Commentary | Budget Taxes and Public Investment

Tax cut approach has already been tried and failed as stimulus

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When it comes to reviving the economy, tax cuts do not work as well as smart public spending. That is economic common sense proven true by the past two attempts at tax-cut stimulus, in 2008 and in 2003-04. And yet, incredibly, we are starting to hear the same old tried-and-failed policies from conservatives and the GOP.

The latest flare-up was prompted by a CBO report released Friday that claimed only about two-thirds of any money set aside now for public investment projects–such as mass transit and water systems–would be spent in the first two years.

Here at the Economic Policy Institute, we disagree with that assessment, which is based on old modeling. The public spending package being considered now is directed at shovel-ready projects and has a ‘use-it-or-lose-it’ caveat, requiring work to be done within two years.

However, even if the CBO projection held, public investment would still be superior to tax rebates in stimulating the economy. Less than half the personal tax cuts, or rebates, are likely to be spent in the first two years. The rest will be used to pay down debt, build savings or buy imports — none of which help boost the U.S. economy. Therefore, the cumulative impact of tax rebates will be much lower than that of public spending.

Let’s review 2008. The Democrats agreed to a stimulus in early 2008 that was all tax cuts, with about $50 billion of wasteful, unproductive business tax cuts added as the ‘price’ of approval by President Bush. Unfortunately, similar business tax cuts are included in the current bill. In addition, the 2008 package called for $100 billion in personal tax ‘rebates’. Only about one-third of the rebate checks, which ranged from several hundred to two thousand dollars per family, were spent. It was not an effective way to get the economy back on track.
See Shapiro and Slemrod: http://www.aeaweb.org/annual_mtg_papers/2009/retrieve.php?pdfid=294.

Even worse were the Bush tax cuts of 2003, which the administration claimed would generate 1.4 million jobs on top of the 4.1 million jobs that were expected to be generated over the eighteen months following June 2003. See: http://www.jobwatch.org/creating/bkg/cea_on_bush_tax_cuts_20030204_macro_effects.pdf.

EPI tracked the initiative’s effectiveness through a Web site, www.jobwatch.org, and found that it fell far short of its goals. Not only did the promised 1.4 million additional jobs not appear, but the 4.1 million jobs expected with no action also failed to materialize. In all, only 2.4 million jobs were created — 1.7 million short of the administration’s projection without their new policy. Thus, by the Bush administration’s own metrics the tax cut program fell short by a total of 3.1 million jobs (149,000 pr month). For an analysis of how the Bush 2003 tax plan (The “Jobs and Growth”plan) fell short of its job claims, see: http://www.jobwatch.org/email/jobwatch_20050107.html

On what basis can the conservatives who embraced those failed initiatives now claim that tax cuts are the best policy? 


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