This is something that most people do not often get to see, but it’s a simple chart that explains where best to spend American taxpayer money if one is interested in growing the economy. This chart showcases fiscal policy multipliers…quite simply – the larger the number – the better the result.
For example – the first item on the chart is the refundable lump-sum tax rebate. This chart says that for every $1 the government spends in this particular area…the American economy will get $1.22 in economic growth. That means the economy receives a TWENTY TWO % increase for every $ it invests in that area. That’s a big deal and a wonderful Return on Investment. Now compare that to making the Bush tax cuts permanent – for every $1 that the country “spends” in permanent tax cuts…GDP grows by only $.35.
When talking about public policy…these facts matter. They matter a great deal to the economy and they go to the heart of how our country fares. If we have low growth…there will be higher unemployment and that leads to wage stagnation (employers pay less because there are more people to choose from), fewer investments in education and infrastructure (which only has a bigger negative long term impact on economic growth) as well as forcing more people into poverty and requiring help from a social safety net. In short – extending the Bush tax cuts for the rich only actually pushes people onto welfare. Most people just do not understand how this works.
The most straightforward way to reduce some of the coming fiscal restraint is to extend for another year both the current 2% employee payroll tax holiday and the emergency unemployment insurance program. Under current law they expire at the end of this year. If they are not extended, real GDP growth will be nearly a percentage point slower in 2012 and there will be approximately one million fewer jobs by year’s end (see Table 4).
There are some downsides to doing this; some of the payroll tax break will be saved, particularly by higher-income households, and emergency UI creates disincentives to work and adds somewhat to unemployment. 5 But on net they would provide important support to the soft economy.
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