Sunday, December 7, 2008

Robert Frank on the Bush tax cuts

Robert Frank makes an eloquent case for repealing the Bush tax cuts sooner rather than later:

"With few exceptions, high-income taxpayers earn substantially more during their lifetimes than they spend, generally bequeathing the surplus to heirs or charities. If these taxpayers faced slightly higher rates, they would have ample resources to maintain their current lifestyles, so most would keep spending as before. The only consequence would be that, years from now, they would leave smaller bequests.

The added revenue from eliminating the Bush tax cuts would pay for larger temporary tax cuts for low- and middle-income families than the permanent ones now planned. And because these families spend most or all of their post-tax income, the immediate effect would be an increase in total spending roughly equal to the additional revenue from repealing the cuts."
He also counters the argument that repealing the tax cuts will have adverse effects on small business hiring decisions:
"If the goods produced by additional workers can be sold for at least enough to cover their salaries, hiring makes economic sense, no matter how poor a business owner might be. But if additional workers won’t produce enough to cover their salaries, hiring is a losing move, even for the richest owners. The after-tax personal incomes of business owners are irrelevant in hiring decisions."
Frank makes a crucial point about tax cuts. While raising taxes on high-income earners, by itself, may not be good for the economy, that money can be used for stimulus. Lower income earners spend a larger proportion of their income, so directing stimulus plans toward the middle and lower classes will be more beneficial to the economy than directing them to the top.

Again, it's important to remind everyone that we're not talking about huge increases here. We're talking about 5 percentage points on a marginal rate.

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