off the charts
POLICY INSIGHT
BEYOND THE NUMBERS

You are here

New Findings Show Unemployment Insurance Trumps High-Income Tax Cuts on Jobs, Deficits

December 6, 2010 at 2:56 PM
BY
Chad Stone

CORRECTED December 10th, 2010: The Figures for 2012 payroll employment and unemployment rate in table 2 have been corrected. In the previous version the figures shown were for 2013 instead of 2012.

We've received some eye-popping estimates from Mark Zandi, chief economist at Moody's Analytics, that flesh out an important point that the Congressional Budget Office, Zandi, and many others have made before: unemployment insurance (UI) and tax cuts focused on low- and moderate-income households have a much larger economic impact than income tax cuts for high-income individuals. I'll be writing a more detailed report later, but here they are in a nutshell:

  • Short-term scenarios: Zandi found that extending federal UI for one year and some of the Obama tax cuts (expansion of the child tax credit, improvements to the earned income tax credit, and the higher education tax credit) for two years would generate more economic activity -- including creating 500,000 more jobs next year -- than would a two-year extension of the Bush high-income tax cuts. It would also add $30 billion less to deficits over the 2010-2015 period than extending the high-income tax cuts would.
  • Longer-term scenarios: Zandi found that extending federal UI for a year, making the Obama tax cuts described above permanent, extending Obama's Making Work Pay tax cut for another year, and creating a two-year tax credit to promote additional hiring would generate substantially more economic activity -- including creating 1.2 million more jobs next year -- than would a permanent extension of the high-income tax cuts. It would also add $441 billion less to deficits over the 2010-2020 period than extending the high-income tax cuts.2010-12-6econ.jpg


Friday's jobs report reminds us that the economy still needs a job-creating boost. As Federal Reserve Chairman Ben Bernanke said in a recent speech, "a fiscal program that combines near-term measures to enhance growth with strong, confidence-inducing steps to reduce longer-term structural deficits would be an important complement to the policies of the Federal Reserve." These results show that, compared with a policy of extending the high-income tax cuts, a policy emphasizing unemployment insurance and refundable tax credits is far better for enhancing growth in the near term without undermining deficit reduction efforts in the longer term.


SHARE