Tuesday, September 14, 2010

Do Business Tax Cuts Mean Less Food Stamps?

In recent proposals, President Obama has pushed a $50 billion infrastructure program for roads, railways, and runways as well as a $200 billion permanent extension of the research and development tax credit, allowing businesses to expense capital improvements in 2010 and 2011 rather than depreciate over several years.  He is pushing a Small Business Jobs Act which would provide $30 billion to community banks to lend to small businesses, $12 billion in tax incentives and tweaks to small businesses, and $1.5 billion for state small business programs.  Numerous attempts have been made to cut SNAP (food stamps) to make the small business tax cuts budget neutral.  He has also continued his push for an extension of the Bush tax cuts except for those making more than $200,000 (individuals) or $250,000 (families).

Unfortunately, Austan Goolsbee, the new chairman of the Council of Economic Advisers to the President, knows from his early published work that tax incentives do not work in stimulating an economy.  His "Investment Tax Incentives, Prices, and the Supply of Capital Goods" and other papers can be found here.  These tax cuts and incentives are political in nature, although they will achieve some longer term economic improvement.  But it will not create jobs now and cannot stimulate the economy into sustained recovery.  Real jobs creation requires government spending which creates jobs now and in the near future, but there is no political consensus in the U. S. Congress concerned about continued high unemployment which is growing and strangling the economy.  Families are saving and businesses are saving.  Tax credits and cuts do not create sales when the consumers have no jobs or fear losing a job or fear the uncertainty fostered and nurtured by both political parties in their maneuvering for the temporary bread and circus applause.  Sustainable economic recovery is directly dependent on job growth.  Without creating jobs as quickly as possible, the economy will go forward slowly at best with continued high employment, a general diminishment of the middle class, and even more rapid income inequality than has already occurred since 1960.

With respect to the Bush tax cuts extension, it has been well documented that lower income people are more likely to spend a tax cut, although this would be an extension of current taxes, and higher income people are more likely to save.  When there is so much effort to cut food stamps to budget neutral business tax cuts, why is it so important to extend the Bush tax cuts for those making more than $200,000/$250,000 when 55% of those tax cuts will go to .1% or 120,000 people for over $3,000,000 each over a ten year period?  Those who are liquidity constrained are more likely to spend and stimulate the economy.

Families cannot spend if they do not have jobs.  Families cannot spend is they are reducing debt in preparation for whatever may happen.  Businesses cannot spend if they do not have sales.  If businesses use tax incentives to purchase new equipment, how many jobs will be lost from the new equipment operation?  If new equipment and other capital expenditures increase the opportunity of increased productivity, of what use is that increased productivity in underutilized capacity economy?  Capital expenditures do not create sales.

Jobs create sales.  Jobs solve vacant housing inventories.  Jobs increases income for the wealthy.  Jobs stimulate an economy.  Jobs buy food and clothing and shelter and medical care.

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