American Forum Op-Ed

Randy Albelda

MASSACHUSETTS FORUM

By Paul Egerman and Randy Albelda

With unemployment close to 10 percent, Congress needs to focus on creating jobs and strengthening our economy. More than ever, our country cannot afford policies that would waste resources needed for job-creating initiatives in the short run and that would increase deficits in the long run.

That’s exactly what extending hundreds of billions of dollars in tax cuts for our highest-income residents would do.

One of us has built prosperous businesses and the other is a public finance economist. From our different perspectives we have learned the same thing: businesses create jobs when people want, and are able, to buy their products.

Paul Egerman

Tax cuts for the wealthy tend primarily to increase their wealth – not their spending in the economy. To increase spending and create demand in the private sector, government needs to put money into the hands of lower- and middle-income families who are struggling to get by and will spend any new income to keep their families afloat.

That’s why economists have consistently found that tax cuts for high-income people are a far less effective means of creating jobs than are tax cuts for lower- and middle-income families, extended unemployment benefits, and direct investment in services like education, health care, and public safety, which lead to direct hiring and put money into the hands of working people who will spend it in the local economy.

With Congress likely to act in the next weeks on the expiring Bush-era tax cuts, there is widespread support for extending the middle-class tax cuts. The debate will focus on whether to extend tax cuts for the highest-earning two percent of Americans – those with adjusted gross income above $200,000 for single filers and $250,000 for married couples.
There is a strong business and economic case for letting these higher-income tax cuts expire.

The bulk of these poorly targeted tax cuts will go to households with incomes above $1 million – resulting in average annual tax cuts for these households of over $100,000, about twice what the typical American household earns in a year.

Most small businesses aren't owned by people in the top-income brackets -- they don’t make enough taxable income ($250,000 a year) to pay the higher tax rates. Only the top 3 percent of people with business income of any kind, let alone income from what most Americans think of as “small businesses,” would be affected. Moreover, high-income households will benefit from extension of the middle-income rate reductions, because a portion of high-income filers’ total income falls within the tax brackets affected by the middle-class tax cuts.

The $40 billion in revenue next year (and some $90 billion over two years) generated by letting the high-end tax cuts expire could be used for a temporary tax credit to spur small-business job creation, or to provide additional aid to the states, and would do much more to generate economic growth and create jobs. Targeted provisions for working families through the Child Tax Credit and the Earned Income Tax Credit also have helped prop up consumer spending and should be extended.

In the long run, terminating the top-end tax cuts will produce substantial deficit reduction once the economy has recovered. If Congress allows the tax cuts targeted at America’s highest-income households to expire, it would reduce both the deficit and debt over the next decade by $1 trillion, improving the nation’s long-term fiscal outlook.

The US currently is experiencing the effects of the worst economic downturn since the Great Depression; reviving the economy and putting people back to work as soon as possible will place the US in a better position to address our deficits and debt in the years ahead. Cutting taxes for the very wealthy will not help the nation as much as keeping teachers and police officers employed, investing in our schools, transportation systems and other infrastructure, and using our resources to help those who need it most.
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Egerman is a businessman and software entrepreneur, co-founder of eScription, Inc., based in Needham, Massachusetts, and is now a member of U.S. DHHS Health Information Technology (HIT) Policy Committee. Albelda is a Professor of Economics and Senior Research Fellow at the Center for Social Policy at Univ. of Massachusetts Boston.
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