Q&A about Obama's economic plan

  • Updated: January 5, 2009 - 7:54 PM

President-elect Barack Obama is betting that a combination of hefty tax cuts and government spending on public works projects -- a package that could cost as much as $800 billion over two years -- will snap the country out of a painful recession. Here are some questions and answers about the evolving plan:

Q Why have a mix of tax cuts and government spending?

A Tax cuts can be implemented fairly quickly -- in weeks or months. Government spending on repairing roads, bridges and other public works projects typically takes longer to roll out. If timed right, though, such spending could give a critical lift to the economy later on. That's key because the economy is likely to remain weak well into next year and possibly into 2011.

Q How would the tax cuts for individuals work?

A Although details are being worked out, Obama envisions withholding less from workers' paychecks, vs. giving people rebate checks. It would cost about $140 billion to $150 billion over two years.

Q Why go this route?

A Supporters believe this approach, which will result in fatter paychecks, is more likely to spur consumers to spend, and thus help revive the economy, than a one-time cash rebate. "A permanent tax cut is much more effective at changing the behavior of consumers than a temporary rebate," said Brian Bethune, economist at IHS Global Insight. "People are better able to plan for the future when they can count on bigger paychecks. It's a totally different ball game." Experts said tax relief via adjusting withholding formulas can be provided faster -- perhaps in a matter of weeks -- than through a rebate system.

Q How about tax breaks for companies?

A More than $100 billion in tax cuts would be given to businesses. One provision Obama is weighing is a one-year tax credit to companies that hire new workers or forgo laying off existing workers. Economists, however, think this provision would be difficult to implement and could have unintended consequences. "You could end up subsidizing growing industries and penalizing shrinking ones," said tax expert William Gale, co-director of the Tax Policy Center at the Brookings Institution.

Q What's the timing for possible congressional action?

A House Majority Leader Steny Hoyer, D-Md., said he wants the House to approve the plan by the end of the month, sending it to the Senate in time for action before Congress leaves on its mid-February break. House Speaker Nancy Pelosi, D-Calif., had hoped to have a bill ready for Obama's signature on Inauguration Day, Jan. 20.

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