Emerginvest Blog

Aides to the President-elect revealed further details of the economy recovery bill yesterday as his inauguration approaches. Of the total $675B-$775B package, aides indicated that approximately $300B of the program would be used for tax cuts. Of the $300B – approximately ½ would be used for individual tax breaks, while $100B of which would be set aside for businesses to encourage hiring. The individual tax cuts would equate to approximately $500 for individuals, or $1,000 per family.

While it seems as if the package is likely to pass, there is some strong opposition from Republicans in Congress. In fact, the newest details of the plan were announced after a growing sentiment of concern of too much spending, with too little disclosure of the details of the plan, by the Federal government. A New York Times article published today entitled: “Obama Plan Includes $300 Billion in Tax Cuts,” quoted republican Senator Mitch McConnell: “Nobody thinks we ought to be spending this money on things like mob museums and waterslides… and if the money were lent rather than just granted, states would I think spend it wisely, and the states that didn’t need it at all wouldn’t take any.”

Of course, the big question is whether it will be enough or not? The Obama’s advisors are making it clear that there are plenty of other measures which were discussed during the election that are not being reflected in this package, and will hopefully follow. However, the 2002 refunds only demonstrated marginal returns, and with an even worse economic environment now than there was 7 years ago, the effectiveness of this tax break remains to be seen. Clearly, the tax break is designed to encourage spending from consumers. However with such looming problems as the omnipresent fear of layoffs for most Americans, an exploding number of “underwater” mortgages with the continuing housing crash, and credit markets which are still not entirely unthawed, Americans are more likely now than ever to use the tax break as a buffer in savings, rather than go on a buying spree.

The Obama administration acknowledges that this is simply a measure to reduce the blood-loss which has been occurring in financial markets for the last few months. The same NYTimes article quoted Vice-president elect Joe Biden: “’There is no short run, other than keeping the economy from absolutely tanking. That’s the only short run,’ Vice President-elect Joseph R. Biden Jr. said on ‘This Week.’ He added: ‘We’ve got to begin to stem this bleeding here, and begin to stop the loss of jobs and the creation of jobs.’”

In theory, it should work to help ease the markets and relieve some financial stress for most working Americans, however it will be interesting to see how the average American uses the tax break.

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