Unclear if stimulus tax breaks will save jobs, spark spending

Tax provisions in the economic stimulus legislation introduced Monday on the Senate floor would cut Treasury revenues by at least $350 billion in a bid to spark economic activity. Tax experts say the legislation would achieve that goal, but there's plenty of room for improvement.

The nearly $900 billion plan includes tax cuts and credits as well as a wide range of spending on infrastructure, aid to states, energy, environment and much more — all designed to prevent the economy from sinking further.

Many Americans swoon at the high price tag and ask a simple question: How will we know it worksS

There's no single answer. The Obama administration has said it will use employment as a metric, expecting the stimulus effort to create or save between 3 million and 4 million jobs. However, proving that jobs have been saved that otherwise would've been lost is more art that science.

Another way to measure success is to gauge whether the plan spurs demand for goods and services. If it boosts demand for things that U.S. companies make or sell, more workers will be needed to make, ship and sell the goods and services.

"The trick from the tax side is putting money in people's pockets in ways that they spend it. How do you get people to do something they otherwise wouldn't do if you just gave them money?" said Roberton Williams , a senior fellow at the Tax Policy Center, a joint venture between the Urban Institute and The Brookings Institution , two center-left research organizations in Washington .

In tough economic times, consumers and businesses typically pay down debt and save money in case problems grow worse. That's rational behavior and one reason why consumer spending has plunged. Usually, consumption drives about two thirds of U.S. economic activity. If people are saving, they're not spending, and the economy contracts.

"If people want to save, giving them money will not force them to spend it," Williams said.

To counter this, the Senate measure would put more money into people's paychecks in small amounts that would be more likely to be spent than saved. Academic research shows that small increases in paychecks are viewed as "spendable" income, while larger lump sums are viewed as wealth to be saved.

The legislation would reduce taxes withheld from paychecks. This involves a refundable tax credit worth up to $500 for single filers and $1,000 for joint filers over one year.

Other tax measures in the Senate bill are designed to support poorer Americans who presumably would spend, not save, the money. These include expanding the earned income tax credit and the child tax credit. These wouldn't immediately stimulate the economy since they're claimed on tax forms, and the expansion would apply to the 2009 tax year.

The Senate bill also includes a number of tax provisions designed to free up cash for businesses, but how well they'd work is in dispute. Many of these provisions were sought by the U.S. Chamber of Commerce , which thinks that the Senate effort isn't sufficient.

"We are generally just disappointed with the amount of business incentives in there," said Caroline Harris , senior director of tax policy for the Chamber.

The group convinced Democrats to include a provision that would allow them to defer some tax if a company pays down its debt this year or next.

That would help companies with ready cash. Helping them lower their debt burdens presumably would discourage layoffs and perhaps even spark hiring.

To help more companies, the chamber wants this provision to be expanded to allow companies to reduce debt through issuance of additional stock or bonds.

"We'll be pushing for some sort of amendment to expand this," Harris said.

Republican senators, with the backing of big business, also will try to attach an amendment that would allow U.S. companies to bring back, over two years, some of their foreign earnings, which would be taxed at a 5.35 percent rate instead of the standard 35 percent rate.

Qualifying businesses would have to direct at least 5 percent of those returning funds to areas the government deems a national priority.

"The proposal would attract an estimated $565 billion of additional repatriated earnings to the U.S that would otherwise remain overseas," said Laura Tyson , a former top economic adviser to President Bill Clinton and a University of California, Berkeley , economist, in a Jan. 30 report.

That estimate is about $20 billion more than the new spending envisioned in the stimulus plan passed last week by the House of Representatives.