Sunday, August 1, 2010
The cuts lowered tax rates across the board on income, dividends and_____William G. Gale is a senior fellow at the Brookings Institution and co-director of the Urban-Brookings Tax Policy Center._____________
capital gains; eventually eliminated the estate tax; further lowered
burdens on married couples, parents and the working poor; and increased
tax credits for education and retirement savings. Obama's proposal would
extend most of these reductions, allowing only those for individuals
making more than $200,000 and families making more than $250,000 to
expire....
1. Extending the tax cuts would be a good way to stimulate 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.
2. Allowing the high-income tax cuts to expire would hurt small businesses.
...
This claim is misleading. If, as proposed, the Bush tax cuts are allowed
to expire for the highest earners, the vast majority of small
businesses will be unaffected. Less than 2 percent of tax returns
reporting small-business income are filed by taxpayers in the top two
income brackets -- individuals earning more than about $170,000 a year
and families earning more than about $210,000 a year.
And just as most small businesses aren't owned by people in the top
income brackets, most people in the top income brackets don't rely
mainly on small-business income: According to the Tax Policy Center,
such proceeds make up a majority of income for about 40 percent of
households in the top income bracket and a third of households in the
second-highest bracket. If the objective is to help small businesses,
continuing the Bush tax cuts on high-income taxpayers isn't the way to
go -- it would miss more than 98 percent of small-business owners and
would primarily help people who don't make most of their money off those
businesses.
3. Making the tax cuts permanent will lead to long-term growth.
A main selling point for the cuts was that, by offering lower marginal
tax rates on wages, dividends and capital gains, they would encourage
investment and therefore boost economic growth. But when it comes to
fostering growth, this isn't the whole story. The tax cuts also raised
government debt -- and higher government debt leads to higher interest
rates. If estimates of this relationship -- by former Bush Council of
Economic Advisers chair Glenn Hubbard and Federal Reserve economist Eric
Engen, and byoutgoing Office of Management and Budget Director Peter
Orszag and myself -- are accurate, then the tax cuts have raised the
cost of making new investments. As the economy recovers and private
borrowing rises, the upward pressure on interest rates is likely to grow
even stronger.
I have used standard growth and investment formulas to calculate that
the overall effect of the Bush tax cuts on economic growth has therefore
been negative -- and it will continue to be negative if the cuts are
extended.
4. The Bush tax cuts are the main cause of the budget deficit.
Although the cuts were large and drove revenue down sharply, they are
not the main cause of the sizable deficit that exists today. In 2007,
well after the tax cuts took effect, the budget deficit stood at 1.2
percent of GDP. By 2009, it had increased to 9.9 percent of the economy.
The Bush tax cuts didn't change between 2007 and 2009, so clearly
something else is to blame.
The main culprit was the recession -- and the responses it inspired. As
the economy shrank, tax revenue plummeted. The cost of the bank bailouts
and stimulus packages further added to the deficit. In fact, an
analysis by the Center on Budget and Policy Priorities indicates that
the Bush tax cuts account for only about 25 percent of the deficit this
year.
5. Continuing the tax cuts won't doom the long-term fiscal picture; entitlements are the real problem.
One theory holds that the country's long-term budget shortfall is "just"
an entitlements problem, the result of rising costs associated with
growing Social Security rolls and increased health-care spending (via
Medicare and Medicaid). ...
But it just isn't true. The deficits we face over the next decade
reflect a fundamental imbalance between spending and revenue, one that
goes beyond entitlements. Based on projections by the CBO, Alan Auerbach
of the University of California at Berkeley and myself, among others,
even if the economy returns to full employment by 2014 and stays there
for the rest of the decade, the continuation of current fiscal policies,
including the Bush tax cuts, would lead to a national debt in the range
of 90 percent of GDP by 2020. That's already the highest rate since
just after World War II -- and Medicare, Medicaid and Social Security
aren't expected to hit their steepest spending increases until after
2020.
According to these same projections, the yearly deficit would rise to 6
to 7 percent of GDP by 2020. The Bush tax cuts would account for a
significant chunk of this, considering that in each year they are in
effect, the revenue lost because of them amounts to nearly 2 percent of
GDP.
Compounding the problem: By increasing the government's debt, the tax
cuts have already led to higher interest payments on that debt. So even
if all of the cuts expire on Dec. 31, we will still be paying for them
for years to come.
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