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."