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Exploding Bush Tax Cut Myths

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William G. Gale, a senior fellow at the Brookings Institution, debunks five common myths about what extending the Bush tax cuts would accomplish:

  1. Extending the Bush tax cuts would stimulate the economy.
  2. Allowing the Bush tax cuts to expire would hurt small businesses.
  3. Making the Bush tax cuts permanent would facilitate long-term growth.
  4. The Bush tax cuts are the main cause of the budget deficit.
  5. Entitlements, not the Bush tax cuts, are the obstacle to long-term fiscal health.

Why does Gale maintain these are myths?

  1. Extending the Bush tax cuts is not an effective way to stimulate the economy because it would not provide enough “bang for the buck.” Most of the Bush tax cuts go to higher-income and wealthy Americans, and they are precisely the Americans least likely to spend that money. According to Gale, “The government could more effectively stimulate the economy by letting the high-income tax cuts expire and using the money for aid to the states, extensions of unemployment insurance benefits and tax credits favoring job creation. Dollar for dollar, each of these measures would have about three times the impact on GDP as continuing the Bush tax cuts.” Kind of the flip side of using stimulus funding from the Recovery Act to pay for unemployment benefits.
  2. Allowing the Bush tax cuts to expire for the highest-income Americans (which is what Obama proposes to do) would NOT hurt small businesses, for the simple reason that there is not much overlap between those two categories. Most small business owners are not the highest-income earners, and the highest-income earners are not usually the ones who own small businesses — and even those who do would not be significantly harmed because they do not depend on their small-business income to survive.
  3. Making the Bush tax cuts permanent is not likely to “encourage investment” and thus facilitate long-term growth because the tax cuts are likely to increase the costs of investing. “The tax cuts … raised government debt — and higher government debt leads to higher interest rates. If estimates of this relationship … are accurate, then the tax cuts have raised the cost of making new investments. As the economy recovers and private borrowing rises, the upward pressure on interest rates is likely to grow even stronger.”
  4. The Bush tax cuts are not the main cause of the deficit. “Although the cuts were large and drove revenue down sharply,” they represent only about a quarter of the current deficit. The larger cause is the recession itself, “and the responses it inspired. As the economy shrank, tax revenue plummeted. The cost of the bank bailouts and stimulus packages further added to the deficit.”
  5. Entitlement spending (Social Security, Medicare, and Medicaid) is not the villain behind our long-term deficit problem. The “fundamental imbalance between spending and revenue” that we face “goes beyond entitlements.” The Bush tax cuts are a big part of the reason for this imbalance and continuing them would only make things worse. Gale ends with this: “By increasing the government’s debt, the tax cuts have already led to higher interest payments on that debt. So even if all of the cuts expire on Dec. 31, we will still be paying for them for years to come.”

Comic relief: Sarah Palin may be a great palm-reader, but she’s still a fool.

When the economists and the GDP and the CBO are not telling you what you want to hear, just say you don’t need to listen to them.