In the article, Do Tax Cuts for the Wealthy Create Jobs? – Megan McArdle – Business – The Atlantic, Megan makes some good points about the economic impact of extending the tax cuts.
We’ve got a massive fiscal problem ahead of us, and extending all these tax cuts until 2012 will simply mean that both parties will be vying with each other to bust the budget ahead of the election. But it seems ludicrous to me to claim that tax cuts for the middle class are affordable, excellent stimulus, while the much smaller tax cuts for the wealthy cost too much relative to the stimulus they deliver. The differences are really pretty marginal, and not particularly well measured.
I think she wandered off of the question, “Do Tax Cuts for the Wealthy Create Jobs?”, and attempted to answer the question what is the impact on jobs by extending tax cuts. The differences between the two questions are very apparent when you focus on the psychology of spending. In the first case the question is whether the wealthy will spend or save their incremental income when their taxes are cut. Unfortunately that is not our situation. In the second case the question is what will the wealthy do if their income stays the same or is reduced. That is the question we are facing when we look at extending existing tax cuts. If the tax cuts are extended then it is generally assumed that the wealthy will not change their spending habits. No new jobs will be created but we will not lose any existing jobs. If the tax cuts are not extended it is generally assumed that the wealthy will cut back their spending and this will likely result in jobs lost. So we are confronted with a lose-lose proposition. If we extend the tax cuts on the wealthy we will expand the deficit but will keep our existing jobs. If we do not extend the tax cuts we will likely lose some unknown number of existing jobs. Depending on your estimate of job losses and your guess at whether past economic data is relevant in this situation, the impact on the deficit could be good or bad.
The fascinating question that this situation brings up is where do people cut spending when tax cuts are taken away? As an example a person receiving a tax cut might purchase an automobile or an appliance. Will that same person sell their car or appliance when the tax cut is taken away? I don’t think so. The cuts will likely come from reduced discretionary spending? This logic is probably appropriate for both the middle class and the wealthy tax cuts. Removing tax cuts probably has a larger effect on consumer spending that granting tax cuts.