The media reports that President-elect Barack Obama plans to propose a whopping $310 billion in tax cuts as part of his overall $775 billion stimulus package. But the “tax cuts” Obama is considering are not going to stimulate anything, much like the rest of his stimulus package.
Tax cuts stimulate the economy when they involve reductions in tax rates. The reduction in rates encourages savings, investment, business creation and expansion, job creation, entrepreneurship, and work by allowing people to keep a greater percentage of the reward produced by these activities.
These types of cuts improve the economy not just by the dollar amount of the tax cut. When they occur at the margin, the improved incentives affect every economic decision and every dollar in the entire economy. The astoundingly successful Reagan tax cuts in the 1980s, as well as the astoundingly successful Kennedy tax cuts of the 1960s, were both based on reducing tax rates and were successful because of it.
But the Obama tax cut package studiously avoids any reductions in tax rates anywhere. The centerpiece of the plan is a $500 per-worker tax credit, estimated to cost $150 billion. The government will just borrow $150 billion from the private economy to give away in these tax credits—in essence, shifting a dollar from the right pocket to the left—so there will be no net gain to the economy.
Nor will there be any improved incentives to save, invest, start or expand a business, or hire new workers. The credit does not even provide increased incentives to work, because once the worker is over a very low income threshold of about $8,000 per year, the amount of the credit does not increase for increased work and income.
Tax cuts do not stimulate the economy by "putting money in people's pockets," which they can then spend, as even some Republicans mistakenly say. That's an old-fashioned Keynesian strategy, and, if it worked, the same result could be achieved by sending out increased welfare checks, which also puts money in people's pockets to spend. But that doesn't change the basic incentives governing the economy.
It’s like scooping a bucket of water out of one end of a swimming pool and pouring into the other end. It may make the scooper feel like he’s accomplishing something, but no one expects there will be more water in the pool—except the Keynesians.