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Want Economic Growth and Jobs? Then Let the Bush Tax Cuts Expire

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This fall Congress will be considering whether to extend the Bush Administration's tax cuts for families earning more than $250,000. Proponents of extending these tax cuts for the wealthy, which are scheduled to expire this year, argue that allowing the tax cuts to expire will place an enormous strain on the economy and result in higher unemployment.

The non-partisan Congressional Budget Office (CBO) has evaluated this claim and come to the conclusion that it is without merit. To the contrary, extending the Bush tax cuts for the wealthy will do far less to grow the economy and produce jobs than any alternative use of these funds.

Extending the Bush tax cuts for the wealthy enacted in 2001 and 2003 would reduce the federal government's revenues by approximately $40 billion in 2011. The CBO compared this tax expenditure with ten other potential uses for this money, including such things as extending unemployment insurance benefits, providing a jobs tax credit, or giving fiscal relief to the states. The CBO found that, dollar for dollar, every single one of these ten alternatives would grow the economy more and produce more jobs than extending the Bush tax cuts for the wealthy. In most instances, they would produce many times more economic growth and jobs. In particular, the CBO found that, at the same cost as extending the Bush tax cuts for the wealthy:

• A temporary jobs tax credit that reduced a firm's payroll taxes on new hires would generate three times more economic growth and create four to six times more jobs.
• State fiscal relief would generate three to four times more economic growth and create two to three times more jobs.
• Extending unemployment insurance benefits, such as the extension approved by Congress last week, would generate five times more economic growth and four to six times more jobs.

Why do all of these alternatives spur so much more economic growth and create so many more jobs than extending the Bush tax cuts for the wealthy? The answer is simple. When the economy is weak, spending is needed to stimulate it. But wealthy people, given an extra dollar in income, are much more likely to save it than spend it. This simple principle explains why extending the Bush tax cuts for the wealthy is the worst alternative available if the policy goal is to stimulate the economy and create jobs.

In the long term, after the current economic crisis has passed and further stimulus of the economy is no longer needed, the revenue gained by allowing the Bush tax cuts for the wealthy to expire should be dedicated to reducing our nation's unsustainable budget deficit. This would be only fitting since the mammoth loss of revenue resulting from the Bush tax cuts for the wealthy is what created huge budget deficits in the first place.

This blog is based on Chuck Marr's article, "Letting High-Income Tax Cuts Expire is Proper Response to Nation's Short- and Long-Term Challenges," Center on Budget and Policy Priorities, July 26, 2010.

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