Argument: Tax cuts for rich can be safely expired as they offer least stimulus

Issue Report: Expiring Bush tax cuts for the wealthy in 2010


“Extending the Bush tax cuts wouldn’t help the economy.” Washington Post Editorial. July 28th, 2008: “Analyzing the best bang-for-the-buck policies to stimulate the economy, the Congressional Budget Office found that the least effective was extending tax cuts for the top brackets. The reason is obvious. ‘The higher-income households . . . would probably save a larger fraction of their increase in after-tax income,’ the CBO said.”

William Gale. “Five myths about the Bush tax cuts.” Washington Post. August 1, 2010: “1. Extending the tax cuts would be a good way to stimulate the economy.

As a stimulus measure, a one- or two-year extension has one thing going for it — it would be a big intervention and would provide at least some boost to the economy. But a good stimulus policy can’t just be big; it should also offer a lot of bang for the buck. That is, each dollar of government spending or tax cuts should have the largest possible effect on the economy. According to the Congressional Budget Office and other authorities, extending all of the Bush tax cuts would have a small bang for the buck, the equivalent of a 10- to 40-cent increase in GDP for every dollar spent.

Why? As the CBO notes, most Bush tax cut dollars go to higher-income households, and these top earners don’t spend as much of their income as lower earners. In fact, of 11 potential stimulus policies the CBO recently examined, an extension of all of the Bush tax cuts ties for lowest bang for the buck. (The CBO did not examine the high-income tax cuts separately, but the logic it used suggests that extending those cuts alone would have even less value.) 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 and 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.”

Robert Creamer. “Why Congress Must End Bush Tax Breaks for the Rich.” Huffington Post. July 28th, 2010: “Most economists agree that the best way to close the “demand deficit” that is at the root of our economic problems is to put money into the hands of people who will spend it — because they need to. Mark Zandi, Chief Economist for Moody’s who was economic adviser to former Republican presidential candidate John McCain, argues that the most efficient way to create immediate growth in demand are investments in food stamps and unemployment benefits. In fact, he estimates that every dollar of spending on unemployment benefits increases overall economic growth by $1.61. That’s because people who get unemployment benefits need to spend the money, and the people who receive it from them spend it as well, and so on.

You don’t create more demand by giving money to rich people who don’t spend it — or for that matter, to corporations who sit on huge sums of cash. And that is one of our current economic problems. Corporate bank accounts are bulging with cash. And remember, corporate profits have actually gone up in the last quarter — mostly by cutting back the costs — and especially cutting jobs.

But that approach is not sustainable over the long run — even for the corporations. To have sustainable growth, the economy needs consumers with money to spend — with rising income, not just credit cards in their pockets. Long-term growth requires widely spread prosperity — not ever-increasing concentration of income at the top of the income pyramid. One of the leading causes of the current economic disaster was the transfer of income from average middle class people to the very rich. Over the eight years of Bush, even when the overall economy grew, the incomes of working Americans actually dropped in real terms by $2,197 per year since 2000.”

Paul Krugman. “Now that’s rich.” New York Times. August 22, 2010: “Or we’re told that it’s about helping the economy recover. But it’s hard to think of a less cost-effective way to help the economy than giving money to people who already have plenty, and aren’t likely to spend a windfall.”

“Editorial: Extending the Bush tax cuts.” News12 Augusta. August 16th, 2010: “Republicans have long argued that lower taxes for the rich is good for the economy, because they spend more. Democrats point out that when taxes have been lowered for the rich, specifically Reagan’s tax cuts in 1981-83 and Bush’s tax cuts, the wealthiest don’t actually spend more, but rather, invest in bubble-prone economic activity, such as real estate speculation, and schemes that gave us the Enron and Savings & Loan debacles. Indeed, the economy is not improved by giving cash to people already sitting on lots of it. U.S.A Today reports that today, non-financial companies in the Standard & Poor’s 500 are holding onto a record $837 billion in cash, which is enough to pay 2.4 million people $70,000-a-year salaries for five years. But they’re not hiring. They’re waiting for the next high-yield investment opportunity, and neither the waiting, nor the investments themselves, will create jobs. However, reducing taxes for people who are likely to spend on everyday needs, does create jobs. If you give money to someone who’s not seen a decent paycheck in a while, that money will end up at the local supermarket or department store. It will put people to work. Mark Zandi, Chief Economist for Moody’s Analytics, produced a study that compares the actual returns on various types of federal spending. The highest rate of return in genuine economic production was tax money spent on unemployment. That’s right. Your basic much-maligned unemployment check gives a return of $1.61 into the economy per each dollars spent. Contrary to what Republicans claim, if you want to “prime the pump” and create economic recovery, the best way is to give money to those who have very little of it. They will spend it on necessities, i.e. products that other Americans must manufacture, build, or grow. What America suffers from right now is a “demand” deficit. If you lower taxes for working people, they will spend it. They will create demand.”

“A Real Debate on Taxes.” New York Times Editorial. August 23, 2010: “Tax cuts for low-, middle- and upper-middle-income taxpayers should be temporarily extended because those taxpayers tend to spend most of their income and the economy needs consumer spending. That would cost roughly $140 billion next year, but the spur to the economy is more important than the budgetary impact. […] Tax cuts for the rich can safely be allowed to expire because wealthy taxpayers tend to save rather than spend their tax savings. The revenue from letting these expire — nearly $40 billion next year — would be better spent on job-creating measures.”