Bush Tax Cut Expiration Hurts Business? Hardly

Bush Tax Cut Expiration Hurts Business? Hardly

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It’s obvious, at least to almost everyone except Arthur Laffer, that the extending the Bush tax cuts would make federal deficits much bigger. But a second issue is less obvious: how much would growth and job creation be hurt if the Bush tax cuts on high-income families are allowed to expire at the end of this year? Macroeconomic Advisers, one of the nation’s pre-eminent forecasting firms, has a new analysis out today on that. Its prediction: not much.

For context, the Obama administration wants to make the tax cuts permanent for most people but let them expire for families with annual incomes above $250,000 – about two percent of households.

Republicans want to make the tax cuts permanent for everybody. Republican analysts argue that higher rates at the top would discourage investment and have a big impact on small business owners, most of whom report their business profits on their individual tax returns.
But Macroeconomic Advisers estimates that growth would slow only two-tenths of a percentage point next year, from 4.2 to 4.0 percent. Unemployment would be barely affected next year, but would remain a bit above 8 percent at the end of the year. Unemployment in 2012 would be 7.4 percent if the high-end tax cuts expire and 7.2 percent if they remain in place.

The firm didn’t spell out the underlying dynamics of its modeling. But other analysts have argued that extending tax cuts on the wealthy would have fairly little impact on growth because higher-income people are less likely to spend their extra money than people lower down the ladder. On top of that, only a small share of small business owners are in the top tax brackets.
Not surprisingly, MA estimates letting all the tax cuts expire on schedule at the end of 2010 would impose a hefty drag on growth and job creation next year.

The firm estimates that growth in would slow from 4.2 percent to 3.3 percent in 2011 and that unemployment would still be just below 8 percent by the end of 2012. But even there, the impact of the Bush tax cuts becomes smaller and more mixed as time goes on. The difference in growth narrows sharply in 2012. And if the all the tax cuts were made permanent, according to MA, inflation and interest rates would climb higher than if they were allowed to sunset.

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