today), delivers tax cuts to working families who don't pay federal income tax but pay a lot in payroll taxes. For example, the "Making Work Pay Credit" would give married couples with $8,100 or more in wages the full $1,000 credit provided in the bill. In order to have an equivalent benefit from the Republican rate reduction, a married couple (with two children) would have to have $46,000 of gross income. The House Democrats' plan would also expand the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC) which are smaller tax breaks in terms of revenue but are even more targeted to working families.

Read the new CTJ report.

Another provision in the package would rescind IRS Notice 2008-83, also called the "Wells Fargo ruling" after its largest beneficiary. In October, the IRS issued this two-page notice declaring, with no authorization from Congress, that banks could ignore a section of the tax code enacted under President Reagan to prevent abusive tax shelters. In December, over a hundred organizations signed a letter to the House and Senate asking them to rescind the Wells Fargo ruling.

An online six-minute video from the American News Project (click here if you need the YouTube version) explains how Treasury officials under former President George W. Bush issued the Wells Fargo ruling with no legal authority and gave banks a hand-out beyond their lobbyists' wildest dreams. The video features interviews with CTJ director Robert McIntyre and Senator Bernie Sanders, the sponsor of the Senate bill to rescind the Wells Fargo ruling, and gives props to the organizations that signed the letter urging Congress to enact his legislation.

Towards the end of the video Senator Sanders questions whether or not the ruling Democratic party will be courageous enough to stand up to the lobbyists for powerful financial interests. Well, that question will be answered soon, because the House stimulus bill to be voted on today includes the proposal that was introduced in the House last year to rescind the Wells Fargo ruling -- and this is one more reason to support the stimulus bill. The Senate version has also recently been amended in the Finance Committee to include a provision rescinding the Wells Fargo ruling. Senator Sanders has been willing to stand up against unjust giveaways like this even when doing so is not popular on either side of the aisle. Tax fairness advocates need to work to make sure his courage and hard work pays off by supporting this reform.

The deadline for organizations to join the letter being distributed by the Coalition on Human Needs urging Congress to make the Child Tax Credit (CTC) fully accessible to low-income working families has been extended to Monday, February 2. If you are authorized to sign on behalf of an organization, click here. If you are not authorized to sign on behalf on an organization but you still want to support this change, click here to send an email to your members of Congress asking for their support.

The House stimulus bill would make the existing $1,000 Child Tax Credit (CTC) more accessible to low-income families by making the refundable portion of the credit equal to 15 percent of a family's earnings (up to the existing maximum credit of $1,000 per child). Under current law, the refundable portion is limited to 15 percent of earnings above $12,550 in 2009 (this threshold is indexed for inflation). That means someone with income below $12,550 is actually too poor to benefit from the CTC. The Senate version would improve the CTC, but not nearly as much because it would lower the earnings threshold to $6,000.

Families who work and pay federal payroll taxes but do not earn enough to owe federal income taxes usually do not benefit from an income tax cut unless it takes the form of a refundable credit. The limitation on refundability of the CTC has resulted in many of the poorest families being excluded from its benefits. Equally important is the fact that expanding refundable tax credits is more likely to be effective economic stimulus than many other tax cuts that are being proposed according to Mark Zandi of Moody's Economy.com and other economists. This is because it puts money in the hands of people who are likely to spend it quickly, giving our economy the boost in demand for goods and services that economists believe will mitigate the recession.

A new report from Citizens for Tax Justice compares the tax cuts proposed as economic stimulus by the House Democrats to the tax cuts proposed by their Republican counterparts. The report includes both national and state-by-state figures showing the average tax cut and the share of total tax cuts that would be received by taxpayers in various income groups under the different proposals.

The report finds that the Democrats' proposal (H.R. 598) includes some tax cuts that are far more targeted to low- and middle-income people than any of the tax cuts included in the Republican alternatives. This is largely because H.R. 598 includes a new refundable credit (the Making Work Pay Credit) and expands two others (the Earned Income Tax Credit and the Child Tax Credit) while the Republican alternatives do not. Working people who pay federal payroll taxes but do not earn enough to owe federal income taxes will only benefit from an income tax cut if it takes the form of a refundable credit. Many economists have argued that any effective stimulus policy would have to boost demand for goods and services by causing immediate spending -- and one way to do that is to put money in the hands of low- and middle-income people who are more likely than wealthy taxpayers to spend it quickly.

The House of Representatives is expected to vote this week on the Democratic proposal, H.R. 598. Many of the provisions of this bill have wide support from progressive advocates. The Coalition on Human Needs is distributing a sign-on letter for organizations in support of the expansion in the Child Tax Credit. If you are authorized to sign on behalf on an organization in support of this provision, click here for more information.

Read the CTJ Report

On Thursday, House Ways and Means Committee Chairman Charlie Rangel (D-NY) released the outlines of a $275 billion tax cut package to be included with a larger stimulus bill that Democratic leaders hope to enact by President's Day. In many ways it is an improvement over the proposal initially floated by the Obama transition team, but it also keeps many of Obama's ill-advised tax cuts for business that will have little or no stimulative effect on the economy.

Most economists believe that the current economic downturn is largely the result of a collapse in demand for goods and services, and that direct government spending can boost demand and prevent the recession from becoming more severe and destructive. Tax cuts are less effective because it's difficult to ensure that they will result in the sort of immediate spending needed to boost demand quickly. But if tax cuts can at least be targeted to those people who are likely to spend the extra money right away (like low-income families), then they could have a decent chance of accomplishing the goal of stimulating the economy.

More Progressive Tax Cuts for Families

Last week, Citizens for Tax Justice released a report that showed how some of Obama's proposed tax cuts would be targeted to those who would likely spend the money right away (thus immediately pumping the money into the economy) while others were more likely to be ineffective giveaways to business. Obama's proposed Making Work Pay Credit would reach people at lower income levels, but it would not be particularly targeted towards the bottom half of the income ladder. (The poorest 60 percent of taxpayers would only get 48 percent of the benefits while the richest 20 percent would get 25 percent of the benefits.) A proposal to increase the availability of the refundable portion of the $1,000 Child Tax Credit looked more promising because nearly all of the benefits would go to the poorest 60 percent.

The Ways and Means Committee proposal improves on Obama's tax cuts for individuals. For example, the improvement in the Child Tax Credit (CTC) would be even more progressive. Under current law, some working families who pay federal payroll taxes but who do not earn enough to owe federal income taxes are actually too poor to benefit from the CTC. That's because people with no income tax liability do not benefit from a tax credit unless it is refundable, and the refundable portion of the CTC is limited to 15 percent of earnings above $12,550 in 2009. The Ways and Means Committee proposal would remove that earnings threshold so that the refundable portion of the CTC is equal to 15 percent of all earnings (with the maximum credit limit unchanged at $1,000 per child).

The refundable Making Work Pay Credit, which Obama proposed during his campaign and which would generally offer working people $500 (or $1,000 for a couple if both spouses work), is also included. A new addition to the package is an improvement in the Earned Income Tax Credit (EITC). It is unclear at this time how extensive the change in the EITC will be. (It may be similar to the EITC expansion Obama proposed during his campaign.) But it's quite clear that expanding the EITC is a promising way to put money in the hands of families who have probably cut back on purchasing all sorts of needed goods and services and who will therefore spend that money quickly.

Tax Cuts for Business: One Bad Idea Dropped, Several Others Included

The Ways and Means proposal does not include Obama's proposed refundable $3,000 tax credit for businesses that create jobs, which was roundly criticized as unworkable. Democrats in the House and Senate are said to have been doubtful that the credit could possibly be implemented in a way that did not result in a huge tax giveaway for companies that were merely hiring people they would hire anyway.

Unfortunately, many other business tax cuts in Obama's proposal that CTJ and others criticized are included in the Ways and Means package. Earlier attempts at using bonus depreciation to boost the economy have proven to be ineffective, but lawmakers apparently insist on this giveaway to business-owners. A 2006 Federal Reserve study reached a similar conclusion to our own findings, finding that previous versions of this tax break had "only a very limited impact... on investment spending, if any." Worse, the proposal would allow businesses to use their losses to reduce taxes they already paid going back five years (the current limit is two years). As Dean Baker explains, this tax cut must have even less stimulative effect than other business tax cuts because it does nothing to change the incentives of business-owners or investors going forward. The net operating loss carryback provision simply hands money to businesses without requiring any sort of investment (or anything) in return.

House Democratic Proposal Would Rescind the Infamous "Wells Fargo Ruling"

Another provision in the package would reverse IRS Notice 2008-83, also called the "Wells Fargo ruling" after its largest beneficiary. In October, the IRS issued this two-page notice declaring, with no authorization from Congress, that banks could ignore a section of the tax code enacted under President Reagan to prevent abusive tax shelters. In December, over a hundred organizations signed a letter to the House and Senate asking them to rescind the Wells Fargo ruling. That call is now being answered.

The Ways and Means package contains provisions addressing many other needs, including a partially refundable credit for higher education, increased availability of bonds for state and local government, energy tax incentives, child support funding and many others.

President-elect Obama and Congressional leaders are discussing plans for economic stimulus legislation to be enacted in the coming weeks or months. The two-year package being discussed is said to cost around $775 billion and a surprisingly large $300 billion of that would go towards tax cuts.

A new report from Citizens for Tax Justice examines some of the major tax cuts that are being discussed as possible components of the stimulus proposal. Tax cuts are generally less effective in stimulating demand than direct government outlays. But tax cuts targeted to the people who are most likely to immediately spend any money they receive, namely low- and middle-income people, are more effective than upper-income tax reductions.

The report explains that Obama's "Making Work Pay Credit," (a refundable $500 credit for each working spouse) could be sufficiently targeted if improved from its current form. The report also finds that improving access to the Child Tax Credit for poor families, which has also been discussed as a possible component of the stimulus package, would be much more effectively targeted.

The report also discusses why business tax breaks that are being considered as part of the package are unlikely to help stimulate the economy and mitigate the current recession.

Read the report.