New Findings Show Unemployment Insurance Trumps High-Income Tax Cuts on Jobs, Deficits

December 6, 2010 at 2:56 pm

CORRECTED December 10th, 2010:  The Figures for 2012 payroll employment and unemployment rate in table 2 have been corrected. In the previous version the figures shown were for 2013 instead of 2012.

We’ve received some eye-popping policy simulations from Mark Zandi, chief economist at Moody’s Analytics, that flesh out an important point that the Congressional Budget Office, Zandi, and many others have made before: unemployment insurance (UI) and tax cuts focused on low- and moderate-income households have a much larger economic impact than income tax cuts for high-income individuals. I’ll be writing a more detailed report later, but here they are in a nutshell:

  • Short-term scenarios: Zandi found that extending federal UI for one year and some of the Obama tax cuts (expansion of the child tax credit, improvements to the earned income tax credit, and the higher education tax credit) for two years would generate more economic activity — including creating 500,000 more jobs next year — than would a two-year extension of the Bush high-income tax cuts. It would also add $30 billion less to deficits over the 2010-2015 period than extending the high-income tax cuts would.
  • Longer-term scenarios: Zandi found that extending federal UI for a year, making the Obama tax cuts described above permanent, extending Obama’s Making Work Pay tax cut for another year, and creating a two-year tax credit to promote additional hiring would generate substantially more economic activity — including creating 1.2 million more jobs next year — than would a permanent extension of the high-income tax cuts. It would also add $441 billion less to deficits over the 2010-2020 period than extending the high-income tax cuts.

Friday’s jobs report reminds us that the economy still needs a job-creating boost. As Federal Reserve Chairman Ben Bernanke said in a recent speech, “a fiscal program that combines near-term measures to enhance growth with strong, confidence-inducing steps to reduce longer-term structural deficits would be an important complement to the policies of the Federal Reserve.” These results show that, compared with a policy of extending the high-income tax cuts, a policy emphasizing unemployment insurance and refundable tax credits is far better for enhancing growth in the near term without undermining deficit reduction efforts in the longer term.

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More About Chad Stone

Chad Stone

Chad Stone is Chief Economist at the Center on Budget and Policy Priorities, where he specializes in the economic analysis of budget and policy issues. You can follow him on Twitter @ChadCBPP.

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5 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. 1

    Brian Coss, assuming you are not writing parody, I’ll try to explain something to you:

    When someone with barely enough money to get by receives some money – from UI, from a tax break, or from a job – they spend the money. It might be a small amount of money, and not enough to hire another person full-time, but they spend it. And when many people spend money in this way, it provides enough money for a business to hire someone.

    When an extremely rich person receives some extra money they are less likely to spend it. And because they are less likely to spend it, such money (on average) is less stimulative to the economy.

    Is that simple enough for you to understand?

  2. Brian Coss #

    This is ABSURD in so many ways it is hard to speak on it. If jobs don’t ultimately come from the upper class then where do they come from? Lower class? Middle class? Someone from Middle class has never signed a paycheck for me. That said, if you want to create jobs you need to incentivize those who do create jobs, i.e. the rich, not punish them. Simple.

    Henry, a tax rate around 90%? Are you joking? If the upper class is taxed out of existence, who will pay you to work? The government? We can’t all have cushy government jobs otherwise we’d be called communists. I don’t care how it “worked in the 50’s” we live in the year 2010!

    “After all, the rich received huge tax cuts under George W Bush, and in thanks they tanked our entire economy” How does a tax break for the Rich tank the economy exactly? Keep in mind that everyone received these tax cuts so by your logic is everyone responsible for tanking the economy? Or do you think the Rich “tanked the economy” because they received tax benefits and they alone have the power to do so? Rich guys says “Yes! Lower taxes! Now, let’s go default on some house loans!”

    Simple fact is that letting the Bush tax cuts expire would raise taxes in a time when people are uncertain about everything and need some good news. With higher taxes companies would hire less (cause they make less profit), people would spend less (because their dollar doesn’t go as far) and it would slow down economic improvement overall.

  3. jonathan #

    I didn’t see any reference to the basic assumptions. I assume this was then run on an existing model. It would be helpful to cite what that is and put in a reference to it if not an explanation.

    • Fd #

      Tax cut for rich do not work

  4. Henry Bennett #

    It has been obvious for years that cutting taxes for the rich does NOT generate jobs. After all, the rich recived huge tax cuts under George W Bush, and in thanks they tanked our entire economy and scuttled hundreds of thousands of jobs since 2007. Lets get back to what has been proven to work – a progressive income tax systgem with the highest marginal tax rates on the wealthy. Back in the 1950s, when the highest marginal tax rate was around 90% we had a pretty decent economy and a managable national debt, even though we were coming out of major spending for World War II. Back then Republicans were reasonable too – a Republican president, Dwight W. Eisenhower, brought us the Interstate Highway System. One of the greatest public works projects in recent history!

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