Many Bucks, Little Bang

April 19, 2010 at 12:26 PM

BY

Today’s Washington Post urges Congress to let the Bush tax cuts for people making over $250,000 expire. We agree. As our recent report on this issue noted, the high-income tax cuts are simply unaffordable given the huge projected deficits we face. Federal revenues would be $680 billion lower over the next ten years than if Congress lets them largely expire, as the President has proposed.

And it’s nonsense to claim, as some tax-cut proponents have, that we need to continue the tax cuts to bolster the economic recovery. The Congressional Budget Office rated extending all of the Bush tax cuts dead last in its evaluation of different stimulus options (see table).

CBO Analysis Shows That Extending Bush Tax Cuts Has Low “Bang for the Buck”
Policy Proposal	Dollars of Economic Activity Generated per Dollar of Cost
	Low	High
Making Bush income tax cuts permanent	$0.10	$0.40
General aid to state governments	$0.40	$1.10
Increased infrastructure spending	$0.50	$1.20
Jobs tax credit	$0.40	$1.30
Increased aid to the unemployed	$0.70	$1.90
Note: “Bang for the Buck” is the estimated dollar change in GDP for each dollar reduction in federal tax revenue or increase in spending. CBO measures the cumulative effects on GDP over 2010-2015. Source: Congressional Budget Office

Extending just the high-income tax cuts would be even less cost-effective than extending all of the Bush tax cuts. As CBO explained, “higher-income households … would probably save [rather than spend] a larger fraction of their increase in after-tax income.”

For 2011, Congress could use the savings from letting the high-income tax cuts expire for stimulus measures with more bang for the buck. But once the economic recovery is secure, the savings should go for deficit reduction.

Topics:

Federal Budget, Federal Tax, Budget Outlook, Personal Taxes, Business Taxes