Even the CBO is pointing out that the Bush Tax Cuts for EVERYONE will raise output, income and employment. No wonder Obama and the Democrats are against it.
CBO’s Analysis of Fiscal Policy Options
To assist policymakers in their decisions, CBO has quantified the effects that some alternative fiscal policy options would have on the economy. In a January 2010 report, CBO estimated the effects of a diverse set of temporary policy options. The agency reported the results in terms of the two-year effect on the economy per dollar of total budgetary cost, what one might informally call the “bang for the buck.” The overall effects of those policies on the economy would depend also on the scale at which they were implemented; making a significant difference in an economy with an annual output of nearly $15 trillion would involve a considerable budgetary cost.
CBO’s key conclusions from that analysis are as follows:
- A temporary increase in aid to the unemployed would have a significant positive short-term effect on the economy per dollar of budgetary cost. Such an increase would slightly raise unemployment among the affected individuals, but it would also raise people’s spending and thereby increase output and employment in the economy overall.
- A temporary reduction in payroll taxes—especially in the share of taxes paid by employers—would also have a significant positive short-term effect on the economy. This approach would boost output and employment both by increasing demand for goods and services and by providing an incentive for additional hiring.
- A number of other temporary policy options, including the expensing of business investment and providing aid to states, would have smaller positive short-term effects on output and employment.
- A temporary increase in infrastructure investment and a temporary across-the-board reduction in income taxes would have still smaller short-term effects on -output and employment per dollar of budgetary cost.
In its January study, CBO also explained that those policy actions would lead to the accumulation of additional government debt that would reduce income in the longer term unless other policies with offsetting effects on future debt were enacted. However, CBO did not quantify those future reductions in income.
At the request of the Chairman, CBO has now estimated the short-term and the longer-term effects of certain tax policy options being considered by the Congress. In particular, CBO studied the effects of extending the 2001 and 2003 tax cuts; extending the higher exemption amounts for the AMT that were in effect in 2009 (adjusted for inflation) for 2010 and subsequent years; and reinstating the estate tax, which expired completely in 2010, for 2011 and subsequent years at the rates in effect in 2009 and with the exemption amounts (adjusted for inflation) that applied in that year. CBO examined four alternative approaches to making those changes: a permanent change affecting all provisions (labeled a “full permanent extension”), a permanent change but without extending certain provisions that would apply only to high-income taxpayers (labeled a “partial permanent extension”), a change affecting all provisions but only through 2012 (“full extension through 2012”), and a change through 2012 but without extending certain provisions that would apply only to high-income taxpayers (“partial extension through 2012”).
The methodology for this analysis was quite similar to the methodology that CBO uses in analyzing the President’s budget each spring. CBO used several models that make different simplifying assumptions about people’s behavior. The models used to estimate the effects on the economy in 2011 and 2012 focus on the policies’ impact on the demand for goods and services, because CBO expects that economic growth in the near term will be restrained by a shortfall in demand. All else being equal, lower tax payments increase demand for goods and services and thereby boost economic activity. In contrast, the models used to estimate the effects on the economy in 2020 and later years focus on the policies’ impact on the supply of labor and capital, because CBO believes that economic growth over that longer horizon will be restrained by supply factors. All else being equal, lower tax revenues increase budget deficits and thereby government borrowing, which crowds out investment, while lower tax rates increase people’s saving and work effort; the net effect on economic activity depends on the balance of those forces. Because the responsiveness of people’s work effort to changes in their after-tax compensation is uncertain, CBO produced estimates based on alternative assumptions about such behavioral responses.
Notwithstanding CBO’s use of alternative models and assumptions, the actual effects of the policy options studied could fall above or below the estimates that CBO reports. With that caveat, the key findings are these:
- All four of the options for extending the expiring income tax cuts would raise output, income, and employment during the next two years, relative to what would occur under current law. A full permanent extension or partial permanent extension would provide a larger boost to income and employment in the next two years than would a temporary extension, and a full extension would provide a larger boost than would the corresponding partial extension.
- But the effects of those policy options on the economy in the longer term would be very different from their effects during the next two years. For some of the options, the estimates based on different models and assumptions cover a broad range. Still, the estimates indicate that all four of the options would probably reduce income relative to what would otherwise occur in 2020. Beyond 2020, and again relative to what would occur under current law, the reductions in income from all four of the policy options would become larger. Either a full or a partial extension of the tax cuts through 2012 would reduce income by much less than would a full or partial permanent extension.
In sum, and as CBO has reported before, permanently or temporarily extending all or part of the expiring income tax cuts would boost income and employment in the next few years relative to what would occur under current law. However, even a temporary extension would add to federal debt and reduce future income if it was not accompanied by other changes in policy. A permanent extension of all of those tax cuts without future increases in taxes or reductions in federal spending would roughly double the projected budget deficit in 2020; a permanent extension of those cuts except for certain provisions that would apply only to high-income taxpayers would increase the budget deficit by roughly three-quarters to four-fifths as much. As a result, if policymakers then wanted to balance the budget in 2020, the required increases in taxes or reductions in spending would amount to a substantial share of the budget—and without significant changes of that sort, federal debt would be on an unsustainable path that would ultimately reduce income. Similarly, even temporary increases in government spending would add to federal debt and reduce future income, and permanent large increases in spending that were not accompanied by other spending reductions or tax increases would put federal debt on an unsustainable path. Compared with the options examined here for extending the expiring tax cuts, various other options for temporarily reducing taxes or increasing government spending would provide a bigger boost to the economy per dollar of cost to the federal government.
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