Better uses for the Bush tax cuts for the top 2%

by Russell's Rants

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Los Angeles metro construction being funded by the American Recovery Act

Originally published November 18, 2010
As a matter of pure economics, an extension of the Bush tax cuts for the upper 2% of income earners doesn’t make much “cents” or sense. And even as a matter of politics, opposition to such an extension is a political winner. But with the Republican take-over of the House of Representatives, the body from which all bills for raising revenue must originate, the President has little room to maneuver.

First the politics. According to a CNN Opinion Research poll released yesterday (http://i2.cdn.turner.com/cnn/2010/images/11/17/rel16e.pdf), almost half of the electorate continues to believe that the Bush tax cuts should only be extended for families earning less than $250,000 but rise for the upper 2% of income earners. Only 35% believe that the Bush tax rates should be preserved for everyone. These polling numbers should give the White House comfort that if it holds the line against extensions at the top, the public will be supportive.

The economics of opposing an extension of the Bush tax cuts are even stronger. Alan Blinder of Princeton and Mark Zandi of Moody’s, and formerly an economic adviser to John McCain’s 2008 campaign, recently ranked the multiplier effect of various tax cut and spending proposals (http://www.economy.com/mark-zandi/documents/End-of-Great-Recession.pdf?L=HPADV2&C=ZANDIBLINDER&P=LEARNMORE). And they found that extending the Bush era tax cuts for everyone would yield only 32 cents per dollar spent. The number would be even lower if we were to isolate the cuts for the top percentiles, as those folks are more likely to save and not spend the money.

As William Gale of the Brookings Institution recently put it, “The government could more effectively stimulate the economy by letting the high-income tax cuts expire and using the money for aid to the states, extensions of unemployment insurance benefits, tax credits favoring job creation. Dollar for dollar, each of these measures would have about three times the impact on GDP as continuing the Bush tax cuts.” (http://www.washingtonpost.com/wp-dyn/content/article/2010/07/30/AR2010073002671.html) Blinder and Zandi agree. Every dollar spend, for example, in extending unemployment benefits would yield $1.61; increasing food stamps $1.71; aiding state governments $1.41; and adding more infrastructure spending $1.57.

So what alternative plans are being floated? Democratic Senator Mark Warner is proposing using the top 2% of the Bush tax cuts to fund new tax cuts for businesses (http://tpmdc.talkingpointsmemo.com/2010/11/mark-warners-tax-cut-compromise-lets-extend-em-all-but-slightly-differently.php). The bipartisan team of Republican Senator Pete V. Domenici and Alice Rivlin are proposing something even bolder: a one year payroll tax holiday (http://www.washingtonpost.com/wp-dyn/content/article/2010/11/16/AR2010111606125.html). Blinder and Zandi rates these tax cut proposals as having more bang-for-the-buck than an extension the Bush tax cuts, but much less than other direct spending proposals.

But polls and policy wonks don’t enact legislation; Congress does. And the composition of Congress changed dramatically during the mid-term elections. So what is the President to do? Since the original stimulus program was under-funded by 50% (http://krugman.blogs.nytimes.com/2010/07/09/what-went-wrong/), the economy is in desperate need of another pump-priming to sustain and enhance the recovery. From a Keynesian perspective, letting all of the Bush tax cuts expire is a bad idea. It takes more money out of the economy. The least attractive alternative currently being talked about (other than making all the Bush era tax rates permanent) is an exchange of permanent middle class tax cuts for a temporary extension of those for the top percentiles. If that’s the best he can do, he’s got to take it and address long-term rates as part of his deficit commission proposals. Before doing so, however, he ought to push harder for a deal that makes more economic and political sense – and cents!

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