Commentary | Economic Growth

Reducing taxes will cost jobs and bloat deficit—Democratic short-term stimulus package would work

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Opinion pieces and speeches by EPI staff and associates

THIS PIECE ORIGINALLY APPEARED IN DETROIT NEWS ON MAY 4, 2003.

Reducing taxes will cost jobs and bloat deficit


Democratic short-term stimulus package would work

By Lawrence Mishel

The U.S. economy is growing too weakly to create enough jobs to reduce unemployment and sustain real wage growth. Despite this, the Bush administration has refused to propose an effective stimulus program to jump-start the economy. Instead, the president has proposed a massive program of permanent tax cuts for the rich that will damage the economy. While numerous stimulus packages have been proposed that would lead to economic growth and substantial job creation at a reasonable cost to the federal budget, the Bush plan would destroy 750,000 jobs at a cost of $670 billion, while increasing inequality and wasting resources needed to address critical needs, such as education and health care. In a recent joint statement, 10 Nobel laureates in economics and 450 other economists said there is wide agreement that the purpose of President Bush’s tax plan is permanent change in the tax structure and not the creation of jobs and growth in the near-term. The permanent dividend tax cut, in particular, is not credible as “short-term stimulus.”

Before the loss of 500,000 private jobs in the last four months, the administration had emphasized raising long-term growth, so we should examine those claims. The administration claims its plan will generate more growth in gross domestic product (GDP) and in jobs in the first two years than over the first five years. This implies that they will decline in 2005, 2006 and 2007 relative to what we would expect if no plan were implemented. Other forecasters have reached similar conclusions. An analysis by Mark Zandi, president of Economy.com, shows a positive impact over the first two years (0.8 percent higher GDP over two years) but an annual GDP decline of 0.25 percent thereafter. Consequently, GDP is lower by 1.0 percent in 2013 than it would be with no Bush package. The result is a loss of 750,000 jobs by 2013.

This happens for two reasons. One is the tax cuts lead to sustained budget deficits. These deficits, in turn, raise long-term interest rates, suppressing investment and productivity growth. The second reason is the administration’s proposal is ineffective at raising long-term growth. Much of the package involves items already scheduled to be implemented, so they do not have a long-term effect. Plus, many economists believe the dividend exclusion will actually depress investment.

In contrast, Economy.com identifies extending unemployment benefits, providing state fiscal relief and providing a broad-based one-time tax cut (the wage bonus-type relief in the House or Senate Democratic plan) as very effective short-term stimuli. One can certainly create many more jobs with a $674 billion expenditure. In fact, the competing plans offered by Democrats in the House and Senate create more jobs over the next year than the Bush plan, yet do not create long-term chronic deficits because they rely on immediate, temporary and effective measures — primarily state fiscal relief and one-time tax relief for middle and low-income families.

It is easy to understand why the Bush proposal is so ineffective at creating jobs in the near-term. First, very little of the package stimulates the economy this year when jobs are most needed – just $31 billion, or 4.6 percent of the $674 billion tax cut. In contrast, all of the Democratic proposals call for much larger stimulus in 2003.

Second, the administration’s tax cuts are ineffective at stimulating consumption because they are so heavily targeted at high-income groups. Third, there is little reason for making permanent tax cuts to generate jobs in 2003 and 2004 — the tax code in 2010 has little to do with the spending habits of consumers this year. So the large permanent tax cuts are unnecessarily expensive and the wrong tool for generating a stronger recovery and creating jobs this year.

Lawrence Mishel is president of the Economic Policy Institute in Washington, D.C.


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