As we continue to try to stimulate the economy, there is much discussion about continuing the Bush Tax Cuts. One position is they are simulative to the economy, while the other position is that they add to the debt.
Guess what? Tax cuts for the rich depress the economy. Tax cuts for the poor, on the other hand, stimulate the economy.
The real problem in discussing the effects of various stimuli is that, for many politicians, ideology trumps facts. Most recently, McConnell said that tax cuts for the rich paid for themselves, and this week John Boehner refused to say that they did or didn’t pay for themselves when asked by David Gregory.
The idea behind a stimulus is to get money moving and passing through many hands, allowing a high multiplier effect. If the first person gets a dollar and spends 95 cents of it and each recipient of part of his 95 cents spends 95% of it (90 cents), we have $1.85 of economic activity taking place (so far). Next of course, lots of the 90 cents will be spent, with smaller amounts in each cycle (81 cents and $2.66 stimulus after round three) until the money is completely spent.
When someone takes the money out of circulation and saves or invests it, the multiplier stops.
The gold standard for facts in Washington is the Congressional Budget Office, so I will use their figures.
CBO Dollar of stimulation per dollar spent
$1.73 – Food stamps
$1.64 – Extending Unemployment Insurance
$1.59 – Infrastructure spending
$1.36 – Aid to states
$1.26 – Refundable tax credit
$1.03 – Temporary tax cut
$1.02 – Non-refundable tax rebate
$.48 – Extend AMT patch
$.37 – Make dividend and capital gains permanent
$.30 – Corporate tax cut
$.29 - Make Bush tax cuts permanent
$.27 – Accelerated depreciation
If we look at the CBO estimates, the payback on the Bush tax cuts is that the economy gets 29 cents of stimulus for every dollar spent. Is this a good investment? $.29 on the dollar? (The rich think so). In other words, the Bush Tax Cuts are de-stimulative – they act to slow down the economy!!
On the other hand, food stamps get $1.73 of stimulus and unemployment insurance gets $1.64 of stimulus. Infrastructure gets $1.59, aid to the states gets $1.36. That is stimulation – we get more economic activity that we put in!
I’m going to propose a hypothesis that is blindly simple and consistent with the facts:
The richer the recipient of money is, the less likely they are to spend it.
To stimulate the economy, raise taxes on the rich and lower them on the poor.
To stimulate the rich, give them tax cuts.