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Tax cut deal

How much do upper-income tax cuts reduce unemployment?

Dec 7th 2010, 19:30 by M.S.

DEMOCRATS have been reluctant to swallow any extension of the Bush tax cuts that preserves the cuts on income over $250,000 per year. But it's been clear from the start that this was the candy Republicans might demand in order to cede on any Democratic priorities in the lame-duck session of Congress. And, indeed, the deal announced last night between Barack Obama and the GOP congressional leadership includes Republican support for extending unemployment insurance, a payroll-tax cut, and a business-investment tax cut in exchange for preserving the Bush tax cuts for the wealthy for two more years, along with a big cut in the estate tax on millionaires. Some Democrats are unhappy with this deal. Others are willing to live with it. Ezra Klein, who likes the deal on balance, captures the ambivalence in two posts over two days. Today he says, "The tax cuts for income over $250,000 are a bad way to spend $100 billion or so, and the estate tax deal is really noxious," but yesterday, he hoped those tax cuts wouldn't be entirely destructive: "It’s not the most stimulative way to spend $100 billion, but it’s more stimulative than not spending it, or than raising taxes."

But what about the stimulative effect of the upper-income, as opposed to lower-income, tax cuts? How big will it be? Mike Konczal points us to research on this subject by the Congressional Budget Office. In September, the CBO found that those $100 billion in tax cuts on income above $250,000 would reduce unemployment in 2011 and 2012 by...somewhere between 0.1% and nothing at all.

The CBO's Doug Elmendorf explains: "(T)he economic impact per dollar of revenue reduction from the full extension would be smaller than that from partial extension because a greater proportion of the tax savings from the full extension would go to relatively high income households, which tend to spend less of an increase in income than lower-income households do."

Meanwhile, today the Center for American Progress's Michael Linden and Michael Ettlinger take the principle a step further and ask how many jobs would be created by letting the Bush tax cuts for income above $250,000 expire, and then using that revenue to fund a bigger payroll-tax cut for lower earners. Their answer, based on a combination of multipliers from the CBO and from economist Mark Zandi: an extra 500,000 jobs.

One of the reasons it's so hard to have political discussions about these kinds of issues is that there's little agreement at this point on fundamental economic gestalts. Some people, most of the GOP leadership for example, say they don't think government stimulus works to reduce unemployment, since money the government spends on one thing is simply taken away from elsewhere in the economy. If you think this, of course, then you also think that tax cuts don't boost employment, since the money the government fails to collect in taxes must simply be collected elsewhere in the economy by borrowing. But if, like most serious economists and the CBO, you think that government spending or tax cuts do boost employment in the short run, then you enter a discussion as to what forms of spending or tax cuts are most efficient at boosting employment. Clearly, $100 billion for somewhere between zero and 100,000 jobs is pretty poor performance. Giving more government money to rich people just isn't a good way to get people working. But given that Democratic hopes for an infrastructure-based stimulus programme are politically impossible, the current compromise is probably the best they could do for themselves.

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doctor robert wrote:
Dec 7th 2010 7:48 GMT

I'm confused. The CAP report takes into account the other aspects of the deal (extension of jobless benefits, investment credit etc) and states the headline number of 2.2 Million Jobs saved or created. The CBO analysis isn't taking into its calculations the programs that President Obama extracted as concessions from Republicans. But it should be cause there was no political way they were going to be extended for a long time without concessions.

doctor robert wrote:
Dec 7th 2010 7:51 GMT

To add (because there is no edit button), I understand if the author of the post is isolating the 250K tax break extension then the other factors shouldn't be taken into account, but the post seems to be a comment on the political situation (see last paragraph) and because of politics being injected into this conversation than the whole deal should be taken into account.

LexHumana wrote:
Dec 7th 2010 8:00 GMT

As a general rule, I don't often disagree with the Economist when it talks economics, but there is one thing that pops up repeatedly in recent times that is really starting to annoy the heck out of me: "since the money the government fails to collect in taxes must simply be collected elsewhere in the economy by borrowing." This is not the first time the Economist has said this (and it probably won't be the last) but I have to point out that this statement is a load of rubbish.

The money that the government does not collect via taxes COULD be made up for via borrowing, but that is not the only alternative. The government COULD choose to do without the money at all, and cut spending instead.

I realize that is a radical concept to many, but I am getting sick and tired of the government acting like it is somehow entitled to skim an expected amount from private payrolls, and that anything less is somehow wrong. It is almost like a bad divorce, where the ex-spouse is demanding a certain amount of alimoney in order to live "at the level to which he/she has become accustomed". The government should simply get accustomed to living at a lower level of income, just like its citizens are doing, and skim less from our paychecks.

Pacer wrote:
Dec 7th 2010 8:13 GMT

I'm most curious about the last statement, since I've never heard that the Democrats have even floated the idea of an infrastructure-based stimulus program. We saw Stim-1 contained only about 10% for infrastructure--and at that the fruits were mostly pork barrel projects that were already waiting in the wings.

Politically impossible? I've spoken in wide ranging circles about a new WPA/CCC/TVA/etc. and the response has been a chorus of support no matter the overall cost (although some preferred to limit the focus to renewable energy, water and mass transit). Or does the author mean that "politically" the banks would hold our financial system hostage again if they felt that the government might be spending some real money that doesn't flow directly to the financial sector?

Heimdall wrote:
Dec 7th 2010 8:23 GMT

What I don't get is why the Democrats caved. For instance, they have the following narrative that they should trumpet from the mountain tops:

"Fellow Americans, you can thank Republicans for the tax hike you are experiencing during a time of economic crisis. Rather than accept lower taxes for every working American -- with the top 2% paying slightly more ONLY on income over $250k -- REPUBLICANS DECIDED TO RAISE TAXES ON EVERYONE.

Do not forget this come election day: REPUBLICANS RAISED YOUR TAXES rather than accept the intended reversion -- on the top bracket only -- on stratospheric incomes.

Be sure to thank them for it."

Doug Pascover wrote:
Dec 7th 2010 8:25 GMT

Greg Ip wrote what I consider the best review of this. My problem with Keynesianism isn't that it doesn't work, it might. The problem is that all kinds of folly stops being called foolish and becomes stimulative instead. The extension of the marginal rate cut is just one good example.

Heimdall wrote:
Dec 7th 2010 8:28 GMT

LexH,

"The government COULD choose to do without the money at all, and cut spending instead. "

Um. Are you aware of a political party in the US with a track record of significant spending cuts? I'm not...

Heck, let's be generous. Are you aware of a political party in the US that even PROPOSES to cut spending in the amount necessary to offset a permanent extension of the Bush tax cuts?

No offense, but absent such a political party in the US, your speculation that the government might cut spending to balance the budget is akin to (and as useful as) speculations about leprechauns and pots of gold being used towards the same end...

KSStein wrote:
Dec 7th 2010 8:30 GMT

"Giving more government money to rich people just isn't a good way to get people working."

This sort of statement only makes sense if you assume that this money is somehow the government's in the first place. This is perhaps what i hate most about MS and his fellow progressives. They assume that all income generated by individuals/businesses is the government's to take, so any reduction in tax rates is somehow taking money out of the government's pocket.

This money does not belong to the government, it belongs to her citizens. This is not an instance of the government "giving", it is a question of the government "taking" less. Most Americans intuitively understand this, and that's why this issue is a vote-winner for Republicans.

A Young wrote:
Dec 7th 2010 8:33 GMT

Look - last month Americans sent a clear message that they rejected Democrats and their radical economic agenda. Americans want a plan for economic recovery that doesn't involve a bunch of elitist talk about marginal propensity to consume, "serious economists", or math. Fortunately the GOP has just such a plan:

Phase 1: Cut Taxes on the Rich
Phase 2:
Phase 3: Prosperity

It's high time the American people got the government they deserve.

Dec 7th 2010 8:38 GMT

@LexHumana, "The money that the government does not collect via taxes COULD be made up for via borrowing, but that is not the only alternative. The government COULD choose to do without the money at all, and cut spending instead."

AHAHAHAHAHA

@Heimdall, how did the Republicans raise taxes?

Heimdall wrote:
Dec 7th 2010 8:55 GMT

RR,

By forcing all of the Bush-era tax cuts to sunset rather than just the top bracket for the top 2%.

Republicans weren't satisfied with tax cuts on the first $250k for every single working American. So they forced every single working American to experience tax increases.

Or so a very clear Democratic narrative could have run, had they not been incredibly poor communicators (and either chicken or complicit, depending on your view)

OneAegis wrote:
Dec 7th 2010 9:02 GMT

So the top 0.1%, a large percentage of which get first dibs on the trough of Fed money ($9 trillion lended to banks to keep them solvent...can I get a Fed credit line to keep me solvent? 1% would go a long way...) absolutely needed to be able to keep more of the money that they are actively making on arbitraging government money inputs and outputs.

If Dickens were writing today, Scrooge would be visited by the ghost of Ronald Reagan, throw the Cratchitts out onto the street and then bask in his moral superiority of not creating negative incentives.

Bah, humbug to this bullsh**.

Mr. Dean wrote:
Dec 7th 2010 9:09 GMT

@LexHumana

It's an accounting rule. Tax cuts that aren't offset with lower spending will have to be made up later, just as spending without an offsetting tax hike will have to be made up later.

"The Government" isn't entitled to money, you're right, but it does have to make spending + borrowing = revenue. That doesn't sound like rubbish to me.

eric meyer wrote:
Dec 7th 2010 9:10 GMT

So this is what Barack Obama's Radical Socialist Plan for America has finally come to. How could I have been so blind for so long?

Mr. Dean wrote:
Dec 7th 2010 9:16 GMT

@KSStein

The fact that "Americans intuitively understand" that tax cuts are free money with no effect on the budget is one of the biggest reasons we have a deficit problem. When publications treat revenue losses from tax cuts as an expenditure, they're being consistent in their accounting. That's the adult thing to do. Just yelling "taxes are theft!" while demanding a fully funded defense department and medicare is childish and does absolutely nothing for the debate. So can we just nip that particular talking point in the bud?

Dec 7th 2010 9:18 GMT

@Heimdall, nobody's gonna buy that twisted logic. In 2 years, the Republicans are gonna come back and try to extend all the cuts. If there's one thing people are sure of, it's that Republicans love cutting taxes.

sparkleby wrote:
Dec 7th 2010 9:42 GMT

doctor robert, the CBO analysis is from back in September and hence only considered the issue of a full extension of Bush cuts vs a partial one.

jomiku wrote:
Dec 7th 2010 9:47 GMT

I've seen an estimate that extending the tax cuts in toto creates - maybe "saves" is a better word - 300k jobs in total over 2 years. It's difficult to isolate the effects of not extending for over $250k filers because not many are actually business owners with employees and there it seems the research is kind of lacking on how a business owner treats a marginal tax increase. For example, an S corp owner can invest more in equipment that can be written off immediately or can accelerate certain expenses or delay certain revenue, meaning elemental business and tax planning. The numbers about how unemployment is affected come from bigger models and we shouldn't trust how well they apply to this segment alone.

There is an additional factor, that thing called Ricardian Equivalence; if the tax increases decrease the deficit then the conservative position would be that people would adjust their planning to expect fewer tax increases in the future - because they wouldn't be as necessary. This effect should then partly cancel any current decrease in after tax income to a business owner.

ccusa wrote:
Dec 7th 2010 9:55 GMT

I have to say I dislike very much the lingo that a tax cut is spending money on people who earned that money. I'm not saying I love millionaires, but I'm not saying I hate them either. I'm just saying what a bunch of bastards the government is if they talk like that, as if the money is first and foremost the government's money. My employer sets my salary, based on me and him, and then government takes some of my money. So let's be clear about that. I'm not a millionaire, to be clear. But I don't like this game playing, because ideas matter.

cognate wrote:
Dec 7th 2010 9:55 GMT

If such projections meant anything the stimulus would have worked.

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