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3 IRET Congressional Advisory 1 (1992)

handle is hein.taxfoundation/iretcgadv0003 and id is 1 raw text is: IRE January 27, 1992 No. 3 WORSENING THE RECESSION: PROPOSALS FOR A FURTHER EXTENSION OF UNEMPLOYMENT BENEFITS Last Fall, Congress pushed through legislation, reluctantly signed by President Bush, extending unemployment compensation benefits for an additional 13 or 20 weeks, depending on a state's unemployment level (see Making A Bad Situation Worse: The Ill-Considered Plan To Extend Unemployment Benefits, IRET Congressional Advisory No. 1A, September 26, 1991.) Now the President and many members of Congress are prepared to legislate another 13 week benefit extension, for a total extension of 26 or 33 weeks. This extension would be temporary, expiring shortly before the November election. But with timing like that, does anyone doubt that it would then be renewed, with little heed as to cost? If unemployment benefits were costless, everyone would be in favor of sweetening them. Indeed, if the benefit checks had no costs, the government could (and should) make us all rich by increasing benefits 10 or 20 fold and giving them to everyone, including the employed. In reality, government checks do have costs. As a result, higher benefits - unless financed by cuts in other government spending - tend to have the perverse effect of destroying jobs, throwing more people out of work and increasing the burden on those who manage to retain their jobs. Policy makers should consider these costs, along with their unpleasant consequences, in assessing whether to expand again unemployment compensation benefits. Because the government does not create wealth, it has to get the resources to pay for a larger unemployment program from somewhere else. In last year's legislation, Congress secured the funds by accelerating individual income tax payments, causing current-year tax collections to be higher and next-year tax collections to be lower. Unfortunately, this change replaced a simple rule regarding estimated tax payments with a complicated, punitive rule that often requires taxpayers to compute their liabilities based on information they will not have until it is too late. The new rule will generate business for accountants and tax lawyers but will raise the cost for many taxpayers participating in the types of activities whose yearly income is most difficult to estimate: productivity-enhancing investments with great potential but uncertain returns. In short, the change was a model of bad taxation that contravenes the goals of making the tax system simpler, fairer, and less of a drag on employment and production. This year's proposal, in its current form, would eschew a tax hike in favor of declaring an emergency and just spending the money. Since the government doesn't have the money, that means deficit financing: borrowing more from the public and going deeper into debt. Although deficit financing is less damaging than a complicated, hidden, or anti-investment tax increase, a further rise in a federal deficit, already estimated to top $350 billion, carries dangers of its own. Not the least of these hazards is that financing the additional benefits by borrowing makes them appear to be costless. The only sound way to pay for more unemployment compensation benefits is to cut other government spending. That way the amount that the government takes from the productive private sector would not continue to climb as sharply as in recent years. Surely, in a federal budget approaching $1.5 Institute for Research on the Economics of Taxation IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N.W., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 * Fax 202-463-6199 0 Internet www.iret.org

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