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Which stimulus is better: tax cuts or spending?

Some analysts say government spending is more reliable because consumers often pocket tax breaks.

By Staff writer of The Christian Science Monitor / February 3, 2009

Mitch McConnell, Republican leader in the Senate, has said GOP senators want to alter the president’s stimulus bill, not block it.

J. Scott Applewhite/AP



Yes, President Obama’s economic recovery bill would shower billions in government spending on everything from rural Internet service to inner-city schools. But as the Senate debates the stimulus bill, lawmakers increasingly are focused on another section of the plan: its tax cuts.

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Republicans are pushing to reorient the legislation as much as possible to tax reduction. They’ve already convinced the Democratic leadership to add a $71 billion provision that would soften the blow of the alternative minimum tax, a levy that was originally intended to affect the wealthy, but now hits many middle-class families.

It’s true that tax cuts might boost the economy more quickly than spending, say many economists. But there is debate as to whether their effect is as lasting or effective per dollar as direct government outlays.

The irony is that the biggest cuts in Mr. Obama’s plan, which put money directly into taxpayer pockets, may not be particularly efficient at jolting the economy back to life. That’s because people may choose to save a portion of the cash.

“I think we ought to be considering a range of tax cuts that are directly linked to spending, or household investment,” says William Galston, a senior fellow in governance studies at the Brookings Institution in Washington.

Obama to turn up heat

President Obama on Tuesday turned up his efforts to push the stimulus bill through the Senate. He planned a series of broadcast media appearances to argue for the necessity of quick passage – and he told Democratic Senate leaders to take out some of the controversial spending provisions in the bill and to increase some of its tax credits.

Among the changes Democrats might accept is a GOP proposal to double a tax credit already in the bill for the purchase of a new home, from $7,500 to $15,000.

Mid-February is deadline

Obama has set a deadline of mid-February for the legislation’s passage. He hopes to pick up enough Republican support so that he can argue that he has fulfilled his pledge to work on important issues in a bipartisan manner.

“What we can’t do is let modest differences get in the way” of the bill, said Obama on Monday.

GOP senators, for their part, say their goal is to change the bill, not block it.

“Nobody that I know of is trying to keep a package from passing,” said Sen. Mitch McConnell (R) of Kentucky, the Senate Republican leader.