The Homa Files

The President sound bites that extending the Bush Tax Cuts “to the wealth” will “cost” $700 billion.

Let’s take his number at face value, but put it in context …

The $700 billion — based on conventional, but odd gov’t accounting — is a 10 year projection. 

The annual impact is $70 billion … and that’s making the unlikely assumption that folks won’t employ strategies to mitigate the tax hit.

The $70 billion equates to about less than 1/2% of GNP … which is sluggishly running at about $14.5 trillion. 

Generally, economists expect that raising taxes on the rich will hurt the recovery since — according to the Tax Policy Center — about $400 billion of small business income in hit and since the rich account for almost a quarter of all consumer spending.

If GNP drops by 2.5%, the apparent tax revenue increase would disappear … tax revenues would be the same as prior to the tax increase.

So, the pivotal question is: will the decline in consumption by the rich (again, 1/4 of consumer spending) be substantial enough to drive a reduction  in GDP ? 

I’m betting “yes”.

Taking another perspective … what about the impact on unemployment ?

Mark Zandi — one of the Dems’ poster-child economists — says that raising taxes on the rich would cost 770,000 jobs. 

The current unemployment rate of 9.6% equates to about 15 million people unemployed.

In other words, bumping the tax rate on the rich is likely to increase the unemployment rate by about .5% — to over 10% if all other things are held constant.

Is $70 million of best case tax revenue worth bumping the unemployment rate by .5% ? 

Keep in mind that the $70 billion is against a national debt that’s running over $13 trillion …

So, the decision reduces to increasing the unemployment rate by .5% to over 10%  in order to (maybe) cut the national debt by about .5% per year .  The latter is a big ‘maybe’ since politicos would have to avoid the temptation to just spend the windfall on more goofy programs  …  and since ‘the rich’ would have to avoid the natural tendency to  change their behavior to duck taxes or to cut spending  — which would utltimately cut tax revenues.

Doesn’t sound like a good bet to me …

* * * * *

Sources:

Washington Post, The Problem With Sound-Bite Economics, September 20, 2010
http://www.realclearpolitics.com/articles/2010/09/20/the_economic_blame_game_107220.html

US Debt Clock
http://www.usdebtclock.org/

This entry was posted on September 27, 2010 at 6:59 am and is filed under Taxes. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.