Unemployment vs. Tax Cuts

Posted Dec. 02, 2010, at 10:32 p.m.

Are we going to extend tax cuts for the rich, giving millionaires an average tax break of over $100,000? Or are we going to continue unemployment benefits of about $245 a week for out-of-work Americans?” Rep. Chellie Pingree asked on the floor of the U.S. House of Representatives on Wednesday.

Her questions encapsulate the choices lawmakers must make in the waning days of the current congressional session.

All 46 Republicans in the Senate signed a letter demanding that chamber turn its attention to extending tax cuts before tackling other matters, including another extension of unemployment benefits, which many GOP members opposed adding to the budget deficit. This focus on tax cuts first was necessary, the Nov. 29 letter said, to boost the economy and create jobs.

But numerous respected economists have long said that unemployment benefits are a much bigger boost than tax cuts.

Mark Zandi, chief economist for Moody’s economy.com, consistently has found that extending unemployment benefits is one of the most effective economic stimulants. In an analysis he presented to the House Committee on Small Business in July 2008, Mr. Zandi found that extending unemployment insurance generated $1.64 for every $1 of cost.

The only more effective stimulus was a temporary increase in food stamps, which returned $1.73 for every dollar invested.

Tax rate reductions returned only 59 cents, costing more than they generated, largely because lowering tax rates results in the largest financial benefits to those with the highest incomes, who are likely to invest or save that money rather than spend it. Consumer spending drives two-thirds of the U.S. economy. So getting people to spend money is what is needed to continue the economic recovery and create jobs.

Research by Jonathan Gruber, an MIT economics professor, found that the amount a family spends on food falls by 7 percent, on average, when the head of a household becomes unemployed but would decline by 22 percent in the absence of unemployment benefits. Earlier this month, Goldman Sachs analyst Alec Phillips estimated that if the unemployment benefit extensions were allowed to expire, it would shave half a percentage point from growth, according to The Wall Street Journal.

Unemployment benefits began expiring this week.

If Senate Republicans really are concerned about the economy, they first should extend unemployment benefits again, at least for several months. Then attention can turn to whether to extend the tax cuts enacted under former President George W. Bush.

On this front, Democrats should stick to the president’s proposal to extend the lower tax rates for those making less than $250,000 a year, which accounts for more than 95 percent of the U.S. population and most businesses. Put this proposal to a vote and let Republicans oppose it. They also should allow a vote on the GOP plan to extend all the tax cuts, even though this would add much more to the deficit. Such a scenario will provide the answer to Rep. Pingree’s query while letting Americans know where their representatives’ allegiances lie.

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