Raising Taxes Won’t Stimulate the Economy

Kathryn Nix / October 15, 2010

Earlier this week, Maya MacGuineas, a fiscal policy expert at the New America Foundation, ranked Congress’s options in addressing the pending expiration of the 2001 and 2003 tax cuts. A little more than two months remain before an automatic tax hike on all American earners sets in, and Congress has yet to act. Here, we compare MacGuineas’s rankings to our own solutions.

Above all, MacGuineas favors sweeping tax reform, describing the current system as “outdated, overly complex, a drag on economic growth, and as leaky as an old fisherman’s dingy.” She’s right. Tax reform should simplify the tax code and reward investment and growth in the United States economy.  We highlight the way forward in Solutions for America: Tax Reform.

But unfortunately, there isn’t time before 2011 for such an endeavor. In the meantime, MacGuineas proposes allowing the cuts to expire and using the revenue to stimulate the economy in other ways. The Congressional Budget Office (CBO) suggests that extending unemployment benefits or aid to states would stimulate the economy better than would extending current tax rates. But this finding has its basis in the assumption that throwing more government money into the economy is effective stimulus. In other words, CBO assumes what it sets out to prove. In reality, this kind of stimulus—injecting money into one area of the economy by taking from another—is a zero-sum game. (more…)