Chad Stone is chief economist at the Center on Budget and Policy Priorities.
If policymakers want the best policies to create jobs and cut unemployment as soon as possible, they should focus on policies that boost demand for goods and services—not policies to expand the economy's capacity to supply goods and services. In other words, they should look for policies that boost businesses' sales by putting more money in customers' hands—not throw tax breaks at businesses hoping they'll expand their capacity at a time when they are not fully using the capacity that they already have.
That's standard economics, but congressional Republicans seem to dance to a different tune. They insist on extending all the Bush-era tax cuts scheduled to expire at the end of this year—including those only for very-high-income taxpayers—while they oppose extending tax cuts of the 2009 Economic Recovery Act that mainly benefit low- and moderate-income households. For generating demand, the Congressional Budget Office, known as the CBO, and private analysts such as Moody's Analytics chief economist Mark Zandi find that tax cuts for low- and moderate-income households have a much higher bang-for-the-buck impact than those for very-high-income taxpayers. That's because, as CBO points out, low-income or otherwise cash-constrained households will likely spend most of any additional income they receive, while higher-income households "are likely to save much of a tax reduction, especially if it is temporary."
As this Tax Policy Center table shows, both the Democratic tax cut extension bill that the Senate passed last week and the Republican tax cut extension bill that the House just passed extend for another year the 2001 and 2003 middle class tax cuts scheduled to expire at the end of this year. The Senate bill also extends the low- and moderate-income tax cuts of the 2009 Recovery Act for another year, at a cost of $27 billion, but not the 2001 and 2003 upper-income tax cuts. The House bill, by contrast, also extends the upper income tax cuts, at a cost of about $49 billion, but not the low- and moderate-income tax cuts.
Because low- and moderate-income tax cuts are so much more cost-effective, the Senate's $27 billion for them would likely boost economic growth and job creation more than the House's $49 billion for the upper income tax cuts. Meanwhile, the House bill would make inequality worse. What's the appeal of a bill that costs more, does less, and is more unfair?
Congressional Republicans say that extending the upper-income tax cuts would create small-business jobs—a claim that strains credulity according to this analysis by my Center on Budget colleagues. Moreover, the latest National Federation of Independent Business survey of small businesses shows that poor sales still edge out taxes as the single most important problem that small businesses report facing, as it regularly has since early 2008. In addition, the share of small businesses saying poor sales are their top concern remains much higher than before the Great Recession, while the number reporting that taxes are their top concern is not much different from what it was a decade ago and remains lower than its historical average.
Putting money in the hands of people who will spend it is textbook advice to achieve the most cost-effective boost in economic growth and employment in a weak economy. Extending the tax cuts for low- and moderate-income households is among the best ways to do that, while extending the tax cuts for upper-income households is among the worst.