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Ending High-End Tax Cuts Has No Impact on Economy

While common sense dictates that cutting the nominal wages of everyone making $110,000 a year and under would have a direct impact on the economy, new research confirms that raising taxes on the top 2% would not.

Jared Bernstein summarizes the new literature on this subject, which comes in two separate studies that reach the same conclusions.

The first one is by economist Owen Zidar, a careful econometric study of the impact throughout history of tax changes on jobs and growth. What’s unique and particularly relevant about this study is that it breaks up the tax cuts into the parts that go to the bottom 90% of taxpayers and those that go to the top 10%.

And in numerous different statistical tests and models, Zidar consistently finds no significant impacts of tax cuts to the high income group […]

He does, however, find consistently strong multiplier effects for tax cuts targeted at the bottom 90%. EG, “a one percent GDP tax cut for the bottom 90% results in 2.7 percentage points of GDP growth over a two year period. The corresponding estimate for the top 10% is 0.2 percentage points and is insignificant statistically.” The comparable result for employment growth is 1.9% for the bottom 90% and an insignificant 0.4% for the top group.

This is critical. It’s not just that Zidar sees tax cuts for the rich as insignificant – it’s that he sees tax cuts for the broad middle as several orders of magnitude more significant. I don’t know if Zidar extends this study to the effect of federal spending on job creation programs like infrastructure or transfer programs like food stamps and unemployment insurance, but whenever CBO tests this, they find that these programs have even higher economic multipliers than tax cuts of any stripe. So the hierarchy goes: job creating federal spending, then broad tax cuts on the bottom 90%, then tax cuts on the top 10%, which are about as effective as doing nothing.

The Economic Policy Institute looked at the same question. They found that extending the Bush tax cuts above $250,000 would increase GDP growth by only 0.1% and increase payroll employment by 102,000 jobs over the entire year of 2013. They describe this as “less than one-tenth the impact of continuing the temporary ad hoc stimulus measures,” aka the payroll tax cut, extended unemployment insurance benefits and other targeted tax cuts from the Recovery Act like the expanded child tax credit and Earned Income Tax Credit.

This is important information to carry into the fiscal cliff debate. It suggests that everyone is targeting the exact wrong tax cuts in the debate. The Bush tax cuts should quite obviously expire. It’s the only way to eliminate the non-productive tax cuts on the high end, and Democrats could come back with a shiny set of new progressive tax cuts that they could pressure Republicans into supporting, much as they forced the extension of the payroll tax cut for 2012.

However, those other measures – the payroll tax cut, unemployment insurance, the Recovery Act tax credits – actually do have an impact, and so would canceling the sequester, the automatic cuts to discretionary and defense spending (not as much on the defense side). These are the major issues in the fiscal cliff, yet it gets called “Taxmageddon” in Washington, because the average Congressman decides his or her priorities based on the priorities of their richest donor.

I should add that there are probably ways to fold the principles and goals of something like the payroll tax cut into that set of new “Obama tax cuts” after the Bush-era rates expire, but that this isn’t anything close to a guarantee, especially because Republicans will try to exact a price – and Democrats will be all too happy to pay the ransom.

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David Dayen

David Dayen

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