Some Tax Cuts Soup Up Economy, Just Not Those President Prefers

October 8, 2010 07:06

Keeping the pro-growth cuts (or indeed doubling down on them) should be part of any effort to get the economy moving. But whether to keep the other cuts is a political decision, not an economic one.

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But the current debate — including the recently signed package of small-business tax cuts — ignores one important fact: Not all tax cuts are created equal. Some tax cuts spur productivity, investment and economic growth. Others don’t.

What we call the Bush tax cuts is really something of a grab bag, because the Bush administration pushed through a number of tax cuts that were more a result of political expediency — what the administration could get the votes for — than an economic strategy.

During the early debate over the proposed Bush tax cuts, the Institute for Policy Innovation conducted a study by economists Gary and Aldona Robbins that analyzed which policy options might produce the most economic bang for the buck.

A capital-gains tax cut, for instance, generates more than $10 in new GDP for every $1 loss in static revenue. Accelerated depreciation — similar to what President Obama apparently has proposed — repeal of the alternative minimum tax (AMT) and an investment tax credit for equipment all more than pay for themselves, according to the Fiscal Associates model.

Other tax cuts probably don’t pay for themselves. That doesn’t mean they aren’t good or don’t help families; it just means that they should be part of a different discussion.


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