Bush tax cut mythology
As the debate turns to economic stimulus, we’re starting to hear this: “Bush realized that the economy needed help, so he asked Congress to enact tax cuts to provide stimulus. And this turned the economy around.”
None of this is true.
When Paul Krugman refers to the administration’s proposed tax policy as the “Obama-McConnell Tax-Cut”, that phrase alone signals more than just a policy disagreement. It’s becoming a kind of short hand on the left for dissatisfaction with Barack Obama.
Krugman believes the current proposal will give the economy a “short-term boost”: Unfortunately, he also believes that a short-term boost is woefully inadequate to fix problems on the scale we are now experiencing.
So why in the world is anyone giving any credence to the insistence by Republican leaders that tax cuts, more tax cuts, and deeper tax cuts are the remedy to our economic woes?
Despite their political appeal, $500 per worker tax credits will do very little to actually boost the economy.
What impact did the Bush tax cuts have on economic growth?
The evidence is not favorable.
…Thus, there is little evidence to support that the Bush tax cuts had a significant effect on growth.
…An analogy with the government might be helpful in understanding why the tax cuts didn’t have a larger effect even though they were much better targeted than the 2001 tax cuts. When the government increases taxes, it can use the money for government investment (e.g. roads, electrical systems, bridges) or for government consumption (e.g. paper for a government office, gas to run a government vehicle, or a fireworks show to celebrate an important event). If the government uses the money for investment, and uses it wisely, the enhanced infrastructure allows us to increase our economic growth rate. But with consumption spending, e.g. an elaborate government fireworks show, there may be immediate benefits to those who watch and participate, but this type of spending doesn’t do anything to increase economic growth in the future.
Tax cuts, which send money in the other direction — from government to households — can be viewed similarly. A tax cut can be used to fund productive investment, e.g. to open a new business, or it can be used for consumption, e.g. for an elaborate private fireworks show or some other use that does nothing to enhance our long-run growth.
Hold that thought.
The Center for Budget and Policy Analysis estimates that allowing the payroll tax cut to revert to its previous rate would add nearly $400 to the 2012 taxes for a worker earning roughly $20,000 a year, $790 for those making $40,000, and more than $2,200 for employees with annual income of $123,000. “Failure to extend the payroll tax cut would harm workers in nearly every job and income category,” researchers at the Washington think-tank said in a recent report.
The benefit of the tax cut is fairly straightforward: Handed a little more money in their paycheck every two weeks, people tend to spend it. That boosts demand. Although the tentative deal in Washington only cuts the average employee’s tax bill by about $20 a week, that could help spur spending at a time the economy is picking up speed. The nation’s gross domestic product rose 2.8 percent in the fourth quarter, up from 1.8 percent in the previous period and the fastest pace since the second quarter of 2010. The unemployment rate also declined sharply in January to 8.3 percent, a three-year low. Other signs of life in recent months include resilient consumer spending, growth in factory output, and rising home construction.
So the Bush tax cuts that put more spending money in people’s pockets don’t help the economy but the Obama tax cuts that put more spending money in people’s pockets does help the economy.
I get it now.
This “payroll tax holiday” bled Social security of $110 billion last year and will bleed at least $143 billion from Social Security in 2012. Over ten years that would be $1.5 trillion not paid into Social Security.
And the left cheers this “coveted win” for Obama that accelerates the destruction of Social Security.
Now it’s a good thing when Obama kills Social Security.