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255 IRET Congressional Advisory 1 (2009)

handle is hein.taxfoundation/iretcgadv0252 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies thait will promote growth and efficient operation of the market economy. May 6, 2009 Advisory No. 255 THE PRESIDENT'S BUDGET: MULTIPLYING BENEFITS OR SUBTRACTING VALUE? Most schools of economics would say not to raise taxes in a recession. President Obama' s Budget submission professes to cut taxes for 95% of households. However, much of the apparent tax cut is a rebate that Congressional E Of GDP tax reduction. Further, the implicit energy tax 15 in the President's cap 14 and trade proposal, if 0 enacted, would be 0 U) 12 passed on to consumers 1 0 and take back the bulk 11 of future rebates from 10 most families. 9 2000 2005 The President's tax Source: Congressional Budget Offic= plan clearly raises taxes GDP stands for gross domestic prod on millions of upper income taxpayers and on businesses. Their tax rates are already the highest, leaving them the least income after-tax out of each added dollar earned. Thus these tax increases would do the most to squeeze the remaining after-tax incentives to produce. Treasury Secretary Geithner told the House Ways and Means Committee not to worry, that the higher taxes for affluent Americans would not interfere with the recovery because they will not come until 2011 once we are safely into recovery. (In fact, the capital gains and dividend tax increase would start in 2010. The energy taxes would not start until 2012.) Pretending that there would be no damage if we wait two years to take the poison is nonsense. The income and energy tax increases would reduce GDP whenever they are imposed, for as long as they are kept. Whether you reduce output and income forever starting in 2010, 2011, or 2012 does not make Office's Comparison much difference. ludget ( And Potential GDP 20 e. uct. Shaded A chart in the Congressional Budget Office's Budget and Potential GDP Economic Outlook shows GDP to be well Actual and below its assumed Projected GDP current potential. This sort of Keynesian chart has appeared in CBO Outlooks and in 10 2015 Economic Reports of bars mark recessions. the President since at least the 1960s. Keynesians think that if a dollar of deficit spending simulates another half-dollar of private spending (a multiplier of 1.5), then spending two-thirds the gap will close it. (A tax cut works too, but supposedly less well, because some of the cut might - gasp! - be saved.) Stimulus economics was debunked by Milton Friedman in the 1960s. The Treasury must borrow to pay for spending or a tax cut (the so-called government budget constraint), so disposable income is taken out of the economy with one hand while being injected with the other. Initial stimulus: zero. Multiplier: irrelevant. Government spending or g~em I, 0 I g6~ g Agg

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