CBPP/Moody’s Say Democrat’s Proposals are Good for Economy, Republican’s, Not so Much

CBPP/Moody’s Say Democrat’s Proposals are Good for Economy, Republican’s, Not so Much

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The Center on Budget Policies and Priorities is promoting a study by Moody’s of the recent bi-partisan tax bill which concludes that the Democratic parts of the bill are better for the economy than the Republican parts of the bill:

As a result of the tax cut-unemployment insurance legislation that President Obama signed into law last week, economic forecasters have substantially upgraded their outlook for 2011. … An analysis of the compromise by Mark Zandi, the chief economist for Moody’s Analytics, indicates that this greater optimism stems largely from the longer extension of federal emergency unemployment insurance (UI) programs than forecasters had expected, the extension of various improvements enacted in 2009 in several tax credits for low- and modest-income families, and a reduction in the payroll tax.

By contrast, the extensions of the upper-income Bush-era tax cuts and a substantially weakened estate tax will provide little or no boost to the economy in the short run; moreover, those extensions increase the risk that such measures will ultimately be made permanent and thereby deal a setback to efforts to restore long-run fiscal balance.

  • In a December 8 analysis of the compromise legislation, Zandi finds that, compared with Moody’s pre-compromise economic forecast, the deal would add 1.2 percentage points to economic growth and 1.6 million jobs to payroll employment in 2011, while lowering the unemployment rate by 1.2 percentage points. (Moody’s pre-compromise forecast already assumed enactment of several measures that were part of the compromise, most notably extension of the “middle-class” tax cuts. Please see the box on page 4 for a more detailed explanation of the measures in the compromise.)
  • Zandi also finds that what he terms the “Democratic Proposals” in the package — the 13-month extension of UI benefits (Moody’s pre-compromise forecast assumed only a three-month extension), the extension of various refundable tax credit improvements enacted in the 2009 Recovery Act, the reduction in the payroll tax, and the “expensing” provision for businesses — account for 1.1 percentage points of the 1.2 percent boost to real economic growth in 2011, 1.4 million of the 1.6 million-job increase in payroll employment, and 1.1 percentage points of the 1.2 percentage-point reduction in the unemployment rate.
  • In other words, Zandi estimates that about 90 percent of the expected improvement in economic and job growth and the reduction in the unemployment rate will be due to the UI and tax provisions the Administration promoted, while the high-end tax provisions will have only very small economic impacts.

It doesn’t take a Chinese arithmetician to find problems with the Moody’s/CBPP analysis.

First, by touting a seemingly non-partisan study that purports to determine the tax effects of those provisions of the bill that are “Republican” and those that are “Democrat” the CBPP reveals its political bias.¹ The truth is, bills are passed in their entirety, not piece-meal. Consequently, everyone who voted for the bill deserves credit for everything in the bill. Thus, Democrats who voted for the measure are as responsible for the extension of the Bush tax cuts for the rich as Republicans who voted for the measure are responsible for the extension of benefits to the unemployed.

Second, the CBPP (and Moody’s) assumes that the only reason Republicans favor tax cuts for all Americans is because they believe those tax cuts will stimulate the economy. This shows either a complete misunderstanding of the conservative position on taxes and the role of government or a cynical attempt to mis-educate the public about the anti-tax position. Whenever debating taxes it is important to remember that Republicans and conservatives believe that the federal government is inefficient and that it grows more inefficient the larger it gets. And more important, they believe that the confiscation of the wealth of the rich for the purpose of redistribution to the poor is both immoral and an assault on economic freedom that is counter to American values.²

Third, the argument that the tax savings realized by the rich will not be spent and, therefore, will not stimulate the economy is an argument that would apply equally to a measure that, in addition to allowing the the Bush tax cuts for the rich to expire, imposed a 10% surtax on the rich. In short, because 99% of Americans are not rich any proposal that seeks to either reduce or prevent an increase in the taxes of the rich can be demagogued as hurting the poor and the middle class by not stimulating the economy. I presume that there is a limit to how much taxes the CBPP thinks the rich ought to pay. If this is true, then there is little difference in the substantive positions of the left and the right. They agree that the rich should be taxed and disagree only as to the rate and extent of that taxation.³


¹  Here’s the CBPP’s stated mission (emphasis added):

The Center conducts research and analysis to help shape public debates over proposed budget and tax policies and to help ensure that policymakers consider the needs of low-income families and individuals in these debates. We also develop policy options to alleviate poverty.

In addition, the Center examines the short- and long-term impacts of proposed policies on the health of the economy and the soundness of federal and state budgets. Among the issues we explore are whether federal and state governments are fiscally sound and have sufficient revenue to address critical priorities, both for low-income populations and for the nation as a whole.

It would be consistent with its stated mission for the CBPP to propose a tax policy that mandated the confiscation of, say, 80% of the wealth of the rich for the purpose of redistribution to the poor. After all, the seizure of an amount of wealth from the rich suffiicient to reduce them to middle-class and a distribution of that wealth to the poor sufficient to raise them to middle-class would achieve the CBPP’s stated goal of alleviating poverty, would it not?

²  The tax-the-rich left uses an ends-justify-the-means approach to justify increasing taxes on rich people (who, by the way, already pay more than 50% of all taxes even though they represent less than 5% of the population). Utilitarian heroes Jeremy Bentham and John Stuart Mill might describe the principle this way: A tax policy that seeks to confiscate the wealth of the rich and redistribute it to the poor helps a greater number of people then it hurts, therefore, it is a morally correct policy.

It is interesting to note that the left regularly eschews the use of the utilitarian approach in matters of war. See, for example, the left’s opposition to the Bush administration’s waterboarding of suspected terrorists. This interrogation technique was designed to identify and foil existing terrorist plots which, if carried out as planned, would have resulted in the deaths of thousands of innocent people.

³  If I proposed that the top rate on the super-rich be raised to 90% and the Democrats opposed me on the grounds that 90% is too high, I would find myself in the exact same position that the Democrats are now in viz a viz the Republicans. And, consequently, I would be able to cynically declare that it is the Democrats who are only looking out for the rich.

About Peter Pappas

Peter is a tax attorney and certified public acccountant with over 20 years experience helping taxpayers resolve their IRS and state tax problems.

He has represented thousands of taxpayers who have been experiencing difficulty dealing with the Internal Revenue Service or State tax officials.

He is a member of the American Association of Attorney-Certified Public Accountants, the Florida Bar Association and The Florida Institute of Certified Public Accountants and is admitted to practice before the United States Tax Court, the United States Supreme Court, U.S. District Courts - Middle District of Florida

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