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Better Uses for Tax-Cut Dollars

Former Federal Reserve vice chairman Alan Blinder makes an excellent suggestion in today’s Wall Street Journal: Congress should let the Bush tax cuts for people earning over $250,000 expire in December and use the savings to pay for jobless benefits and other programs that “put more spending into the economy than the tax hike takes out, thus creating jobs.”

As I explained in a recent report, a Congressional Budget Office analysis makes clear that extending the tax cuts for high-income households would be the least effective of all spending and tax options that CBO examined for boosting the weak economy and creating jobs.   It comes in dead last.

Our report continued:

The CBO findings point the way toward sounder alternatives. Policymakers should allow the high-income tax cuts to expire on schedule and use the 2011 proceeds for policies that CBO has found would have a much higher “bang-for-the-buck” in creating jobs and strengthening economic growth, such as extending unemployment benefits and state fiscal relief, increasing infrastructure spending, and a jobs tax credit.  Once the economic recovery is secure, the savings from allowing the high-income tax cuts to expire should go entirely for deficit reduction.

Over the long term, allowing the high-income tax cuts to expire on schedule would benefit the economy by making deficits and debt significantly smaller than they otherwise would be.  There is a broad consensus among analysts that the large deficits projected for coming decades will reduce economic growth.

“The right mix of fiscal policies would combine more stimulus in the short run with more budgetary restraint for the long run,” Blinder argues.  I couldn’t agree more.

Chuck Marr
Vice President for Federal Tax Policy