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News from EPI Upper-income Bush-era tax cuts should be replaced with effective job-creation measures

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For Immediate Release: Wednesday, November 14, 2012
Contact: Phoebe Silag or Donte Donald, news@epi.org 202-775-8810

Upper-income Bush-era tax cuts should be replaced with effective job-creation measures

In a new report, Josh Bivens and Andrew Fieldhouse propose a blueprint for policymakers trying to navigate the so-called “fiscal cliff” that would boost real GDP by 1.7 percentage points and generate more than 2 million jobs in 2013, relative to current policy. Notably, this approach would also avoid another sharp fiscal contraction in 2014 similar to the one currently facing Congress and reduce the ten-year budget deficit by $651 billion.

Bivens and Fieldhouse note that this blueprint’s recommendations meet the constraint imposed by some members of Congress that short-term economic stimulus must be paired with longer-term deficit reduction. As a result of meeting this political constraint, the blueprint’s policy proposals are weaker than what the still-damaged job market and economy really need.

In Navigating the fiscal obstacle course: Supporting job creation with savings from ending the upper-income Bush-era tax cuts, Bivens, a macroeconomist and EPI’s research and policy director, and Fieldhouse, a federal budget policy analyst at both EPI and The Century Foundation, propose ending the upper-income Bush-era tax cuts and recent estate and gift tax cuts and devoting half the savings to job-creation policies. Allowing these tax cuts to expire would increase revenue by $1.2 trillion over the next decade, while providing only a minimal drag on economic recovery in 2013. Half of this revenue could be used to reduce long-run projected deficits; the other half could be allocated to cost-effective near-term job-creation policies, which would allow policymakers to reorient fiscal policy to be much more supportive of jobs and growth.

Effective near-term job-creation policies include:

  • Continuing the Emergency Unemployment Compensation (EUC) program, which is slated to terminate at the end of 2012. Allowing beneficiaries to claim up to 99 weeks of unemployment benefits in high unemployment states (up from 73 weeks in most high-unemployment states) and continuing the program over 2013–2015 would boost real GDP growth by 0.4 percentage points and increase employment by 539,000 jobs in 2013.
  • Providing $120 billion in direct fiscal relief to distressed state governments over 2013–2015 through a combination of increased Medicaid matching rates (Federal Medical Assistance Percentages, or FMAP) and block grants. This would boost real GDP growth by 0.4 percentage points and increase employment by 495,000 jobs in 2013.
  • Investing $234 billion over the next decade in surface transportation infrastructure and establishing an infrastructure bank. This would boost real GDP growth by 0.2 percentage points and increase employment by 237,000 jobs in 2013, with even bigger gains in subsequent years as obligations and outlays ramp up.
  • Investing $55 billion in education by funding school modernizations and rehiring teachers over 2013–2015. This would boost real GDP growth by 0.3 percentage points and increase employment by 354,000 jobs in 2013.
  • Enacting a targeted refundable tax rebate for 2013 to mitigate the impact of the payroll tax cut’s expiration on lower- and middle-income households’ disposable income. This would boost real GDP growth by 0.4 percentage points and increase employment by 502,000 jobs in 2013.

Bivens and Fieldhouse view “fiscal cliff” as a poor metaphor, preferring “fiscal obstacle course” because the scheduled fiscal contraction is composed of numerous, entirely separable obstacles to faster economic growth and lower unemployment. In A Fiscal obstacle course, not a cliff: Economic impacts of expiring tax cuts and impending spending cuts, and policy recommendations, which EPI and TCF released in September, they enumerated the budgetary and economic impact of each major component of the fiscal obstacle course. They found that the biggest risks to economic growth are the expiration of a group of ad hoc fiscal stimulus measures (including emergency unemployment benefits, the payroll tax cut and expansions of refundable tax credits) and spending cuts scheduled by the Budget Control Act. The upper-income Bush tax cuts and estate tax cuts are the policies that contribute the least to economic recovery.

In fact, removing the pending automatic “sequestration” cuts scheduled by the Budget Control Act for 2013 and beyond, as the authors recommend and as is assumed under current policy, would have no effect relative to current policy, but sequestration would reduce real GDP growth by 0.7 percentage points and lower employment by 829,000 jobs in 2013 if it takes effect for the full year.

“Everybody, even critics of past policies like the Recovery Act, clearly acknowledge now that the too-rapid fiscal contraction coming at us in 2013 will slow the recovery, as can be seen in their advocacy for canceling automatic spending cuts,” said Bivens. “Luckily we don’t have to just vote ‘yes’ or ‘no’ on the entire fiscal cliff, we can pick and choose which parts of it we keep and which parts are allowed to expire on schedule.”

“The upper-income Bush tax cuts have a huge opportunity cost but offer negligible economic support—of all the policies within the fiscal obstacle course, they most clearly fail reasonable cost-benefit analysis,” added Fieldhouse. “If politics demand that much-needed stimulus be paid for, ending these tax cuts are unequivocally the most prudent offset, whereas spending cuts would be an entirely counterproductive ‘pay for.’”

For more of EPI’s work on the fiscal obstacle course, click here.

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