High-Income Tax Cuts Are a Poor Way to Support the Recovery

November 12, 2012 at 4:34 pm

As we’ve noted, a new Congressional Budget Office (CBO) report shows that extending the high-income tax cuts would boost gross domestic product (GDP) by merely 0.1 percent by the end of 2013, compared to a 1.3 percent boost to GDP from extending most of the other tax cuts.

One reason is that the high-income tax cuts are a very inefficient way to stimulate demand.  Using data in the CBO report, we calculate that they deliver only about 30 cents in additional economic growth per dollar of fiscal cost.  Measures such as extending unemployment insurance and the payroll tax cut have much more “bang for the buck,” as the chart shows.

If policymakers want to create jobs at a time when the economy is suffering from excess unemployment and underutilized business capacity — like now — they should focus on boosting demand for goods and services.  The high-income Bush tax cuts do little of that. They benefit only about the top 2 percent of taxpayers, who (as the CBO report explains) likely spend less of each extra dollar of income they receive than low- and moderate-income taxpayers do.

In short, letting the high-income tax cuts expire wouldn’t risk the recovery.  And it’s clearly the right thing to do in the long run:  it would reduce deficits by about $950 billion over the next ten years.  That’s why CBO analysis indicates that that letting those tax cuts expire would boost national investment and economic growth.

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More About Chye-Ching Huang

Chye-Ching Huang

Chye-Ching Huang is a tax policy analyst with the Center’s Federal Fiscal Policy Team, where she focuses on the fiscal and economic effects of federal tax policy. You can follow her on Twitter @dashching.

Full bio | Blog Archive | Research archive at CBPP.org

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