Tax Cuts An Inefficient Stimulus

A federal spending program that only yielded 37 cents of benefit for every dollar spent, or even less, would generate sustained demands from the conservative chattering class that it be shut down. So why does the right keep selling extending President Bush's tax cuts as an economic stimulus tool?

The argument that tax cuts are preferable to federal spending to stimulate the economy is effectively refuted by a new study by the Economic Policy Institute, which lays side by side the various effects of stimulus proposals from both the left and the right. What's clear, as you can see from the chart below, is that as a rule taxpayers get a fair better bang for their dollars through direct federal stimulus spending than they do from the tax proposals proffered by conservatives.

The main components of a stimulus package being formulated by a group of progressive leaders—which would be about $300 billion a year and would include infrastructure spending, extended unemployment benefits, and assistance to state and local governments—all give a positive return to the taxpayer.

Tax proposals promoted by conservatives as the core of their stimulus strategy—making the Bush tax cuts permanent, further cuts in corporate tax rates and accelerated depreciation—all yield a negative return to the taxpayer.

An economic snapshot report by EPI explains that direct spending is also more effective than the tax rebate strategy that was employed earlier in 2008. EPI's Ethan Pollack notes: [1]

As money is spent, it creates beneficial ripples through the entire economy. The evidence is that most of the money from the recent tax rebate was saved rather than spent, thus blunting its stimulative benefit.1 By comparison, other options—such as infrastructure spending, aid to states, food stamps, and unemployment insurance (UI) benefits—are much more cost-effective because they target the needs most likely to channel money back into the economy. Mark Zandi from Moody’s Economy.com estimates that each dollar of refundable tax rebates only boosts GDP by about $1.26, while each dollar of infrastructure spending could provide a $1.59 boost. Not only are many of these stimulus options more effective, but they also have the added benefit of assisting those hardest hit by the downturn and tackling long-standing infrastructure needs that would lower transportation costs, decrease traffic, and increase business productivity.

Zandi’s analysis also shows what doesn’t work as stimulus: a variety of tax breaks for corporations and wealthy individuals, which cost over twice as much as they return to the economy.

EPI economist Jared Bernstein discussed these findings [2] October 24 at a hearing of the House Education and Labor Committee. There, he noted that the past eight years of economic policy—based on the principle that the benefits of tax cuts for corporations and the wealthy would trickle down to working-class people—have been a failure for millions of ordinary Americans:

Much of the current recession/stimulus debate has stressed that recent recessions—the ones in 1990-91 and 2001—were both mild and short-lived, and perhaps the next recession will follow the same pattern. It is critical to recognize that these claims are based solely on real output growth, and not on job market conditions. The allegedly mild 2001 recession, wherein real gross domestic product barely contracted, was followed by the longest “jobless recovery” on record. Though real GDP grew, payrolls shed another net 1.1 million jobs. The unemployment rate rose for another 19 months and for almost two years for African-Americans. The pattern was similar, though not quite as deep, after the early 1990s recession.

This is more confirmation that the tired economic policies of the right don't meet the smell test.