Which tax increases would hurt job growth the least?
That鈥檚 鈥測ou ask, I answer.鈥�
I鈥檝e been remiss in offering answers to many excellent questions folks have been posing in recent weeks, including this AM.聽 So let take (too) brief stabs at some of them (some questions are edited a touch):
Re the supercommittee, I wrote: given the automatic triggers, no deal is better than a bad deal, prompting this excellent question:
Q: So just to be clear, you think the automatic triggers are a good thing? You would prefer that Congress not cancel them?聽 Even in the absence of tax increases, you support an across the board cut of $1.2 trillion in federal spending. What do you think this would do to unemployment?
A: Ah, you are expanding the choice set, in which case I鈥檇 make a very different set of choices.聽 I wouldn鈥檛 have had the crazy debt ceiling debate which ended with a process鈥攕upercommittee, sequestration鈥攚hich I鈥檝e undemocratic.
But the Budget Control Act鈥攖he legislation enacted to resolve the debt ceiling debacle鈥攎andated that the supercommittee either come up with a plan to reduce deficits by $1.5 trillion or automatic cuts of $1.2 trillion would ensue.聽 So that鈥檚 the choice on the table.聽 And yes, given that the trigger would lead to around $110 billion in cuts in 2013 (no cuts in 2012, which is good in terms of your macro concerns), and that the unemployment will still be too high then, I worry about that too.
But the plans on the table, as I鈥檝e , are more harmful to the economy, to programs I care about, and to the future budget process,聽than the automatic cuts.
If it were me, I鈥檇 have a supercommittee working around the clock on the deficit鈥鈥檇 have numerous supercomittees.聽 聽But I鈥檇 have them working not on the budget deficit鈥擨鈥檇 have them working on the jobs deficit.
Q: So if we must have deficit reduction, which spending cuts or tax increases would be the least harm in terms of growth and jobs?
A: Easy: tax increases on the wealthiest households.聽 Since they鈥檙e not, by definition, income constrained, raising their taxes will be have less impact on their spending and saving than tax increases on lower income families.聽 I鈥檓 not saying there鈥檚 no multiplier there, but it鈥檚 small compared to other options (see Table 11 鈥攊t shows that the Bush tax cuts have among the smallest multipliers and that鈥檚 for all the cuts鈥攋ust the highend cuts would be even smaller).
Which spending cuts would be least hurtful to jobs/growth?聽 Let me think about that one and get back to you.
Q: (In my tax reform liberation I argued that all income should be treated the same and taxed at progressive rates, i.e., no special rates for cap gains and dividends, which prompted this question.)
Are there any legitimate downsides to treating capital gains the same as say, personal income taxes?
A: First of all, not to be an annoying economist, but the way to think about this question鈥攖he way to think about every economic question鈥攊s 鈥渃ompared to what?鈥澛� That is, it鈥檚 not enough to ask about any downsides.聽 You have to ask about any downsides compared to the upsides you鈥檇 get from simplifying the code, not encouraging income shifting and other tricks by giving special treatment to certain types of income, collecting more revenue, closing a loophole, etc.
I think the weight of the evidence here is that the benefits of ending favoritism in the code re cap gains would outweigh any costs in terms of any investment disincentives.聽 I come to this view because I think (as does Warren Buffett鈥搒ee next link) the historical record shows a very weak relationship between favoring capital gains and investment in productive capital (I go into some detail ).聽 So if the incentive is weak, ending it shouldn鈥檛 have much of a negative impact to net out of the benefits noted above.
