Tax Stimulus Report Card: Conference Bill

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Abstract

This report card evaluates the provisions of the Finance and Ways & Means Committees' conference tax stimulus bill (the "American Recovery and Reinvestment Tax Act of 2009"). The evaluation is preliminary and does not include all of the provisions in the bill most notably we omit provisions related to state and local debt and recovery zone credits. TPC will update the report card if significant changes occur before Congress passes the bill.

Introduction

The Tax Policy Center has graded the key tax provisions of the Conference stimulus bill (the "American Recovery and Reinvestment Tax Plan of 2009"). Our grades, which rely on the Finance and Ways and Means Committees' summary of the bill and proposed legislative language, focus on how well these measures would boost the economy in the short run.

In the long run, economies grow by expanding their capacity to produce goods and services. This involves increasing the supply of capital and labor, developing new technologies and moving resources to industries and regions where they can be employed best. This is a problem of raising aggregate supply of labor and capital.

The current economic problem, however, is not a lack of capacity or supply but rather a lack of aggregate demand that is reflected in the underuse of existing capacity: unemployment rates are high, capacity utilization rates in manufacturing are low, and consumer confidence is dismal. In the current environment, the most promising way of turning the economy around is to raise aggregate demand by stimulating consumer spending, business hiring and investment, and purchases by federal, state and local governments. This will raise demand for goods and increase use of existing capacity.

Therefore, a good provision boosts aggregate demand, has a high "bang for the buck" that is, stimulates a substantial amount of spending per dollar of tax cut and expires after the recession is over. Individual tax cuts with high bang for the buck target those most likely to spend the money and do so in a timely way. Business tax cuts with high bang for the buck encourage new investment and hiring rather than subsidize spending that would have occurred anyway.

These grades are preliminary and we may adjust them as we learn more about the proposals and their economic effects. In addition, TPC will update its Report Card as more information becomes available.

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