Chattanooga: Tax plan outlook hazy Would tax middle-class credits be encumbered?

Chattanooga: Tax plan outlook hazy Would tax middle-class credits be encumbered?

January 21st, 2009 by Brian Lazenby in Business

While many hope President Barack Obama's proposed tax cuts will give the failing economy a boost, most are unsure how or if the plan will work.

As part of the new administration's $825 billion economic stimulus package, the details behind Mr. Obama's $275 billion tax relief proposal likely will change as the bill works its way through Congress.

Dr. Bruce Hutchinson, an economics professor at the University of Tennessee at Chattanooga, said it is difficult to predict how taxpayers will be affected by the tax breaks.


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"I don't know of anyone who has articulated clearly how it is expected to help consumers other than it is supposed to help stop the decline in the general economy," he said. "They claim it will lead to the saving of a couple million jobs, but I don't know of anyone who has articulated the how."

The tax cut proposal is nestled in Mr. Obama's economic stimulus package which also includes funds for infrastructure improvements, increasing college Pell grant awards and Department of Defense building improvements. The tax plan includes a "making work pay" component that would give a $500 tax credit per worker earning less than $75,000 a year and $1,000 for couples earning less that $150,000 annually.

Dr. Hutchinson said the administration is considering placing restrictions on how the tax credits can be spent.

"One of the things that are lacking are what are the guidelines that they are using or going to use to determine how those funds will be paid out," he said. "We hear they are going to place additional restrictions on how those funds are used, but that is different from placing guidelines of how they will be paid out."

Bill Fox, director of the Center for Business and Economic Research at the University of Tennessee, agrees it is unclear what the tax breaks will look like.

"His plan is to put more money in peoples' pockets," Dr. Fox said. "(Former) President (George W.) Bush sought to do that with tax rebates in May and June of last year, and the consensus was it didn't have much impact."

Most agree the rebates enacted by former President Bush did little to improve the economy because most consumers put it into savings rather than spending it or used it to pay down debt.

"From the individual perspective that's a great thing, but all that really did was shift personal debt to government debt," Dr. Fox said. "It only helps the economy if people go out and spend it."

He said Mr. Obama's plan may be to dole out the money in smaller amounts spread out over time in hopes that people will be more likely to spend it.

"I assume that's the plan, but I haven't seen the details on it," he said.