By Jessica Chau
Economist and Senior Fellow for the Center on Budget and Policy Priorities Jared Bernstein reviewed two new economic studies in his On the Economy blog today. His conclusion: both studies show that “allowing the Bush tax cuts to expire for the top 2% of Americans (those with household incomes above $250,000) will not have a negative impact on the economy.” We also feature a Letter to the Editor from a small business owner in Maine who writes that ending the Bush tax cuts above the $250,000 household income level would impact only three percent of incorporated businesses that make that much profit, but provide much needed revenue to pay down the debt and boost programs that benefit his middle class customers.
On the Economy blog, Jared Bernstein, 9/24/2012
I read two papers over the weekend both of which underscored an important point about an ongoing area of contention around the fiscal cliff: allowing the Bush tax cuts to expire for the top 2% will not have a negative impact on the economy.
The first one is by economist Owen Zidar, a careful econometric study of the impact throughout history of tax changes on jobs and growth. What’s unique and particularly relevant about this study is that it breaks up the tax cuts into the parts that go to the bottom 90% of taxpayers and those that go to the top 10%.
And in numerous different statistical tests and models, Zidar consistently finds no significant impacts of tax cuts to the high income group. As he puts it in the conclusion (my bold):
If tax cuts for high-income earners generate substantial economic activity and job creation, then we should expect to see three things in the data. First, employment growth should tend to be higher in the years following…tax cuts for the rich. Second, places with a higher share of rich people should grow faster following national tax cuts for the rich (since these areas receive more tax cuts for rich people in dollar per capita terms). Similarly, growth should be lower following tax increases on the rich, especially in places where many rich people live. None of these predictions are born out in the data.
He does, however, find consistently strong multiplier effects for tax cuts targeted at the bottom 90%. EG, “a one percent GDP tax cut for the bottom 90% results in 2.7 percentage points of GDP growth over a two year period. The corresponding estimate for the top 10% is 0.2 percentage points and is insignificant statistically.” The comparable result for employment growth is 1.9% for the bottom 90% and an insignificant 0.4% for the top group.
In another useful analysis, researchers at EPI look at the stimulative impact on GDP and jobs of all the components of the dreaded cliff. Re the highend tax cuts, they find:
Extending just the upper-income Bush tax cuts would boost GDP growth by 0.1 percentage point, increasing nonfarm payroll employment in 2013 by only 102,000 jobs—far less than one-tenth the impact of continuing the temporary ad hoc stimulus measures.
The latter refers to extended unemployment insurance benefits, the temporary payroll tax cut, and the Recovery Act extensions of some well-targeted tax credits.
Letter: Keep tax relief
Bangor Daily News, 9/22/2012
As a small-business owner, I know that when considering a change in business tax rates, it’s important to keep in mind the difference between revenue and profit. Revenue is all the money you bring in, profit is what’s left after expenses such as cost of goods and wages. Taxes are based on profit, not revenue.
So when you hear a proposal to increase taxes on businesses with income more than $250,000, we’re talking about a quarter of a million in profit. So don’t think it will affect the corner convenience store, local bookkeeper or almost any other small-business owner you know. Only 3 percent of unincorporated businesses in the country make that much profit.
For the other 97 percent of us, the effect of slightly higher taxes on the most profitable businesses is all positive, since the increased public revenue can be used to pay down debt and bolster programs that support our customers, the middle class. With federal finances in better shape and programs such as Medicare and college tuition assistance strengthened, working families are more likely to spend on local businesses such as mine.