Tuesday, January 6, 2009

$300 Billion Tax Cut

President-elect Barack Obama and congressional Democrats are crafting a plan to offer about $300 billion of tax cuts to individuals and businesses in order to entice companies to create jobs and jump start a sagging economy.

The proposed tax cuts represents 40% of an economic stimulus package that would cost $775 billion over two years. According to the Wall Street Journal, one of the reasons for adding the tax cuts to the economic recovery package is that it may be easier to win Republican support for a stimulus package that relies on tax cuts instead of spending. Senate Republican leader Mitch McConnell of Kentucky said there will be “widespread Republican enthusiasm” to include tax relief as a large part of the stimulus package.

Another reason for the emphasis on tax cuts is a need to get money into the hands of consumers. The plan's focus is to boost consumer spending by providing a $500 tax cut to individuals and a $1,000 tax cut to families. This tax cut would be accomplished by making changes to the tax code pertaining to payroll withholding rules so that taxpayers could see an immediate increase ion their take home pay. According to Michael Darda, chief economist for MKM Partners LP , cutting the payroll tax “would be more efficient” in helping the economy.

The business portion of the proposed tax cuts would allow companies to use their tax losses to offset U.S. taxable income. Currently, companies are allowed to carry back losses for a period of two years. The Obama proposals likely would mean that companies with enormous losses from last year and this year could use the losses to help wipe out tax obligations from the previous five years and receive sizable tax-refund checks from the Treasury Department. For some firms, that would mean cash payments of billions of dollars.

Another element would offer a one-year tax credit for companies that make new hires or forgo layoffs, which could be worth $40 billion to $50 billion. And the Obama plan also would allow small businesses to write off a broad range expenditures worth up to $250,000 in 2009 and 2010. Currently, the limit is $175,000

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