CUTTING TAXES A NON-STARTER

CUTTING TAXES THE BEDROCK OF THE NEW CONSERVATISM IS A NON-STARTER. Get the fact behind the news

Economic research suggests that tax cuts, though difficult for politicians to resist in election season, have limited ability to bolster the flagging economy because they are essentially a supply-side remedy for a problem caused by lack of demand.

The nonpartisan Congressional Budget Office this year analyzed the short-term effects of 11 policy options and found that EXTENDING TAX CUTS WOULD BE THE LEAST EFFECTIVE WAY TO SPUR THE ECONOMY and reduce unemployment. The report added that TAX CUTS FOR HIGH EARNERS WOULD HAVE THE SMALLEST “bang for the buck” WEALTHY AMERICANS ARE MORE LIKELY TO SAVE THEIR MONEY THAN SPEND IT. The office gave HIGHER MARKS TO A PROPOSAL now embraced by President Obama, THAT WOULD ALLOW SMALL BUSINESSES TO WRITE OFF 100%OF THEIR INVESTMENT COSTS, NEITHER of those options, though, would do as much TO STIMULATE THE ECONOMY as offering DIRECT PAYMENTS TO THE UNEMPLOYED and SOCIAL SECURITY RECIPIENTS or REDUCING the PAYROLL TAXES OF WORKERS,the study found. OTHER PROPOSALS RECOMMENDED WERE AID TO STATES AND MUNICIPALITIES.

So while THE DECISION on WHETHER TO EXTEND the TAX CUTS will have a lasting impact on the deficit and on how the nation’s tax burden is distributed, ECONOMISTS AND TAX EXPERTS SAY IT IS UNLIKELY TO GIVE MUCH IMMEDIATE RELIEF FOR HIGH UNEMPLOYMENT AND SLOW ECONOMIC GROWTH. “Firms don’t hire based on tax breaks; they hire based on demand,” said Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center. “So a lot of the tax breaks are likely to be rewarding people and companies for that they were going to do anyway.” When they were signed into law in 2001 and 2003, the huge package of income and capital gains tax reductions that became known as the Bush tax cuts were hailed as a way distribute the government surplus and promote long-term economic growth. Mr. Bush was so confident in their power to generate business growth and revenue that he predicted they would enable the government to pay down $1 trillion in debt in just four years.
Those surpluses have now become crushing deficits because of a combination of factors, including the recession, the cost of the wars in Iraq and Afghanistan, the Medical Prescription drug benefit, UNFUNDED, and the $1.7 trillion in forgone revenue from from the tax cuts themselves.

The Obama administration figures that nearly a third of the cost of the tax cuts — more than $700 billion during the next decade — would go to the wealthiest 2 percent of Americans. Essentially arguing "that we add $700 billion to the deficit in return for $35 billion in what has been found to be the least effective means of stimulus,” said Jason Furman, a deputy assistant to the president overseeing economic policy.
Mr. Obama’s proposal would preserve the tax cuts for families that earn less than $250,000 a year (or individuals who make less than $200,000) at a cost of $2.8 trillion over the next decade.

Edward D. Kleinbard, former chief of staff of the bipartisan Joint Committee on Taxation, said the reliance on tax expenditures had distorted the budget process because it induced the public to overlook the fact that — unless they are accompanied by spending reductions — tax cuts have the same effect on the deficit as additional spending. It also allows politicians to make unsubstantiated claims about the power of tax-cutting to accomplish other economic goals, he said.

THE THOUGHT THAT TAX CUTS PAY FOR THEMSELVES OR TAX CUTS ALONE CAN TURN AROUND THE ECONOMY IS WISHFUL THINKING said Mr. Kleinbard, now a law professor at the University of Southern California. “The debate has become so unrealistic it makes you want to scream.”