Will ending tax cuts for the rich hurt the economy?

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The New York Times
By: Catherine Rampell
July 9, 2012

Will ending tax cuts for the rich hurt the economy?

President Obama on Monday proposed extending most of the Bush tax cuts, but not those for the highest-income Americans. Republicans responded that all of the tax cuts should be extended, since tax hikes of any kind would hurt economic growth.

Are they right? Will allowing the tax cuts for the highest earners to lapse put a damper on gross domestic product?

Most likely. I should note, though, that the magnitude of the drag is likely small, at least relative to other fiscal tightening that looms when this year ends.

Mark Zandi, the chief economist at Moody's Analytics, estimates that allowing tax cuts for Americans who earn above $250,000 to expire at the end of 2012 would reduce gross domestic product growth in 2013 by $40 billion, or about 0.24 percentage points.

Allowing the "middle class" tax cuts to expire would shave an additional 1.06 percentage points off economic growth. That means letting all of the Bush tax cuts phase out would cut about 1.3 percentage points from growth.
Here's a table showing Mr. Zandi's estimates for how each of the spending cuts and tax increases scheduled at the end of 2012 would hurt economic growth:

As you can see, allowing the Bush tax cuts for households earning under $250,000 to expire would be the biggest drag on growth, followed by the automatic spending cuts set off by last year's failed supercommittee talks, and then the end of the payroll tax holiday.

If Congress were to drive off the "fiscal cliff" entirely -- that is, let every fiscal policy that's supposed to expire this year do so -- the total effect would decrease economic growth by about 3.6 percentage points.

The growth cut that would come from allowing all of the Bush-era tax policies to expire -- 1.3 percentage points -- may not sound like much, but economic growth is pretty anemic as is. In the first quarter of this year, the economy grew at an annualized rate of just 1.9 percent. If Congress undoes its scheduled fiscal tightening, Moody's Analytics expects growth next year to come to 3.8 percent.

So far Mr. Zandi's numbers are the only ones I have been able to find that estimate the economic impact of isolated fiscal policies sunsetting this year. Others have tried to estimate the economic effect of allowing all of these fiscal policies to lapse, however.

The Congressional Budget Office estimates that going headlong over the "fiscal cliff" would cut economic growth next year by 3.9 percentage points. That means the United States economy would grow just 0.5 percent, rather than the 4.4 percent we would be able to expect if Congress eliminated its fiscal restraint entirely. The office has not, however, released numbers estimating the effect of extending or phasing out individual policies that make up the fiscal cliff.

Mr. Zandi acknowledges that there's a lot of uncertainty around his estimates.

"These estimates do not consider the broader context," he wrote me in an e-mail. "Depending on what else policy makers do or not do to address the other aspects of the fiscal cliff, the Treasury debt ceiling, and laying out a credible path to fiscal sustainability will determine whether the economic consequences are more or less severe than these estimates suggest."

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This page contains a single entry by CFED published on July 10, 2012 7:32 PM.

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