Posted on January 24, 2009 by Economic Policy Institute

When it comes to reviving the economy, tax cuts do not work as well as smart public spending. That is economic common sense proven true by the past two attempts at tax-cut stimulus, in 2008 and in 2003-04. And yet, incredibly, we are starting to hear the same old tried-and-failed policies from conservatives and the GOP. The latest flare-up was prompted by a CBO report released Friday that claimed only about two-thirds of any money set aside now for public investment projects—such as mass transit and water systems—would be spent in the first two years. Here at the Economic Policy Institute, we disagree with that assessment, which is based on old modeling. The public spending package being considered now is directed at shovel-ready projects and has a ‘use-it-or-lose-it’ caveat, requiring work to be done within two years.

Let’s review 2008. The Democrats agreed to a stimulus in early 2008 that was all tax cuts, with about $50 billion of wasteful, unproductive business tax cuts added as the ‘price’ of approval by President Bush. Unfortunately, similar business tax cuts are included in the current bill. In addition, the 2008 package called for $100 billion in personal tax ‘rebates’. Only about one-third of the rebate checks, which ranged from several hundred to two thousand dollars per family, were spent. It was not an effective way to get the economy back on track.
See Shapiro and Slemrod (http://www.aeaweb.org/annual_mtg_papers/2009/retrieve.php?pdfid=294).

Even worse were the Bush tax cuts of 2003, which the administration claimed would generate 1.4 million jobs on top of the 4.1 million jobs that were expected to be generated over the eighteen months following June 2003.
See:
http://www.jobwatch.org/creating/bkg/cea_on_bush_tax_cuts_20030204_macro_effects.pdf

EPI tracked the initiative’s effectiveness through a website, http://www.jobwatch.org, and found that it fell far short of its goals. Not only did the promised 1.4 million additional jobs not appear, but the 4.1 million jobs expected with no action also failed to materialize. In all, only 2.4 million jobs were created—1.7 million short of the administration’s projection without their new policy. Thus, by the Bush administration’s own metrics the tax cut program fell short by a total of 3.1 million jobs (149,000 pr month). For an analysis of how the Bush 2003 tax plan (The “Jobs and Growth”plan) fell short of its job claims see: http://www.jobwatch.org/email/jobwatch_20050107.html

On what basis can the conservatives who embraced those failed initiatives now claim that tax cuts are the best policy?

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