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Home Publications Blogs Beat the Press Not Just Tax Increases, but ANY Deficit Reduction Will Cost Jobs

Not Just Tax Increases, but ANY Deficit Reduction Will Cost Jobs

Thursday, 18 October 2012 04:34

The Washington Post ran an incredibly confusing piece on the ending of the Bush tax cuts which was highly favorable to those wanting to keep the tax breaks for the rich. First, the piece repeatedly uses the term "fiscal cliff," which implies that there is some ledge that the country will hurtle over at the end of the year. This metaphor is completely wrong. The impact of letting the tax cuts expire on January 1 is in fact minor. There will only be a substantial impact if the higher tax rates are left in place as written through much of the year.

The piece also presents comments from an aide to House Speaker John Boehner about the impact of higher tax rates on jobs without any explanation. Boehner is quoted as saying:

"'The hard truth, which even the president’s advisers must know, is that raising those tax rates will have a major effect on small businesses and cost hundreds of thousands of jobs,' said Boehner spokesman Kevin Smith. 'In this troubled economy, it’s hard to see how anyone in a post-election scenario could be for that.'"

In the middle of a steep recession, any measure that reduces the deficit will cost jobs. That is because it will reduce demand. If anyone wants to see a lower deficit in 2013 (certainly the Post does), then they want to throw people out of work.

This is sort of like pulling the trigger on a gun pointed at someone's head. Presumably this is not done unless the desire is to see the person dead.

The Post should have reminded readers of this fact, since many may not remember the relationship between deficit reduction in a downturn and jobs. It also would have been worth reminding readers that tax increases on rich people have less impact on jobs than almost any other form of deficit reduction. In other words, if we want to reduce the deficit by some fixed amount in 2013, there is no way that leads to less job loss than raising taxes on rich people.

It would have been helpful to remind readers of this fact, since many may not have not realized that Boehner's aide was being deceptive.   


Comments (8)Add Comment
Depends on where the money is spent
written by bakho, October 18, 2012 4:59
We want to create jobs in our domestic economy. If we tax money that the wealthy are using to purchase labor overseas and instead spend that money on domestic labor for public goods and services, it will create a net increase in domestic jobs. If there is a multiplier effect greater than 1, then it makes sense to increase taxes on the upper incomes but put the money to job creation rather than deficit reduction for the short term.
written by Bart, October 18, 2012 5:51

Before clicking on the link, I guessed Lori Montgomery. Do I win something?
Raising Taxes On Rich People Can Increase Demand=More Jobs, Less Deficit If We Spend, Not Save.
written by Robert Salzberg, October 18, 2012 1:10
If we institute a financial transactions tax, FTT, of say 0.1% and use the money as a new dedicated funding source for establishing and funding a National Infrastructure Bank, the net cost in jobs due to the FTT should be dwarfed by the jobs creating by spending on infrastructure.

Rich Dead People Should Pay More
written by Robert Salzberg, October 18, 2012 1:21
Bundled into the expiring Bush Tax Cuts is the expiration of the reductions in the provisions of the Estate Tax which will fall from affecting estates of over 5 million down to 1 million with the rates rising from 35% to 55% for the portions of the estates over the exempted limits.

Boomers are not only retiring but they are also dying. The vast wealth of the Boomers should have been taxed heavier to leave Social Security and Medicare more financially sound along with more money for infrastructure and education.

Since the Boomers collectively didn't pay their full share and have left us with a far worse infrastructure than they inherited, it's only fair that those whose die wealthy should pay back some of the excess profits they collectively reaped.

Letting the Estate Taxes rise has the least impact on Demand of all tax increases.

Guess that's why we've not heard much from the Death Tax crowd of late.
written by JSeydl, October 18, 2012 1:41
This is sort of like pulling the trigger on a gun pointed at someone's head. Presumably this is not done unless the desire is to see the person dead.

I laughed out loud after reading this. Very well put.
spending not deficit is the issue
written by pete, October 18, 2012 2:41
If real spending on goods and services stays the same, and taxes are reduced, while transfers are reduced, there is little effect. This is the problem with deficit folks, confusing transfers and spending, which are of course not at all the same. Government spending, say paying someone to build a highway, is different than transfers, say paying someone on unemployment. Similar to "confusing" health care with health insurance. Casual slip of the tongue here and there to prove a point.

So if spending is reduced, then that might have a negative impact on the economy. Tax increases per se are not an issue since they are offset by decreased borrowing.
Estate Tax Rates
written by Ethan, October 18, 2012 3:14
I have long though that it would be good to have an estate tax rate that reaches 100% at some point. Yes we let the Richie Rich's of the world keep most of their money, but why do we let the Richie Rich, Jrs. of the world be given 10's of millions of dollars for really doing nothing? Aren't we encouraging them to keep on doing nothing instead of going out and being productive citizens? So pick a number -- $5 million, $50 million, $100 million -- something and beyond that the estate tax rate is 100%. Either per estate or per legatee/devisee/beneficiary.

I remember a business magazine about 5-6 years ago which had a cover story entitled "Die Broke". It suggested that you leave your children $1 million (or some such number) each, and that you spend or give away the rest while you are still alive. Same idea as a 100% estate tax rate. To their credit Bill Gates and Warren Buffet have advocated something very similar.
written by Jay, October 18, 2012 5:46
How will reducing taxes on small business owners improve the economy when their customers are unemployed, underemployed, or are so concerned about their job security that they don't want to spend any money.

It would make more sense to start stimulus spending to improve our infrastructure (improve public transportation for people squeezed at the pump, build public parks/gyms to help bring down obesity, install fiber optics for faster Internet, upgrade gov technology so workers can be more productive), hire unemployed people into temporary jobs with 3-5 year terms with benefits, and pass legislation to make the entire country a for cause employment country.

All finance/banking companies with government subsidies that issued mortgages and students loans should be asked to make payments more affordable or risk losing their government subsidy. The people that don't qualify for the loan forgiveness should get tax credits or stimulus checks.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.